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For a stock with market cap in hundreds of billions, when the price goes down, it's market cap could drop in billions in seconds. When this happens, does the money just disappears into the thin air? I suppose it's not logical to think it just disappears, for example in gambling, when one guy lost money, the other guy wins the money, the money doesn't just disappears, it just switched from one person to another. So in stock, where did the money go when the price of a stock goes down?

Update: In Aganju's example, no actual money is involved yet because I painted the picture and I haven't sold it in exchange for money yet, so it's just value of the picture goes up or down.

Now assume I sold the picture for $1000 to person A, then few months later person A doesn't want it anymore and want to sell it, but he can only sell it for $900. In this case, the total money involved is $1000, the actual cash didn't disappear. It it correct to say person A lost $100 to me, and he will lost more money to me if the value of the picture keeps going down? Is it correct to say when a stock price goes down, the stock holder lost money to the people who sold them the stocks?

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    It's not money that's changing, it's value. The company lost that much value. – quid Jul 22 '16 at 1:11
  • yes, the valuation of the company goes down as it's stock price goes down, but does the money just disappears? – s-hunter Jul 22 '16 at 1:16
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    Money isn't disappearing, value is disappearing. – quid Jul 22 '16 at 1:17
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    I would link to the bellhop dollar riddle, but I think it might blow your mind. – AakashM Jul 22 '16 at 8:01
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    We have a cynical quote which would translate as "The/your money isn't gone, it has just gone elsewhere." – JimmyB Jul 22 '16 at 13:58
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Yes and no. There is no actual money involved - just assumed value.

Imagine you own a picture that you painted yourself, and all your friends agree it is worth 1000 $. You feel like you have a 1000 $-picture. Now a guy with some more knowledge visits you, and tells you that it is really only worth about a 100 $. Did you just lose 900 $? If yes, where did the money go?

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    You are allowed to believe what you want. I think it does work exactly like that. The stock price at any given time is what buyers are willing to pay for it, and that in turn is what they believe it is worth. If their opinion changes (for real or imagined) reasons, the stock price now shows this changed assessment. That's all there is to it. – Aganju Jul 22 '16 at 1:19
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    @s-hunter that is exactly how stock prices work. The price of a stock is nothing more than the current price that people are willing to buy and sell it for. Just like with a painting if people decide that Apple is worth more than the current price, the price goes up. And the same thing happens they decide that it is worth less. The valuation of the company is simply the current price per share times the number of outstanding shares. – Eric Johnson Jul 22 '16 at 1:29
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    @s-hunter that's exactly how the stock market works. Just like your friends opinion on the value of the painting is not money, market cap is not money. It's just the aggregated opinion of the market as to how much the company is worth. – Charles E. Grant Jul 22 '16 at 4:00
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    @s-hunter: What cash on what table? The market cap is not cash on any table. It's just an estimate of value that could be realized by selling stock. – BrenBarn Jul 22 '16 at 4:33
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    @s-hunter most of the cash from the IPO becomes working capital for the company. It is then used to buy real estate, build buildings, buy machinery, pay for marketing, and pay salaries. Much of that will go onto the companies accounting books as assets, and so become part of the 'book value'. If the market feels that the company is going to loose lots of money, the market cap can drop well below the book value. That's when the private equity firms come in, buy up all the stock, and sell off the assets. – Charles E. Grant Jul 22 '16 at 16:53
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Cash changes hands when you buy or sell the stock. While you own the stock, you own it, not cash, so there is no cash to go anywhere.

You spent your money when you bought. The seller got that money. It's gone.

You hope that when you sell the stock, someone will give you more money for it than you spent. But they may give you less. Money doesn't magically appear either way, it comes from the buyer. After selling, you have the money -- however much you sold for -- and no longer have the stock.

NOTE that this means the current value of a share of stock is interesting, but not really very relevant, unless you are actively buying or selling. What your portfolio is worth on paper is nothing more than an approximate snapshot at the moment you retrieve the data. It is not a promise of what will actually happen when you do sell.

