Monday, March 16, 2009

When stocks fall, where does the money go? Essential reading

Via Freakonomics, I get to an article that answers longstanding questions of mine ...

http://finance.yahoo.com/focus-retirement/article/106739/When-Stock-Prices-Drop-Where%27s-the-Money?mod=fidelity-buildingwealth

... So, if you purchase a stock for $10 and then sell it for only $5, you will (obviously) lose $5. It may feel like that money must go to someone else, but that isn't exactly true. It doesn't go to the person who buys the stock from you. The company that issued the stock doesn't get it either. The brokerage is also left empty-handed, as you only paid it to make the transaction on your behalf. So the question remains: where did the money go?...

... The most straightforward answer to this question is that it actually disappeared into thin air, along with the decrease in demand for the stock, or, more specifically, the decrease in investors' favorable perception of it...

Superb.

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