Ever wonder where your money goes when the stock prices goes down? We rarely think about this because our mind is focus mainly on how much our loss is (as well as the sleepless nights we spent thinking about the loss hehe). Several questions come into mind. Does the company lose too? Does the money just disappear?
The stock market prices go up and down depending on several factors. I found an interesting article about how the money circulates upon buying and selling of stocks.
Let’s see how the following (fictional) story goes:
Introduction:
Three friends Joy, Juan, and Jose started investing in the stock market. They have 500 pesos each. Luckily, Globe has offered 1 share for 100 pesos (yayyy).
|
|
|
|
| Globe |
0 |
1 |
| Joy |
500 |
0 |
| Juan |
500 |
0 |
| Jose |
500 |
0 |
| Total |
1,500 |
1 |
1st transaction: Joy bought 1 share from Globe at 100 pesos.
Joy is excited to buy her first share from Globe. Joy tells her friends Juan and Jose.
|
|
|
|
| Globe |
0+100=100 |
1-1=0 |
| Joy |
500-100=400 |
0+1=1 |
| Juan |
500 |
0 |
| Jose |
500 |
0 |
| Total |
1,500 |
1 |
2nd transaction: Joy sells the 1 share to Juan for 250 pesos
Joy is lucky and sees that Globe stock prices went up to 250 pesos. She sold it to her friend Juan.
|
|
Money |
Shares |
| Globe |
100 |
0 |
| Joy |
400+250=650 |
1-1=0 |
| Juan |
500-250=250 |
0+1=1 |
| Jose |
500 |
0 |
| Total |
1,500 |
1 |
3rd transaction: Juan sells the 1 share to Jose for 50 pesos
Unfortunately, Globe stock prices went down to 50 pesos after Juan bought it. Feeling that he could lose more, he sold it at 50 pesos to Jose. Jose now has 1 share he bought at 50 pesos.
|
|
Money |
Shares |
| Globe |
100 |
0 |
| Joy |
650 |
0 |
| Juan |
250+50=300 |
1-1=0 |
| Jose |
500-50=450 |
0+1=1 |
| Total |
1,500 |
1 |
Final assessment:
Globe and Joy gained 100 and 150 pesos respectively. However, Juan and Jose lost 200 and 50 pesos respectively. A total of 250 pesos was gained by both Globe and Joy and a total also of 250 pesos was lost by both Juan and Jose. So there you go. Every loss one makes in the stock market means a gain for another some other lucky guy.
|
|
Money |
Shares |
| Globe |
Gain 100 |
Loss 1 |
| Joy |
Gain 150 |
0 |
| Juan |
Loss 200 |
0 |
| Jose |
Loss 50 |
Gain 1 |
| Total |
1,500 |
1 |
So did the Globe company lose any money while Juan and Jose lost money?! Actually no because they still held the 100 pesos they originally sold their 1 share. Globe could actually gain by buying back the 1 share at a cheaper price of 50 pesos.
So did money disappear magically?! No money actually disappears as the total money is 1,500 pesos throughout the whole story. It just moves from one person to another as we buy and sell stocks.
Hope this clears things up ^_^.
If you want to know if they are still friends after Joy gained money whereas Juan and Jose lost money, well in the end they realize that their friendship is more important (haha alright this is a corny ending I admit).
Popularity: 14% [?]
|
|
Receive articles on email
Subscribe through email
|
Nice one! A simple presentation and I understand it now. hehehe
Thanks!
^No problem. Stock basics is important to know so you can learn advance stuff hehe. Glad you liked it.
Thanks for this article, now I have the idea how to invest in the stock market and now I know where the investor’s money goes if he loss his investment. My question is; Is it safe to invest on line?
Joel´s last blog ..Meet the three leaders of the country’s biggest corporation on "The 3rd Internet and Mobile Marketing Summit 2009"
Very intresting
Nice article, hope you can produce more investors like us thru this.
i like article too simplest pattern to learn how stock market works…thanks it gives me idea
good example akoy naliwanagan…