Stocks can be unpredictable, and many people feel confused or frustrated when their investment account balance suddenly drops. Where did the money go? When stock prices fall, it can feel as though money has vanished. This blog looks at what happens to money when stocks fall.
Buying and Selling Stocks
If you buy a stock for $10 and later sell it for $5, you realise a $5 loss per share. That $5 hasn’t been ‘taken’ by anyone; it simply reflects the change in the price investors are willing to pay.
For example, if a stock was previously trading at $15 but has fallen to $10 by the time you buy it, you are purchasing at the current market price of $10. You haven’t ‘saved’ $5, you have simply bought at the current market value. However, if the price later rises from $10 back to $15, you will have an unrealised gain of $5.
The same holds if your stock drops in value and you have to sell it for less money. The person who buys from you does not automatically profit from your loss. They would only profit if the share price later rises above the price they paid.
No one, not even the company that issued the stock, keeps the money from your declining stock price. The total amount of money disbursed to individual investors is not reflected in changes in stock prices. Every price change results from supply and demand, as well as associated investment activity.
For a broader explanation of how the stock market works, see the U.S. Securities and Exchange Commission’s investor guide.
Short Selling
Some investors engage in short selling, aiming to profit from a falling share price. If the price falls, the short seller buys the shares back at the lower price and keeps the difference between what they sold and what they paid to repurchase them.
Short sellers do not expressly steal money from you when you lose a stock transaction, even when they profit from a declining price. As opposed to investors who long (own) the stock, they conduct individual transactions and are just as prone to losing money or making mistakes.
To understand the mechanics and risks involved, you can read more about short selling explained.
Do You Lose Money If A Stock Goes Down?
Your stock investment’s market value could drop in tandem with the stock market. You still own your shares if you didn’t sell them, so their value may rise again when the market recovers. As a result, even though you might lose value, it might just be momentary.
If you are transferring or selling US shares, you may be asked to provide a signature verification, learn more in our guide, What is a Medallion Guarantee?