When Stock Prices Drop, Where Is the Money? (2024)

Have you ever wondered what happened to your socks when you put them in the dryer and never saw them again? It's an unexplained mystery that may never be solved.

Many people feel the same way when they suddenly find that their brokerage account balance has taken a nosedive. Where did that money go?

Fortunately, money that is gained or lost on a stock doesn't just disappear. Read on to find out what happens to it.

Key Takeaways

  • When a stock tumbles and an investor loses money, the money doesn't get redistributed to someone else.
  • Drops in account value reflect dwindling investor interest and a change in investor perception of the stock.
  • That's because stock prices are determined by supply and demand driven by investor perception of value and viability.
  • As long as you don't sell your shares, you have a chance to regain lost value.

Disappearing Money

Before we get to how money disappears, it is important to understand that regardless of whether the market is rising (a bull market) or falling (a bear market), supply and demand drive the price of stocks. And it's the fluctuations in stock prices (and the points at which you buy and sell shares) that determine whether you make money or lose it.

Buy and Sell Trades

If you purchase a stock for $10 and sell it for only $5, you will lose $5 per share. You may believe that that money goes to someone else, but that isn't exactly true. It doesn't go to the person who buys the stock from you.

For example, let's say you were thinking of buying a stock at $15, and before you do so, the stock price falls to $10 per share. You decide to purchase at $10, but you didn't gain the $5 depreciation in the stock price. Instead, you got the stock at the current market value of $10 per share.

In your mind, you may think that you saved $5, but you didn't actually earn a $5 profit. However, if the stock then rises from $10 back to $15, you will have a $5 (unrealized) gain.

The same is true if you're holding stock and its price drops, leading you to sell it for a loss. The person buying it at that lower price—the price you sold it for—doesn't necessarily profit from your loss. That's because their entry point is the lower price and they must wait for the stock to rise above that level before making an unrealized (or realized) profit.

No one, including the company that issued the stock, pockets the money from your declining stock price. The money reflected by changes in stock prices isn't tallied and given to some investor. The changes in price are simply an independent by-product of supply and demand and corresponding investor transactions.

Short Selling

There are investors who place trades with a broker to sell a stock at a perceived high price with the expectation that it will decline. This is called short-selling.

If the stock price falls, the short seller profits by buying the stock at the lower price and closing out the trade. The net difference between the sale and buy prices is settled with the broker.

Although short-sellers profit from a declining price, they're not taking money from you in particular when you lose on a stock sale. Rather, they're conducting independent transactions and have just as much of a chance to lose or be wrong on their trade as investors who are long (own) the stock.

In other words, short-sellers profit on price declines, but it's a separate transaction from bullish investors who bought the stock and are losing money because the price is declining.

So the question remains: Where did the money go?

Implicit and Explicit Value

The most straightforward answer to this question is that it actually disappeared into thin air, due to the decrease in demand for the stock, or, more specifically, the decrease in enough investors' favorable perceptions of it to move the price down by selling.

But this capacity of money to dissolve into the unknown demonstrates the complex and somewhat contradictory nature of money. Yes, money is a teaser—at once intangible, flirting with our dreams and fantasies, and concrete, the thing with which we obtain our daily bread.

More precisely, this duplicity of money represents the two parts that make up a stock's market value: the implicit and explicit value.

Implicit Value

On the one hand, value can be created or dissolved with the change in a stock's implicit value, which is determined by the personal perceptions and research of investors and analysts.

For example, a pharmaceutical company with the rights to the patent for the cure for cancer may have a much higher implicit value than that of a corner store.

Depending on investors' perceptions and expectations for the stock, implicit value is based on revenues and earnings forecasts.

If the implicit value undergoes a change—which, really, is generated by abstract things like faith and emotion—the stock price follows. A decrease in implicit value, for instance, leaves the owners of the stock with a loss in value because their asset is now worth less than its original price. Again, no one else necessarily receives the money; it simply vanishes due to investors' perceptions.

