Possibly stupid economics question

Jeremy · Post by **Jeremy** » 26 Mar 2009 23:38

Ok I'm sure there is an easy answer to this, but I've had a bit of trouble finding it.

My question is this - when you invest in shares etc. and they drop in price where does the money go?

For example I have $10. I give it a broker in exchange for $10 worth of shares. He then has $10 which he gives to the company I've bought shares in. The company has my $10 and I have $10 worth of their shares. Their share price then falls by 50%. I now have $5 worth of shares but surely they still have my actual $10? Even if lets say they spend my $10 and have $0, which is why their share price falls. Obviously they give my $10 to somebody, who maybe spends it or keeps it etc.

The point is that surely that $10 never disappears. I might only be left with $5 worth of goods, but my actual money should be floating around the economy somewhere.

With that in mind - when we have a global economic recession/depression as we are apparently in now - where is all the money? If lots of people are losing money, does that mean an equal amount of money is being gained by other people, and if that's not the case, where is the money being lost going?

mc · Post by mc » 27 Mar 2009 06:12

sorry for the useless reply,

but that's a damn good question...

slapdash21 · Post by **slapdash21** » 27 Mar 2009 07:34

i feel like the value is lost when the product or services are sold or bought for less than its worth. so if you buy $10 worth of stock in IBM, then less people buy computers in that quarter than expected, IBM drops the price of what they're selling. so i think the loss of value starts in the company when they're getting less money for the same products or services, and since you own part of the company the worth of your stock goes down and the small losses in profits for the company translate into loss of worth for your stock. maybe?

like its still technically worth the same, the demand for it is just less, the actual loss is in the books of the company which in some way trickles down to the people that own the company, and then down to the general public.

Tsiangkun · Post by **Tsiangkun** » 27 Mar 2009 07:37

http://jonathanjarvis.com/crisis-of-credit

Blue_turnip · Post by **Blue_turnip** » 27 Mar 2009 15:35

Without watching the linked video above (and thus not really having appropriate judgement), I don't think it really answers the question at hand. Although I don't doubt it'd be a damn good watch.

Lol, the money doesn't go anywhere. The price of a stock merely reflects what people think it is worth.

Imagine I sell you a computer for $1000. Then someone smashes it and you don't have any insurance. The money hasn't disappeared, but the computer's value has.

Because the economy's seem kinda fucked up, most companies will suffer. People (and thus the market) see the companies as worth less and are then willing to pay less for stocks. Thus the market plummets. No money has actually been removed from the whole system.

The funny thing about the economic crisis is that not everyone has lost money, but the hype makes it seem so. Everyone has lost something though, when the economy goes sour. Thats because the economy is the production and distribution and consumption of goods, and all that jazz. Companies need a good economy to make a profit.

Imagine now that you buy a computer for $1000. Then someone comes to you the next day and says they'd only pay you $600 for your computer. You havn't 'lost' any money. You still have the functional computer you payed a grand for yesterday.

The difference is that with objects such as computers, their value comes from their uses. Whereas its the liquidity of a stock is important to people. People want to know that they can sell that shit whenever, and thats how they value it.

IMO, stocks are probably halfway between the first computer example and the second, but a fair bit closer to the second. The price of the market is dependent on the profits of the companies in the stockmarket. At the moment they're earning less money, so the value of the company has decreased a bit, but not really all that much.

Anyway to kind of sum up my rant, no money has been 'lost'. The valuations of everyones portfolio has gone down. However until they sell their stock, a loss hasn't been realised. They still own X number of shares of a company.

Jeremy · Post by **Jeremy** » 27 Mar 2009 15:36

Peter you're not answering my question. I understand why share prices go down. What I don't understand is how everybody can lose money - rather than some people losing money and other people gaining money.

The same applies to that link Cameron - which I've seen before - I feel like I understand the causes of the current crisis fairly well, and I'm not asking a question about that.

I appreciate both of you trying to help though, so thanks.

Jeremy · Post by **Jeremy** » 27 Mar 2009 15:45

Thanks Ollie, but I still don't understand.

Ok so you sell me a computer for $1000. It turns out the computer is bullshit and after sending my people around to beat you up, I realise that it's only worth $10. I sell it on to Anssi for $500. I have now lost $500, but you still have my $1000 - so no money has been lost - I'm down $500, Anssi is down $500 and you're up $1000, but have a black eye.

Now comparing that to the share market. I buy $1 trillion worth of shares in Badcock and Brown. They now have $1 trillion. They spend that money buying computers from you, which all turn out to be worthless. You now have $1 trillion while they essentially have nothing. Their inability to use computers results in their business collapsing and their share price falling dramatically. I lost most of my $1 trillion - but the point is that it still exists. You actually have the physical money in loose change around your house somewhere (probably mostly down the back of the couch).

