economics.about.com: When Stock Prices Go Down, Where Does the Money Go?

[alexey]

http://economics.about.com/cs/finance/a/money_lost.htm

...

When you have a “where does the money go?” type question, a good way of answering it is to construct a simple example. We’ll use four different entities: one company, AOL, and three people named Mert, Becky, and Rachel. AOL has a share in the company that they are willing to sell, and each of our entities have the following amount of money in the bank:

Initial Positions

• AOL has $0 (but owns 1 share)
  
• Mert has $200
  
• Rachel has $500
  
• Becky has $1000
  

Suppose that the following events take place:

Share Sales

1. AOL has an IPO (initial public offering), and sells one share of stock to Mert for $30.
   
2. AOL’s stock goes up, and Mert sells his share to Rachel for $80.
   
3. The bubble bursts, AOL’s stock value crashes, and Rachel sells her share to Becky for $15
   

If we take each transaction one at a time, we can follow where the money goes. We’ll compare each person’s current wealth to the wealth they had when they started. First AOL goes public and sells a share to Mert for $30.

Transaction 1: AOL sells one share to Mert for $30

• AOL has $30 (down 1 share, up $30 from initial)
  
• Mert has $170 (up 1 share, down $30 from initial)
  
• Rachel has $500
  
• Becky has $1000
  

A tech boom occurs and Mert worries it may not last and he sells his share to Rachel for $80.

Transaction 2: Mert sells his share to Rachel for $80

• AOL has $30 (down 1 share, up $30 from initial)
  
• Mert has $250 (up $50 from initial)
  
• Rachel has $420 (up 1 share, down $80 from initial)
  
• Becky has $1000
  

Mert was right and the tech bubble burst. Rachel is worried that AOL may go bankrupt, so she decides to sell her share to Becky for $15.

Final Transaction: Rachel sells her share to Becky for $15

• AOL has $30 (down 1 share, up $30 from initial)
  
• Mert has $250 (up $50 from initial)
  
• Rachel has $435 (down $65 from initial)
  
• Becky has $985 (up 1 share, down $15 from initial)
  

...

Looks like Mert made the money there.

[twa]

The bears eat it?

Becky looks in good position

[thebluefood]

Mert's about to get a phone call from the SEC. :pfft:

[Larry]

So, what this nifty cutesy story tells us is that, when a stock goes down, the person who owned the stock at the time takes the loss?

Sounds like a job for :obvious:

[alexey]

Monday morning bump.