  • Assume there is a stock that its price/value never go up but keeps going down since its IPO, is it correct the actual cash that was used to buy the stock at the IPO didn't disappear, the initial buyers lost the money to the company and the subsequent buyers lost the money to the previous holder of the stocks? – s-hunter Jul 22 '16 at 18:44
  • The company got the cash that was used to buy stock at the IPO (minus the costs of the IPO). The moral buyers paid that money and now own the stock shares. If they sell the shares, they will get money from the people they sell to; in your scenario they will get less money than they spent. They didn't "Lise money to the company"-- they bought partial ownership of a company which, at the time they sold, was worth less than they paid for it. Of course their other option is to hold onto those shares and hope the company's value increases again. Nothing disappears or appears; the value changes. – keshlam Jul 22 '16 at 21:22
  • With all these comments and answers, I understand the value goes down as the price goes down and the actual cash doesn't just disappear. However, as the value goes down, the stock holder can get less money from selling the stock. Suppose I paid $100 to person A for 100 shares of the stock, late on the value of the 100 shares go gown to $80, although the value disappear $20, but the actual cash didn't disappear, it's in the hand of person A, so in a sense, isn't that $20 lost to person A? because person A made a good call to sell the stock before it's value go down. – s-hunter Jul 22 '16 at 22:50
  • If you buy anything for $100 and sell it for $80, you have lost $20. This does not mean someone else has gained $20. If they can eventually find a buyer who will pay $100 and sell it at that price, then they will have gained $20. This would be true for anything; stocks are only special because (a) as partial ownership of a company, their value tracks that of the company (ideally), so you are participating in the success or failure if the company, and (b) the company may (or may not) pay out some of that success as dividends to stockholders. – keshlam Jul 22 '16 at 22:58
  • I bought some stocks for $80, sold it for $100, I gained $20, later on the stock went down to $80 again, isn't it true that whoever bought those stocks from me for $100 lost $20? – s-hunter Jul 22 '16 at 23:12
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At any given time there are buy orders and there are sell orders. Typically there is a little bit of space between the lowest sell order and the highest buy order, this is known as the bid/ask spread. As an example say person A will sell for $10.10 but person B will only buy at $10.00. If you have a billion shares outstanding just the space between the bid and ask prices represents $100,000,000 of market cap.

Now imagine that the CEO is in the news related to some embezzlement investigation. A number of buyers cancel their orders. Now the highest buy order is $7. There isn't money involved, that's just the highest offer to buy at the time; but that's a drop from $10 to $7. That's a change in market cap of $3,000,000,000. Some seller thinks the stock will continue to fall, and some buyer thinks the stock has reached a fair enterprise value at $7 billion ($7 per share). Whether or not the seller lost money depends on where the seller bought the stock. Maybe they bought when it was an IPO for $1. Even at $7 they made $6 per share.

Value is changing, not money. Though it would be fun, there's no money bonfire at the NYSE.

  • Good example of how and why the stock price could go down, but doesn't apply to my question, I try to figure out where the actual cash goes to, see my updates to my question. – s-hunter Jul 22 '16 at 1:57
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    @S-hunter, there is no actual cash going anywhere. – quid Jul 22 '16 at 2:03
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You buy a $100k sport car, but don't buy any insurance. You take a curve too fast and jump out just in time to see your car go off a cliff, like a chase movie. The value went from $100k to zero in seconds. Where did the $100k go?

