When you lose something around the house, it feels like a mystery as to where it go be. The same could be said for stocks, as when people discover abruptly that their brokerage account balance has dropped precipitously, many experience those emotions. That money, where did it go? Thankfully, gains or losses on stocks don’t simply evaporate. Continue reading to learn what happens to it.
Purchase and Offer Exchanges
You will lose $5 a share if you buy a stock for $10 and sell it for only $5. Although you might think the money is used for anything else, it isn’t accurate. The individual who purchases the shares from you does not receive it.
Let’s take an example where the price of a stock drops to $10 per share just before you decide to purchase it at $15. You buy at $10 but lose out on the $5 stock price decline. Instead, you bought the stock at $10 per share, its current market value. You might believe you saved $5 but did not make $5. However, you will have an unrealised gain of $5 if the price later moves up from $10 back to $15.
The same applies if you own stock and it declines in value, forcing you to sell it at a loss. The buyer at that discounted price—the amount you were able to sell it for—does not always make money off your loss. This is because, to realise an unrealised (or realised) profit, they have to wait for the stock to climb above their entry point, which is the lower price.
Nobody keeps the money from your falling stock price, not even the firm that issued the stock. Changes in stock prices do not represent money that is totalled and distributed to individual investors. All price fluctuations are consequences of supply and demand and related investment activities.
Quick Selling
Some investors use a broker to arrange trades where they sell a stock at a premium, believing the price will eventually drop. We refer to this as short-selling. The short seller makes money by purchasing the shares at a cheaper price and terminating the trade if the stock price drops. The broker settles the net difference between the buy and sale prices.
Even though they benefit from a falling price, short sellers do not specifically take money from you when you lose a stock transaction. Instead, they make separate trades and are as likely to lose money or make a mistake as investors who long (own) the stock.
Do Stock Drops Cause You to Lose Money?
The market value of your stock investment may decrease along with the stock market. If you didn’t sell your shares, you still possess them, so when the market turns around and starts rising again, the value of your shares could increase again. Thus, while you might lose value, that might only happen temporarily.
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