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comment by kleinbl00




user-inactivated  ·  2469 days ago  ·  link  ·  

I'm working on trying to read that graph. FAANG is the best anagram every though.

kleinbl00  ·  2469 days ago  ·  link  ·  

*Acronym

And yeah I love it

user-inactivated  ·  2469 days ago  ·  link  ·  

So. What happens to the money that went into stocks when stocks crash? Does it disappear? Does it go back to the banks?

kleinbl00  ·  2469 days ago  ·  link  ·  

Think of it as an exchange. A dollar is worth two coconuts. If you have two coconuts, you can reasonably expect to trade them for a dollar. Until there's a coconut blight, the coconut harvest goes down and demand for coconuts rises Now coconuts are a dollar each. Or maybe the Maldives discover an easy way to ship coconuts for Florida and suddenly coconuts are three for a dollar.

You don't have dollars. You have coconuts. The exchange of dollars to coconuts changes based on market conditions.

Suppose you're a big booster of solar energy, and you have a pension fund. In that pension fund you have ten thousand dollars. You decide SunEdison has a bright future so you buy ten thousand dollars worth of SunEdison stock. Now you have zero dollars in your pension fund but you know you can exchange it for whatever your 500 shares (or whatever) of SunEdison stock are worth.

THIS IS THE IMPORTANT PART

You have already lost your money. Your money holdings are zero. However, you have traded them for what you think is a greater future value. And if SunEdison goes to $25, you can cash out your 500 shares (or whatever) and suddenly you have $12,500.

But you don't have that $12,500 until you exchange your shares for cash.

Now suppose that instead of going to $25, SunEdison blows up. Now, in addition to having zero dollars, you have 500 shares (or whatever) of worthless stock that you can exchange for exactly nothing.

So. Money is neither created nor destroyed. VALUE, on the other hand - the value of your investment - is fluid.

The money that went into the stocks was spent by whoever sold you the stocks. What you've lost, in a nutshell, is the money you'd get from selling it to someone else.

Does that make sense?

someguyfromcanada  ·  2468 days ago  ·  link  ·  

FYI: SunEdison was trading at $0.37 on Friday. Most bankrupt companies like SunEd, which had a positive asset/liability ratio, stop trading while in protection but when they emerge some share value is retained even though they may be forced into trading OTC.

kleinbl00  ·  2468 days ago  ·  link  ·  

So glad I offloaded mine at a lot more than that.

someguyfromcanada  ·  2468 days ago  ·  link  ·  

Sweet. I have an idiot friend that drank the Kool-aid while working a summer at Nortel and bought 100 shares at $142. As a student. He had faith so was a buy and hold guy. They were literally at $0 not soon thereafter.

user-inactivated  ·  2467 days ago  ·  link  ·  

I used to work at Nortel. I got into the stock buying program while it was all still skyrocking up up and up. The stock hit $90 and I freaked out and bailed on all Nortel Stock and pushed everything into an index fund. This decision is why I will get a retirement.

user-inactivated  ·  2468 days ago  ·  link  ·  

Dude. Perfect sense. Thank you.

someguyfromcanada  ·  2468 days ago  ·  link  ·  

This might be TMI for you but....

A company may decide to "go public" with an initial public offering (IPO) of its shares if they want to raise significant money or make the shares more liquid. (Private company shares have a limited market for various reasons and can be hard to sell which depresses their value.)

The first step in an IPO is to consult with investment banks (usually more than one are involved). They determine if there is a market for your shares and what the potential price would be.

Say the banks determine that you can sell one million shares at $1.10 each. They then agree to buy those shares at $1 each and pay that risk-free money directly to the company. When the shares open for sale to the public, the investment banks take the risk that they will sell for $1.10 or more, as that is how they make their money. If the price soars while the banks still have not sold all of their shares, they make more. If it plunges, they don't make as much. Having a stock price soar immediately is not a good thing for a company as it means they "left money on the table" as the company was undervalued and the share price paid to them should have been higher. For example, if the share price was $2 at the end of the first day, they should have received more like $1.90 from the banks and so they failed to capture a lot of money. It is good for the banks as they made more money but bad in the sense that no one wants to habitually underprice a stock as then companies will not want to use you.

The shares then trade hands at whatever price people agree to sell and buy for. The company can then use that share price to issue options to employees (who then make money if the price goes up and nothing if it goes down) or to sell shares to outsiders to raise more money.

If a company "goes bankrupt" (which can mean many things), it may be for a variety of reasons. Sometimes, like SunEd, they still have a positive asset/liability ratio and still have some value. In that case, shares will stop trading while they are in bankruptcy protection, but eventually when that process finishes, they can start trading again. So if you bought a share at $10 prior to bankruptcy, you may be able to sell it now for $10 or $1 or,like SunEd, $0.37, down from $38 I believe. Or maybe more as sometimes companies emerge much stronger after the bankruptcy process is over.

someguyfromcanada  ·  2469 days ago  ·  link  ·  

Simply put, it remains with the person you bought the stock from. Even though the structure of a public market is complex, it is still essentially buying something (a stock certificate) from another person and assuming whatever risks or benefits may accrue to that thing.