A:

First, a quick review of stock basics: owning a stock means owning a portion (usually very small) of a 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 amongst any 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.

Let's look a little closer at how a company's value can simply 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 a low demand in relation to supply. Just as a high number of buyers creates value, a high number of sellers erodes 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 Missing Money, Missing Socks? Coincidence?

RELATED FAQS
  1. How safe are money market accounts?

    Learn the difference between a money market account and a money market fund. Both savings vehicles are relatively safe, but ... Read Answer >>
  2. Why is Belize considered a tax haven?

    Explore the factors that make Belize one of the most modern and corporate-friendly tax havens in the world, including its ... Read Answer >>
  3. What is an assumable mortgage?

    The purchase of a home is a very expensive undertaking and usually requires some form of financing to make the purchase possible. ... Read Answer >>
  4. Why would a homebuyer need to take out PMI (private mortgage insurance)?

    Learn why some home buyers are required to take out private mortgage insurance (PMI), and how it affects the total monthly ... Read Answer >>
  5. Why does the majority of my mortgage payment start out as interest and gradually ...

    When you make a mortgage payment, the amount paid is a combination of an interest charge and principal repayment. Over the ... Read Answer >>
  6. What are the disadvantages of a Roth IRA?

    Get informed about Roth IRAs, which have a few disadvantages, including limited access to funds and contribution limits based ... Read Answer >>
Related Articles
  1. Forex

    Global Utilities: Exploring Revenue Trends & Fundamentals

    Analyze global revenue exposure in the utilities sector to learn about the impact of currency, regulation and economic growth on geographic contributions.
  2. Home & Auto

    4 Alternatives to a Traditional Mortgage

    If you can't qualify for or don't want a traditional mortgage, one of these options might be right for you.
  3. Home & Auto

    Understanding Mortgage Impound Accounts

    Home buyers with low down payments may get stuck with higher mortgage payments. Find out what you get for the extra money.
  4. Investing

    Municipal Bonds Offer Something More for Everyone

    Are municipal bonds really for me? The popular perception is that tax-exempt income only benefits those investors in the highest tax brackets.
  5. Retirement

    5 Top Alternatives to a Reverse Mortgage

    If you have substantial home equity and don't want to do a reverse mortgage to tap it for retirement expenses, cost out these viable alternatives.
  6. Credit & Loans

    What Is an Alt-A Mortgage?

    Called "liar loans" for their low documentation requirements, Alt-A mortgages were hot until the subprime crisis. Now Wall Street wants to bring them back.
  7. Home & Auto

    Understanding Mortgage-Backed Securities

    Find out the meaning of this popular asset-backed security and its benefits for banks and investors.
  8. Investing

    Berkshire Hathaway Stock: Capital Structure Analysis (BRK.A)

    Review the capital structure of Berkshire Hathaway, and understand how equity and debt capitalization and enterprise value may interact with each other.
  9. How the Future of Driverless Trucks Impacts the Global Economy

    A successful cross-border trip of a convoy of self-driving trucks across Europe gives insight to a future of autonomous vehicles to replace human drivers.
  10. Markets

    Chart of the Week: Why It’s Time for Caution?

    This week’s chart helps illustrate why we’re taking a more cautious view of global equities over the near term.
RELATED TERMS
  1. Primary Mortgage Market

    The market where borrowers and mortgage originators come together ...
  2. 100% Mortgage

    A mortgage loan in which the borrower receives a loan amount ...
  3. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against ...
  4. Mortgage Originator

    An institution or individual that works with a borrower to complete ...
  5. Secondary Mortgage Market

    The market where mortgage loans and servicing rights are bought ...
  6. Mortgage Pool

    A group of mortgages held in trust as collateral for the issuance ...
Hot Definitions
  1. Physical Capital

    Physical capital is one of the three main factors of production in economic theory. It consists of manmade goods that assist ...
  2. Reverse Mortgage

    A type of mortgage in which a homeowner can borrow money against the value of his or her home. No repayment of the mortgage ...
  3. Labor Market

    The labor market refers to the supply and demand for labor, in which employees provide the supply and employers the demand. ...
  4. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  5. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  6. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
Trading Center