He may have more dollars in addition to that one, and he may have made a profit or taken a loss - but that one dollar you lost, he has…
Sure, but Andy L is still correct. A commonly asked question is When Stock Prices Go Down, Where Does the Money Go? It seems the OP’s question is based on the same principle, which is why I used the buying and selling of a car in my previous post as it’s easier to visualize. I think Andy L may have interpreted the OP’s question similar to me and is explaining where the lost value went and not the entire $10 originally paid.
Yeah I think i misunderstood the original question. Sorry about that.
In uncertain times like these, large investors will generally use the money from the sale of stock to buy an asset perceived as safe. And the safest assets are loans to the U.S. federal government. When investors buy U.S. Treasury instruments, the price goes up and so the effective yield goes down, to record lows this week.
To expand on this, say Alice has $100 in cash and decides to put in in the local bank. The bank keeps $10 on hand, and loans $90 to Bob. Bob uses the $90 to buy something from Charlie. Charlie puts 90 in the same bank. The bank keeps 10 on hand, and loans $80 to Dave. Dave uses the $80 to buy something from Ethan. Ethan puts $80 in the same bank.
The next day, Alice ($100), Charlie ($90), and Ethan ($80) all come to the bank and demand to withdraw their money in cash.
So somehow that $100 in paper money turned into $270 of wealth. But the bank still only has $100 in cash to give out.
Stocks settle in T+2 business days (trade day plus two business days) This is a holdover from the days where people would send in a check or deliver physical shares to the broker, it was T+5 when I started in the industry.
You’d want to check with your brokerage firm to see how they handle the uninvested cash, most common these days is a bank sweep feature; the cash is swept over into a separate sub account allowing the cash to be protected under FDIC. You’re free to leave the cash there until your next investment or you can transfer it to another bank account. It’s also common for most brokerage firms to offer check writing/debit cards for your idle cash.
I understand the point you’re making but it still seems off to me.
To use the example given “But if the price drops to $9, you’ve really lost $1, and the guy who has that dollar is the one who sold you the stock at $10.”
Now suppose I sell the stock at nine dollars and the price then falls to seven dollars. According to the above logic, I made two dollars. That would presumably offset the dollar I lost from the original transaction and now I’ve made a dollar profit.
That does not follow from the above logic. You haven’t made two dollars. But it could be said that the two dollars lost by the person to whom you sold those stocks is in your pocket. The fact that you have two dollars that they lost doesn’t mean those two dollars put you in the black or give you a profit.
If you buy a car for $1000 and then sell it for $900, where is the $100 that you lost? It’s in the pocket of the guy who sold it to you. If the guy who bought it from you, then has to sell it for $700, where did his $200 go? It’s in your pocket. It doesn’t mean you gained anything. It’s still a lost for you.
That’s what a *bank run *is, isn’t it? When a majority of depositors want to withdraw their money and the bank can’t fulfill their requests?
Maybe also helps with stocks to realize it’s not all zero sum, not on the real underlying market. When headlines say several $trillion were lost in the recent sell off, that’s net for society. The stock market, valued at current transaction prices, was worth $X tril, now it’s worth some $tril’s less. There’s no offset by which that becomes zero somehow.
Note that’s different from the zero sum derivative activity related to the underlying stock market. For example people who were long S&P index futures have lost a huge amount of money, every cent of which went to people where were short, sum of futures profit/loss is always zero. Likewise for physically shorting stocks. Stock owned by A was borrowed by B and sold to C, IOW B sold short. B’s recent gain and C’s recent loss exactly offset. But you still have A’s loss, which is not offset by anything. The total value of society’s wealth, as measured by current transaction prices, declined.
Yeah, a bank run is when the bank is forced to reconcile its ledger of money it created out of thin air against its cash-on-hand, and comes up short.
The loser is the one who sold it to Alice, whom you didn’t name, because that person should have held until it went to $20. And we don’t know how much that person paid for it. You have to back to the IPO for this kind of chain of reasoning.
I was questioning the idea, not endorsing it.
I think the way to determine if you gained or lost money in a transaction is to look at the difference between what you paid for something and what you sold it for. Where the price went after you sold it (or before you bought it) says nothing about your profit or loss.
Banks don’t create money out of thin air. They have customers who deposit money in the bank. They then loan the deposited money out and collect interest from the loans.
A bank run happens when customers want to withdraw their money from the bank and the bank doesn’t have it on hand because it’s been loaned out.
If the person who sold it to Alice made a profit, why would they be a loser? You assume they should have held it, but you don’t know the reasons why they sold when they did. Maybe they needed cash, or wanted to free up capital for a more lucrative investment in something else.