Share market losses cause many people to wonder where all the money goes during downturns or crashes. This short article explains the difference between a paper loss and a real loss.
During market crashes or downturns we often hear of share markets ‘losing’ billions of dollars. But what happens to all that money and where does it go? In fact, the answer is that it is purely a book figure – a ‘paper loss’. There is no magical drain other than the metaphorical one to explain this economic concept.
To put it ‘simply’ – imagine a real estate agent estimated the value of your home as $450,000. Next week a second agent estimates it would sell for $400,000. Have you lost $50,000? No, even though no money has changed hands, you may feel poorer. This is the difference between value (what someone may be prepared to pay) and the price at which a sale actually happened.
It’s the same with the share market. When there are more buyers than sellers, the price of a share increases and holders of that share feel richer. Conversely, when there are more sellers than buyers, share prices fall. The holder of devalued shares has not actually lost any money – unless they sell the shares and realise the loss.
Share speculators get burnt by rapid changes in value because they want to realise short-term profits. Investors hold on to the shares in quality companies through the price fluctuations because they believe in the future of the business and the flow of future dividends. We hope that better explains where the money goes!
For more information, contact us at Leenane Tempelton on 02 4926 2300 or email email@example.com