Explicit Value

Now that we've covered the above somewhat unreal characteristic of money, we cannot ignore how money also represents explicit value, which is the concrete value of a company.

Referred to as the accounting value (or book value), the explicit value is calculated by adding up all assets and subtracting liabilities. So, this represents the amount of money that would be left over if a company were to sell all of its assets at fair market value and then pay off all of the liabilities, such as bills and debts.

Without explicit value, the implicit value of the company would not exist. Investors' interpretation of the financial health and performance of a company is based on its explicit value. Explicit value is the force behind the stock's implicit value.

Even if your brokerage account suffers a loss of value, you have a chance to regain and even exceed the loss as the stock price recovers—as long as you don't sell your shares.

Disappearing Trick Revealed

Let's say Cisco Systems Inc. (CSCO) had 5.81 billion shares outstanding. This means that if the value of the shares dropped by $1, the loss would be equivalent to more than $5.81 billion in (implicit) value.

Because Cisco has many billions of dollars in concrete assets and makes profits, we know that the change occurs not in explicit value, so the idea of money disappearing into thin air ironically becomes much more tangible.

In essence, what's happening is that investors, analysts, and market professionals are declaring that their projections for the company have narrowed. Investors are, therefore, not willing to pay as much for the stock as they were before.

When investor perception of a stock diminishes, so does the demand for the stock, and, in turn, the price.

The Explicit Drives the Implicit

So faith and expectations can translate into cold hard cash, but only because of something very real driving perception. That's the capacity of a company to create something useful and needed by people and businesses.

The better a company is at creating something for which there's demand, the higher the company's earnings will be, and the more faith investors will have in the company.

Should I Sell Stock If It Goes Down?

Unless there's something fundamentally wrong with the financials of the company whose stock you own (or you need the money), it may be worth waiting to see if the stock price reverses and recovers. Avoid panic selling.

Do You Lose Money When Stocks Drop?

When the stock market declines, the market value of your stock investment can decline as well. However, because you still own your shares (if you didn't sell them), that value can move back into positive territory when the market changes direction and heads back up. So, you may lose value, but that can be temporary.

What Are Unrealized Gains and Losses?

An unrealized gain is the increase in value of an asset owned by an investor. An unrealized loss is a decrease in value. These gains and losses become realized (and can't change) if the investor sells the asset. Unrealized gains and losses are subject to change when you continue to own the asset.

The Bottom Line

In a bull market, there is an overall positive perception of the market's ability to keep producing and creating. Because this perception would not exist were it not for some evidence that something is being, or will be, created, investors participating in a bull market can make money.

Of course, the exact opposite can happen in a bear market. In other words, the stock market can be seen as a huge vehicle for wealth creation and destruction.

No one really knows why socks that go into the dryer never come out, but the next time that you're wondering where that stock price came from or went to, at least you can chalk it up to investor perception.

When Stock Prices Drop, Where Is the Money? (2024)


When Stock Prices Drop, Where Is the Money? ›

Disappearing Money: When the value of a stock declines, it is primarily due to a decrease in enough investors' favorable perceptions of the stock to move the price down by selling. The money reflected by changes in stock prices isn't tallied and given to some investor.

Where does the money go when a stock drops? ›

“In other words, the money did not exist or disappear for long-term investors if you did not make any transactions. However, for short-term investors, when stock prices go up or down, the money would be transferred among them as a zero-sum game, i.e. your losses would be others' gains, and vice versa.”

What happens to the money when stock price goes down? ›

The drop in stock prices directly impacts investment portfolios. For individual investors and institutional funds alike, the decrease in the market value of stocks leads to a reduction in the overall worth of investment portfolios.

How do people make money when stock prices fall? ›

Short selling is a strategy for making money on stocks falling in price, also called “going short” or “shorting.” This is an advanced strategy only experienced investors and traders should try. An investor borrows a stock, sells it, and then buys the stock back to return it to the lender.

