Where Does the Money Go When the Stock Prices Fall?
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We’ve all seen headlines like this online:
On the other hand, we’ve also seen others like this too:
Have you wondered, where did the money go? How do they lose or gain massive amounts of money? Who did they lose it to? Or how did they lose that much money? How did they gain that much and from whom did they gain that much?
The answer lies in understanding what happens when the prices of stocks fall. But before then, let’s go through the fortune of the richest people in the world.
For the richest people, their net worth is tied up in businesses, either publicly traded or private companies. For most, at least one of their businesses is publicly traded and a high percentage of their net worth is attached to the company. Example, Mark Zuckerberg’s Facebook, Elon Musk’s Tesla, and Jeff Bezos’s Amazon. This does not mean they do not own other businesses.
Since a person’s net worth is simply an estimate of what they own, all their assets are estimated and valued. Different sources have different methods of valuation.
Publicly traded companies are easier to evaluate than privately owned companies. As such, owners of stocks in a publicly traded company (shareholders) can easily say this is how much they own.
It is simply calculated as the number of shares owned multiplied by the current market stock price.
So for the richest people, their major asset holdings are in stocks of businesses. Ignoring other assets, then their net worth would be the number of shares they own of the company multiplied by the share price.
So hypothetically, if Elon owns 1M shares of tesla and the current share price of tesla is $228.52, then his net worth is $228,520,000
So what happens when he loses say $10,000,000 in a day or gains $12,000,000? Where does the money go?
For starters, the money doesn’t go anywhere. What?? Yes, it doesn’t. There’s a reason why it is called paper money or money on paper.
Let’s use socks as an example. If socks = stocks
Elon has a million pairs of socks. Each pair is said to be worth $228.52 each. This means Elon is worth $228,520,000 (same maths as above).
In the scenario a pair’s price drops to $100, then Elon having the same number of socks is now worth $100,000,000; a loss of fortune worth $128,520,000. This is what happens when we see headlines like this:
When the opposite happens, the socks increases to $320 then Elon is now worth $320,000,000; an increase of $91,480,000 and this is when we see headlines like this:
There is no actual money; it is simply an evaluation of what the asset owned by individuals is worth. Since stock prices are determined by market forces (supply and demand), we assume it is an accurate estimation. This is why stocks and other similar securities are referred to as money on paper. Any gain or loss is called a paper loss or paper gain; it turns into an actualized loss or gain when the stock owner sells the stock.
Technically, the money they gain or lost is not anyone’s money. It is simply owning a thing and the price of the thing increase or decrease, when you sell, you make a profit or loss, if you don’t sell then it is still “the thing”. No more, no less.
PS: If this stocks thing sounds gibberish, then read my intro to stocks; Understanding Stocks — minus the maths
Thank you for reading, and see you next week. Don’t forget to share
Originally published at https://iamuhammadtahir.substack.com on October 30, 2022.
