Owning a stock means owning a portion (usually very small) of a publicly-traded company. Therefore, if the value of the entire company fluctuates, so will the value of the stock.
When a share's price decreases in value, that change in value is not redistributed amongany parties –the value of the company simply shrinks. The stock market is governed by the forces of supply and demand. In other words, it is not a zero-sum game, like gambling in a casino, in which there is an equal loser for every winner, and vice versa.
How a Company's Value Can Shrink
First, we need to understand how a company's value is "created."When a stock's price increases, it does so because there are more people willing to buy the stock (demand it) than people willing to sell it (supply it). This high demand in relation to supply creates value for the stock because buyers must compete against one another for it, and the more they want the stock for themselves, the more they are willing to pay for it.
The opposite occurs when a stock price decreases, which simply results from low demand in relation to supply. Just as a high number of buyers creates value, a high number of sellers erodes value.
For example, Waste Management Inc (WM) has 422.03 million shares outstanding as of May 2020.If its share price dropped by $1, it would be roughly equivalent to a $422 million loss in (implicit) value.
So even though it might feel like someone is taking your money when your stock declines, the cash is simply disappearing into thin air with the popularity of the stock. However, this decline in popularity corresponds to something tangible— the company's ability to carry on its operations efficiently,which is reflected in its earnings.
Remember, you are part-owner of the company, so if the stock declines, it means you are part-owner of a company that is no longer perceived to be doing a great job of producing something. And, if you want to get rid of this company, you must be willing to sell it for less. Why? Because its inherent value is perceived to be worth less.
Therefore, on a very basic level, a realized loss from a stock is a reflection of the difference between the market's perception of the company when you bought it and the market's perception of it when you sold it.
(For more on this subject, check out When Stock Prices Drop, Where's the Money?)
FAQs
No one, including the company that issued the stock, pockets the money from your declining stock price. The money reflected by changes in stock prices isn't tallied and given to some investor. The changes in price are simply an independent by-product of supply and demand and corresponding investor transactions.
Do I owe money if my stock price drops? ›
No. A stock price can't go negative, or, that is, fall below zero. So an investor does not owe anyone money. They will, however, lose whatever money they invested in the stock if the stock falls to zero.
What to do when you lose all your money in the stock market? ›
How to Recover From a Big Trading Loss
- Learn from your mistakes. Traders need to be able to recognize their strengths and weaknesses—and plan around them. ...
- Keep a trade log. ...
- Write it off. ...
- Slowly start to rebuild. ...
- Scale up and scale down. ...
- Use limit and stop orders.
Short selling is a strategy for making money on stocks falling in price, also called “going short” or “shorting.” This is an advanced strategy only experienced investors and traders should try. An investor borrows a stock, sells it, and then buys the stock back to return it to the lender.
What happens when the stock price goes lower than what you paid for it? ›
If a stock is worth less than you paid for it, you don't owe money; you've just incurred a paper loss. It's unrealized until you sell the stock.
Can you get money back from losing in the stock market? ›
Even if your brokerage account suffers a loss of value, you have a chance to regain and even exceed the loss as the stock price recovers—as long as you don't sell your shares.
Can stocks go to zero? ›
When a stock's price falls to zero, a shareholder's holdings in this stock become worthless. Major stock exchanges actually delist shares once they fall below specific price values.
Do you lose all your money if the stock market crashes? ›
Again, you technically don't lose any money in the stock market unless you sell your investments. If you simply hold your stocks until the market rebounds, your stocks should regain their value. The key is to ensure you're investing in strong stocks that have the ability to weather market turbulence.
What happens if you lose 100% of your stock? ›
Impact on Investors After Bankruptcy
For investors who own shares in a company that goes bankrupt, the equity is wiped out, rendering their investment worthless. Big stock exchanges set limits on how low a stock can go before they take it off their platform.
Why do 90% of people lose money in the stock market? ›
Staggering data reveals 90% of retail investors underperform the broader market. Lack of patience and undisciplined trading behaviors cause most losses. Insufficient market knowledge and overconfidence lead to costly mistakes.
How Many People Lose Money in the Stock Market? About 90% of investors lose money trading stocks.
Why did stock prices suddenly drop during the Great Depression? ›
There were many causes of the 1929 stock market crash, some of which included overinflated shares, growing bank loans, agricultural overproduction, panic selling, stocks purchased on margin, higher interest rates, and a negative media industry.
When should I sell my stock? ›
Investors might sell a stock if it's determined that other opportunities can earn a greater return. If an investor holds onto an underperforming stock or is lagging the overall market, it may be time to sell that stock and put the money to work in another investment.
Can you owe your broker money? ›
A margin call occurs when the equity in your investing account drops to a certain level and you owe money to your brokerage firm. Margin calls must be satisfied by depositing cash into the account, or by making up the difference you owe by selling off assets or depositing other assets into the account.
Can you lose more money than you invest? ›
The biggest risk from buying on margin is that you can lose much more money than you initially invested. A decline of 50 percent or more from stocks that were half-funded using borrowed funds, equates to a loss of 100 percent or more in your portfolio, plus interest and commissions.
What happens if I keep buying and selling the same stock? ›
What Happens If You Sell and Buy Stock Same Day? If you're already registered to be a day trader, you're all set. But if you're not, your account could be flagged and your account may be restricted. Check with your broker about the rules for executing multiple transactions for the same stock within a single day.
What happens if you short a stock and it goes to zero? ›
For instance, say you sell 100 shares of stock short at a price of $10 per share. Your proceeds from the sale will be $1,000. If the stock goes to zero, you'll get to keep the full $1,000. However, if the stock soars to $100 per share, you'll have to spend $10,000 to buy the 100 shares back.
What happens if your brokerage account goes negative? ›
If your equity falls below the minimum because of market fluctuations, your brokerage firm will issue a margin call (also known as a maintenance call), and you will be required to immediately deposit more cash or marginable securities in your account to bring your equity back up to the required level.
