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Where's my money gone? - Views on News from Equitymaster
 
 
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  • Apr 16, 2009

    Where's my money gone?

    For many a lay investor, it's a little perplexing to think of what happens when one buys a stock and subsequently sees its price fall, from say Rs 1000 to Rs 600, and then sells it at Rs 600. A discussion relating to such a transaction usually evokes a flurry of curious questions, mostly seeking to know exactly where it is that the money (Rs 400 in this case) went, looking almost like it simply disappeared into thin air.

    That Rs 400 doesn't go to the person you bought the stock from. You already paid him Rs 1,000 while buying the stock from him, after which no extra amount goes from you to him irrespective of the amount of money you loose when your stock's price falls. It doesn't go to your broker, he just gets his fixed commission for completing the transaction. And it obviously doesn't go to the one you sell the stock to at Rs 600. So the question remains, who on earth does your hard earned Rs 400 go to?

    To solve this intriguing mystery, imagine that you have bought a new bungalow in Lonavala for Rs 5,000,000. You've bought it in a scenic, peaceful location, where there is neither noise nor pollution. You were willing to pay the seller a premium to the rates prevailing in the town because of the beautiful view and location of the bungalow and were confident that you would be able to command the same premium if you were to sell it at a later date. And in that way, you become the proud owner of a bungalow worth Rs 5,000,000.

    After 2 years pass by, you suddenly get the news that the hills that your bungalow overlook are now going to be blasted down, and a cement factory is now going to take its place. You stew with anger and immediately contact the local broker with the intention of selling your bungalow as soon as possible. After all, the very reason for which you had bought the property now no longer applies. Your start getting quotes from sellers, and realise not a single one is ready to pay you more than Rs 4,000,000 due to change in the property's attractiveness. But for you, that's a straight loss of Rs 1,000,000. So what happened to that Rs 1,000,000?

    Not much really, as you may have now realised. It's just that the value that the market or more specifically, the people in the market are willing to ascribe to your bungalow is now lower than the price you bought it. Its location and view are not that attractive anymore, leading to lower demand for it and consequently, a lower price.

    The very same thing applies to the stock market and the individual stocks bought and sold on the exchanges. The stockmarket is not a zero sum game like many people think it to be. Your loss doesn't necessarily have to be someone else's gain. Just like the attractiveness of the above bungalow, the prospects of businesses can change along with the various macro and micro factors affecting each business. And along with that changes the price of the stock, which stands for nothing but the value ascribed to the business by the market at that point of time.

    You may also want to view our detailed discussion on the various factors that affect and move share prices for a better understanding.

     

     

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    1 Responses to "Where's my money gone?"

    Chandrakumar Karunamoorthy

    Apr 20, 2009

    You are rightI agree with you. But, the person who sold the stock for Rs. 1000 might have booked profitalso avoided the chance of losing. So, in one way the person who sold the shares, gained.

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