Now obviously a large part of the current crisis is the fact that people spent money that didn't actually exist, but even if we put that aside, lots of people have been losing large amounts of money in investments. Surely, as you say, that money must still exist somewhere? So where is it? Who are the people who have the money that has been lost? Why do they have it?

Blue_turnip · Post by **Blue_turnip** » 27 Mar 2009 15:59

The reason it seems like everyone has lost money:

-Some was money that didn't exist
-People also think they have lost stuff when they really havn't (ie when their super fund goes down like 40%)
-And then there are some smart people who capitalised on the bad decisions of others. But you don't hear about them, because if you did there wouldn't be the negative hype in the first place, and people thus wouldn't have made bad decisions (to really really oversimplify something)

Also not every company is babcock and brown. Yes sometimes a businesses goes kaput and shareprice drops to zero. We hear a lot about these companies. However most of the time the shareprice of other companies just drops significantly, without the underlying intrinsic value of the company dropping. This is where all the "OMG I'VE LOST ALL THIS MANEY" comes from. Noones really lost anything unless you sell your shit right now (which is obv. what a lot of people are doing)

BainbridgeShred · Post by **BainbridgeShred** » 27 Mar 2009 16:42

Ya isn't it wrong to assume in the first place that the money was ever physical. For instance your money goes to Citibank or wherever and Citibank turns around and spends a billion dollars lobbying the government on the assumption that the housing market will continue to go up, and then when it crashes the money has already been lobbied away or paid to employee's? Who knows

Tsiangkun · Post by **Tsiangkun** » 27 Mar 2009 16:44

Yeah, it was just credit money. People were gambling with loaned money.

The people cutting these big loans are missing money.
The people who have lost money got screwed when people who had borrowed money invested, needed to cash out large parts of their investments to pay back their loans. A lot of honest companies thought they were supported with real money investments, and it disappeared when the loan backing the money needed to be paid.

They probably shouldn't let people take out loans and then invest in the market.

BainbridgeShred · Post by **BainbridgeShred** » 27 Mar 2009 19:41

I did some more thinking about this while I was at basketball.

It really doesn't matter whether the money is paper or electronic. Forget about the company and the bank too it is irrelevent.

"Person A" has 10 dollars.
"Person B" has a stock worth 10 dollars.
"Person A" trades his 10 dollars for "Person B's" share of stock.

At this point, nothing has happened. A piece of paper symbolizing an asset has been traded for a share of stock symbolizing a stake in the company. Neither is worth its weight in gold, and even if it was gold being traded it wouldn't matter it is simply another symbolic representation of wealth.

Now, back to our fictious people. If "Person A's" share of stock drops in value to $5, "Person A's" OVERALL net worth has declined by $5. $5 of wealth has been completely utterly DESTROYED. It simply no longer exists, and a fraction of "Person A's" symbolic representation of his net worth has gone to dust.

This is deflation-total money in the world is now $5 less. Before, if you would have added the assets of both Person A and Person B you got 20 dollars, now you only have $15

Blue_turnip · Post by **Blue_turnip** » 27 Mar 2009 20:04

Yeah, no money has been lost (If it had, then there wouldn't be inflation), but a lot of wealth has been lost.

SlashC · Post by **SlashC** » 27 Mar 2009 21:57

Iron Clad Ben · Post by **Iron Clad Ben** » 28 Mar 2009 08:52

The way I see it, an item's monetary value at any given time is simply what someone else is willing to pay for it. So if you buy a ten dollar stock, and later it drops in value, you can only find someone else who will buy it for $5.

The total valuation of all the assets in the world is not fixed. You couldn't get someone to buy everything in the world all at once (I saw something that valued all the wealth in the world at $293 trillion USD). The value of things is changing all the time. Look at crude oil, it took huge swings because of supply and demand, but a barrel of crude oil is still a barrel of crude oil whether you can sell it for $50 USD (approx price now) or $175 USD (near peak price last summer).

Take for example an original still the in box WHAMO hackysack from 1982. Back then it probably sold for $5 or $10. Now it can sell for $150, because that is what people are willing to pay for it.

A stock is simply an asset the same way. At any given time, it's worth what people are willing to pay for it. The money doesn't "go" anywhere if it goes down in value, much the same way money doesn't just manifest itself into existence if it goes up. Someone is just willing to pay more or less for it than they did a certain time ago.

BainbridgeShred · Post by **BainbridgeShred** » 28 Mar 2009 09:31

That's absolutely ridiculous. I'd doubt if the combined wealth in the world could even be counted in the trillions. Maybe now that we've crashed but that still seems unlikely.