  • The $100k went to the car dealer – s-hunter Jul 22 '16 at 1:47
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    Sure, but one moment you have a car worth $100k, the next, that $100k is gone. The dealer has the cash either way. – JoeTaxpayer Jul 22 '16 at 1:51
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    You are suggesting my assets total value doesn't change in the crash? There is a $100k difference between those 2 points in time. This is why you don't care for either of the other two answers. – JoeTaxpayer Jul 22 '16 at 2:23
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    @s-hunter: As another example, suppose you buy an apple for $1. The seller now has $1 and you have an apple worth $1. Together you have assets worth $2. You leave the apple in the sun and it rots. Now no one will pay $1 for the apple. Where the did the $1 go? It didn't go anywhere, because there was no $1 on your end. You didn't buy $1, you bought an apple. You still have the apple, but now it's rotten and worthless, and the combined assets of you and the seller now total only $1. – BrenBarn Jul 22 '16 at 4:38
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    @s-hunter The $100k of your money went to the dealer when you bought the car (I'm assuming for simplicity's sake that there are no loans involved, but even if there are, the exact same basic principles hold). Immediately after the purchase, you have $100k less in cash-like assets, and $100k more in tangible assets (assuming the car kept its value, which it doesn't, but that's simplifying all this again to fit in the comment space). The dealer has $100k cash he didn't have before, and lacks one $100k car that he did have before. Suddenly the car is worth $0. Financially, what changed? – a CVn Jul 22 '16 at 6:30
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In short, thanks to the answers and comments posted so far. No actual money is magically disappeared when the stock price goes down but the value is lost. The value changes of a stock is similar to the value changes of a house.

The following is the long answer I came up with based on the previous answers and comments alone with my own understandings. Any experts who find any of the following is 200% out of place and wrong, feel free to edit it or make comments.

Everything below only applies if the following are true: The stock price is only decreasing since the IPO because the company has been spending the money but not making profits after the IPO. The devaluation of the stock is not the result of any bad news related to the company but a direct translation of the money the company has lost by spending on whatever the company is doing.

The actual money don’t just disappear into the thin air when the stock price goes down. All the money involved in trading this stock has already distributed to the sellers of this stock before the price went down. There is no actual money that is literally disappeared, it was shifted from one hand to another, but again this already happened before the price went down.

For example, I bought some stocks for $100, then the price went down to $80. The $100 has already shifted from my hand to the seller before the price went down. I got the stock with less value, but the actual money $100 did not just go down to $80, it’s in the hand of the seller who sold the stock to me.

Now if I sell the stock to the same seller who sold the stock to me, then I lost $20, where did the $20 go? it went to the seller who sold the stock to me and then bought it back at a lower price. The seller ended up with the same amount of the stocks and the $20 from me. Did the seller made $20? Yes, but did the seller’s total assets increased? No, it’s still $100, $80 from the stocks, and $20 in cash. Did anyone made an extra $20? No. Although I did lost $20, but the total cash involved is still there, I have the $80 , the seller who sold the stock to me and then bought it back has the $20. The total cash value is still $100. Directly, I did lost $20 to the guy who sold me the stock when the stock has higher value and then bought it back at a lower price. But that guy did not increased his total assets by $20. The value of the stock is decreased, the total money $100 did not disappear, it ended up from one person holding it to 2 people holding it.

I lost $20 and nobody gained $20, how is that possible? Assume the company of the stock never made any profit since it’s IPO, the company just keeps spending the money, to really track down where the $20 I lost is going, it is the company has indirectly spent that money. So who got that $20 I lost? It could be the company spent $20 for a birthday cake, the $20 went to the cake maker. The company never did anything to make that $20 back, so that $20 is lost.

Again, assume the stock price only goes down after its IPO, then buying this stock is similar to the buying a sport car example from JoeTaxpayer (in one of the answers), and buying an apple example from BrenBarn(in one of the comments from JoeTaxpayer’s answer).

Go back to the question, does the money disappears into the thin air when the value of the stock goes down? No, the money did not disappear, it switched hands. It went from the buyer of the stock to the company, and the company has spent that money.

Then what happens when the stock price goes down because bad news about the company? I believe the actual money still did not just disappear. If the bad news turn out to be true that the company had indeed lost this much money, the money did not disappear, it’s been spent/lost by the company. If the bad news turn out to be false, the stock price will eventually go up again, the money is still in the hand of the company.

As a summary, the money itself did not disappear no matter what happens, it just went from one wallet to another wallet in many different ways through the things people created that has a value.

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Price and value are two different things. Price is determined by supply and demand. Value does affect the demand. People are willing to pay more if they value the item more but value is not price.

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