so, i've often wondered this question myself, so when i saw the name of the article, i had to read it. it turned out to be fairly insightful, and i thought maybe i'd share it with the class.
When Stock Prices Go Down, Where Does the Money Go?
by Mike Moffatt
so, Mr. Moffatt explains in this article where the money goes in the stock market. basically, he says that no matter how many people buy or sell a share of stock, the market will always break even. by this he means that all of the gains of the people who sold the stock on a profit will equal all of the losses by people who sold on a loss. he uses an excellent example involving AOL in order to explain it all handily.
although i understand this concept of how the profits in the market will equal the losses, i can't exactly comprehend how the market can go up collectively over a long period of time. i think he tries to explain it near the end of the article, but i still just can't quite grasp it. if anyone could shed some light on the topic, i'd really appreciate a post. thanks.
p.s. if you want to read the whole article because my explaination didn't quite cut it, here's the link: http://economics.about.com/cs/finance/a/money_lost.htm
When Stock Prices Go Down, Where Does the Money Go?
by Mike Moffatt
so, Mr. Moffatt explains in this article where the money goes in the stock market. basically, he says that no matter how many people buy or sell a share of stock, the market will always break even. by this he means that all of the gains of the people who sold the stock on a profit will equal all of the losses by people who sold on a loss. he uses an excellent example involving AOL in order to explain it all handily.
although i understand this concept of how the profits in the market will equal the losses, i can't exactly comprehend how the market can go up collectively over a long period of time. i think he tries to explain it near the end of the article, but i still just can't quite grasp it. if anyone could shed some light on the topic, i'd really appreciate a post. thanks.
p.s. if you want to read the whole article because my explaination didn't quite cut it, here's the link: http://economics.about.com/cs/finance/a/money_lost.htm
2 comments:
D Mac... im not sure that the market price does go up collectively. Doesn't it all depend on the market and actually fluctuate??
Okay. Here's my attempt to answer. It's a long answer that's really very complicated but I'm trying to cut it short (this is about a week's worth of lessons in reg econ):
Stock is ownership in a company. When you buy, you are getting a tiny piece of the company. Any value added is conjecture until you sell - your stock isn't worth crap unless you can find someone to buy at a given price.
The prices that you follow daily (or whenever) isn't necessarily what you could/would get for your stock - it is what is being paid for stock at that given point in time. Therefore, you base your value on what others are paying for others' stocks. If I buy a stock for $10 and it's selling today for $40, I tend to see a "gain" of $30...but it doesn't really exist unless you (1) sell your stock in that microsecond, and (2) get that exact price.
What they are explaining in the article is that the value added is actually just shifting of money (value). If I have that $10 stock that goes to $40, but I sell it for $20, I'm still ahead. I never had that $40 to begin with. If I have a $10 stock and sell it for $5, I lose, but the company I bought stock in still has the original money spent on the stock, which did not necessarily come from me. The only money the company sees is the very first time they put stock on the market (Initial Public Offering = IPO) - they never see another penny from stock unless they offer more.
So - if your parents bought Microsoft stock in the mid-1970's, they may have paid $5 (or whatever). Bill Gates got that $5 and was happy, because he could make his business grow. All of the other millions of stock trades since then didn't get him a penny. It added value to the interest of whoever was buying or selling. If there are stock SPLITS, that is just another type of value added - instead of one stock worth $50, now you have two each worth $25.
Through increased value and stock splits, that original purchase of Microsoft might be worth millions - but only if someone buys it. And Microsoft doesn't see a dime of that money - it's all speculation by the "owners" - the stockholders.
So technically, money just switches hands, it is not lost. Kinda like energy - not created or destroyed, just moving along. Yeah, I'm no good at those science analogies. I should stick to Econ.
For Katie's question - the market fluctuates, and individual stocks are very risky. They also have the highest possible returns - mostly because of those risks. The fact is, there's no 10 year period since the Depression that the stock market has not averaged at least an 8% return. That's a pretty good investment - and most years, it's much higher. BUT - you're taking the risk that the stock you purchase is going to go up (it is an AVERAGE, after all) - and it very well might go down. That's why many "investor suggesters" will say to take the stock market chance if you are young and if you're going to keep the money in for at least 8-10 years - because historically, it has always gone UP.
I think I answered all that. Email me or post again if something's not clear. :)
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