Where does the money go when you sell a stock? ›

In most situations and at most brokers, the trade will settle — meaning the cash from the sale will land in your account — two business days after the date the order executes.

Do I lose my money if a stock is delisted? ›

Though delisting does not affect your ownership, shares may not hold any value post-delisting. Thus, if any of the stocks that you own get delisted, it is better to sell your shares. You can either exit the market or sell it to the company when it announces buyback.

What happens to money in stocks? ›

So, when you invest in stocks, your money goes into the engine that drives businesses forward. It's like having a stake in the success of companies and sharing in their prosperity. Stock prices fluctuate based on market demand, company performance, and other economic factors.

Do you owe money if stock goes down? ›

No. A stock price can't go negative, or, that is, fall below zero. So an investor does not owe anyone money. They will, however, lose whatever money they invested in the stock if the stock falls to zero.

What happens if a stock drops below $1? ›

When a stock's price falls to zero, a shareholder's holdings in this stock become worthless. Major stock exchanges actually delist shares once they fall below specific price values. The New York Stock exchange (NYSE), for instance, will remove stocks if the share price remains below one dollar for 30 consecutive days.

What do you do when you lose money in the stock market? ›

If tough market conditions in the past have left you with cold feet, consider this six-point plan to help you start trading again.
  1. Learn from your mistakes. ...
  2. Keep a trade log. ...
  3. Write it off. ...
  4. Slowly start to rebuild. ...
  5. Scale up and scale down. ...
  6. Use limit and stop orders.

Do rich people keep their money in stocks? ›

High-net-worth individuals are opting to keep most of their assets in cash right now. Stocks are still a popular choice for wealthy investors. You don't have to be rich to come up with a plan for your own money.

Who buys stocks when everyone is selling? ›

But there's one group of investors who charge in to buy when stocks are selling off: the corporate insiders. How do they do it? They have 2 key advantages over you and me that provide them the edge during uncertain times. If you follow their lead, you can have that edge too.

Why did stock prices suddenly drop during the Great Depression? ›

There were many causes of the 1929 stock market crash, some of which included overinflated shares, growing bank loans, agricultural overproduction, panic selling, stocks purchased on margin, higher interest rates, and a negative media industry.

Should I sell all my stocks and go to cash? ›

While holding or moving to cash might feel good mentally and help avoid short-term stock market volatility, it is unlikely to be wise over the long term. Once you cash out a stock that's dropped in price, you move from a paper loss to an actual loss.

When I sell stock when do I get money? ›

When does settlement occur? For most stock trades through May 24, 2024, settlement occurs two business days after the day the order executes, or T+2 (trade date plus two days). For example, if you were to execute an order on Monday, it would typically settle on Wednesday.

What happens if you sell a stock but don't withdraw money? ›

Your stock investment profits are taxable whether you withdraw them or not. In most countries, capital gains tax is payable on the sale of stocks that have increased in value since you bought them, even if you don't withdraw the money from your investment platform.

Do I owe money if my stock price drops? ›

No. A stock price can't go negative, or, that is, fall below zero. So an investor does not owe anyone money. They will, however, lose whatever money they invested in the stock if the stock falls to zero.

Does money from stocks go to the company? ›

For companies, money comes from the payments they receive when investors first buy their shares. This cash infusion can help companies in a variety of ways, such as helping to pay off existing debt and funding growth plans they can't—or don't want to—finance with new loans.

What happens when stock drops below $1? ›

With investors trying to exit their positions, sellers outweigh buyers, causing a stock's price to fall. If a stock's share price drops below $1.00 and remains below that level for 30 days, the exchange may notify the company that it is not in compliance with listing requirements and is at risk of being delisted.

What happens if you short a stock that goes to zero? ›

If the shares you shorted become worthless, you don't need to buy them back and will have made a 100% profit. Congratulations!

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