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From time to time I hear X dollars in value was erased in the stock market etc. But can money really vanish when, for instance stocks lose value?

For example, Joe buys a stock from Ben for 100 dollars, then the price crashes to 20 dollars. Well Ben still has the 100 dollars, and it is only Joe who lost 80.

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I think you need to mentally separate money in the sense of actual currency from value (which is sometimes expressed in terms of units of currency). Value can vanish, or change. Money can't vanish (unless you lose it in the sofa cushions!)

I can give you $100 for a used sofa. You get to have that $100 even if my cat pukes on the sofa and causes it's value to plummet to only $1. $99 of value is destroyed, but not $99 of money - You get to keep the $100 bill I handed you, no matter what my cat does.

Stocks are the same: I can buy a stock for $100. That $100 in money is preserved no matter what happens to the stock. The stock may increase or decrease in value, but no literal money is created or destroyed. If or when I sell the stock, someone else has to exchange money for my stock. If my stock goes up in value to $200, that doesn't mean an actual $100 money is ever created - whomever buys my stock isn't magically creating $100 out of thin air, they're giving me $200 in money that already existed.

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    +1 ... And that is why the market is zero sum. Regardless of the source of the money, the amount of money remains the same - it only changes hands. Only the Fed and counterfeiters create money. BTW, lose the cat :-) – Bob Baerker Mar 11 at 20:07
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    @user1 the value of the stock market is essentially a theoretical value. It can change all day long in all directions regardless of whether or not any actual money changes hands, and changes in the stock market do not impact the money supply. The real trick though, is that even though the value still only exists "on paper" it is still actual value, and a loss of value still has a real impact on the economy. – dwizum Mar 11 at 20:20
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    Imagine if you were in my shoes and the cat mess caused your sofa to drop in value by $99. Even though you haven't lost any "real" money (no one took $99 out of your wallet), you would still feel the loss in terms of the worth of your assets. – dwizum Mar 11 at 20:21
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    @User1 - A market crash destroys value which is different from people who sell their securities, repatriate their money and can then put it anywhere they want. The Fed can change the money supply but that doesn't affect the examples cited in the answers posted so far. – Bob Baerker Mar 11 at 20:21
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    @Ben Miller - Your answer in your link misses the mark. Your seed to tree to sawmill to lumber to finished product analogy is applicable to the question asked in your link Do I make money in the stock market from other people losing money? In all instances, as the product moves up the 'food chain', money is changing hands (zero sum). It is not being created. Your explanation is applicable to profit and loss not zero sum. This question asks How does money vanish in the financial system? It doesn't.** Don't make the same mistake as the OP and confuse value with money in existence. – Bob Baerker Mar 12 at 0:59
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It's "unrealized" value that vanishes. Nothing changes from a money supply standpoint.

Joe buys a stock from Ben for 100 dollars, then the price crash to 20 dollars. Well Joe still have the 100 dollars it is only Ben who lost 80.

You have it backwards - Ben still has $100. Joe now has something that's "worth" $20 instead of $100 so he has a paper loss of $80. He can choose to sell it for $20 and realize that loss, or keep it and hope that it goes back up in value, but neither of those transactions changes the money supply.

It would be the same as if Joe bought a baseball card for $100. It's only "worth" what someone else is willing to pay for it. If no one is willing to pay more than $20 then it was a bad investment.

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  • Thanks for the answer. I am tying to come to grips with how a crash stock market recovers, if there is money on the sideline it has to get in at some point. People will not just sit on alot of cash. – Vlad Mar 11 at 20:01
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    "People will not just sit on alot of cash" Sure they do - Berksire Hathaway has billions of cash just waiting for a good buying opportunity. The market will recover when money is moved from other sources (cash, real estate, other investments, etc.) into the stock market. – D Stanley Mar 11 at 20:10
  • People will not just sit on alot of cash forever * – Vlad Mar 11 at 20:17
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For every buyer, there is a seller so the amount of money involved always remains the same. Money just changes hands, regardless of what happens to the price of the stock. The money supply remains the same even with frictional costs (commissions, B/A slippage, etc.).

For example, there are 3 people (A, B, and C). Each one has $10 and A owns the stock. That’s $30 in existence. Assume no transactional costs.

B buys the stock from A for $5. Now B has the stock.

A has $15, B has $5 and the stock, and C has $10.

Now B sells the stock to C for $3

A now has $15, B has $8, and C has $7 and the stock.

Suppose the company goes bankrupt and the stock is delisted.

A still has $15, B still has $8, and C still has $7 but no stock. Again, no money vanished. $30 is still in existence.

So when share price drops significantly (the past two weeks), billions of dollars paper wealth is wiped out.

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For example Joe buys a stock from Ben for 100 dollars, then the price crash to 20 dollars. Well Ben still have the 100 dollars it is only Joe who lost 80.

Before the transaction, Joe has $100, and Ben has a tulip bulb.

Joe buys the tulip bulb from Ben for $100, with the hope that he'll be able to sell it for a higher price later.

After the transaction, Joe has a tulip bulb, and Ben has $100.

Then the excitement about tulips goes away, and nobody is willing to buy a tulip bulb for any price higher than $20.

Joe still has a tulip bulb, and Ben still has $100. No money was created or destroyed, and no tulip bulbs were created or destroyed. The only thing destroyed was Joe's expectation of being able to sell the tulip bulb for a good price later on — his "valuation" of tulips, if you will.

If you replace the tulip bulb with a piece of paper conferring an 0.0001% share of ownership in Frobozz Incorporated, or even a digital record that says the same thing, the situation is really the same as with the tulip bulbs, but people's psychology changes. Because a stock is a financial instrument, they think of it as "as good as money", measure it by money (the hypothetical price they could sell it for), and feel as though they have lost money when that price goes down. Everyday language talks about losing money when the stock market takes a dip. But the reality is that an investor loses money when they buy, just the same as you lose money when you buy a cup of coffee. You probably don't have any hopes of selling that coffee later, but the investor does. However, those hopes aren't always well-founded.

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    Good point about investor loses money. It's not an easy concept for most people to swallow but when you buy a stock, your money is lost (someone else now has it). If share price appreciates and you sell, you get your money back and then some. If the stock drops, you've lose value. If you sell it at a lower price, you’ve lost some money. If the company goes bankrupt, you’ve have no opportunity to sell your stock and recover your money and it is gone forever. But at no point was money created or destroyed by the stock market. – Bob Baerker Mar 12 at 4:26
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Money vanishes from the financial system when you pay back bank loans. The stock market is unrelated to this.

Simply put, there are three different types of money in the financial system: physical currency (created by the government), a form of special electronic currency that the banks use to transfer money between themselves (also created by the government), and the electronic money that sits in your bank account. This last form of currency is technically just debits and credits on a bank's accounting balances, and it is created whenever someone takes out a bank loan, and it is destroyed whenever someone repays a bank loan. While the creation of this currency was previously governed by laws about fractional reserve banking, limiting the banks to producing an amount of this money proportional to the amount of "real money" they possess, some countries like the UK have removed these restrictions and allow their banks to produce arbitrary amounts of money this way.

The stock market is completely unrelated to all of this, barring something like someone using bank loans to buy stocks, or using the money raised by selling stocks to pay back bank loans.

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