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?

  1. What is a stock split? Why do stocks split?

    All publicly-traded companies have a set number of shares that are outstanding on the stock market. A stock split is a decision ... Read Full Answer >>
  2. How do I place an order to buy or sell shares?

    It is easy to get started buying and selling stocks, especially with the advancements in online trading since the turn of ... Read Full Answer >>
  3. Is there a difference between financial spread betting and arbitrage?

    Financial spread betting is a type of speculation that involves a highly leveraged derivative product, whereas arbitrage ... Read Full Answer >>
  4. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  5. How does a forward contract differ from a call option?

    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>
  6. What is the difference between passive and active asset management?

    Asset management utilizes two main investment strategies that can be used to generate returns: active asset management and ... Read Full Answer >>
Related Articles
  1. Investing

    How ETFs May Save You Thousands

    Being vigilant about the amount you pay and what you get for is important, but adding ETFs into the investment mix fits well with a value-seeking nature.
  2. Investing Basics

    5 Common Mistakes New Investors Make

    When it’s time to start investing, watch out for these five common beginner’s mistakes.
  3. Investing Basics

    5 Investing Statements That Make You Sound Stupid

    If you want to talk investments without being mocked, avoid these five statements.
  4. Investing

    How to Effectively Monitor Your Stock Holdings

    Investors should concentrate on the business, not the stock price.
  5. Economics

    Tech Startups Can Save Detroit, Here is Why

    Rising from the ashes in the once proud auto-manufacturing City of Detroit is a rapidly emerging tech startup scene that could prove to be its salvation.
  6. Investing Basics

    Calculating Capital Gains Yield

    Capital gains yield refers to a security’s appreciation or depreciation during the time it’s held.
  7. Investing Basics

    A Primer On Investing In The Tech Industry

    The tech sector can provide fantastic returns for investors with a little know-how in the field.
  8. Mutual Funds & ETFs

    7 Best ETF Trading Strategies for Beginners

    Exchange-traded funds are ideal instruments for beginning traders and investors. Learn the seven best strategies for trading ETFs.
  9. Mutual Funds & ETFs

    3 Fixed Income ETFs in the Biotech Sector

    Learn about the top biotechnology ETFs, such as the SPDR S&P Biotech ETF, the First Trust NYSE Arca Biotech ETF and the iShares Nasdaq Biotech ETF.
  10. Stock Analysis

    4 Reasons Intercept Pharmaceuticals Should Be on Your Radar

    Learn about Intercept Pharmaceuticals and what type of biopharmaceuticals it seeks to create. Understand four reasons why the company is a good investment.
  1. Bid Wanted

    An announcement by an investor who holds a security that he or ...
  2. Hindsight Bias

    A psychological phenomenon in which past events seem to be more ...
  3. Paper Trade

    Using simulated trading to practice buying and selling securities ...
  4. Financial Exposure

    The amount that one stands to lose in an investment. For example, ...
  5. Bid And Asked

    A two-way price quotation that indicates the best price at which ...
  6. Compound Net Annual Rate - CNAR

    The return on an investment after taking tax implications into ...

You May Also Like

Hot Definitions
  1. Purchasing Power

    The value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Purchasing ...
  2. Real Estate Investment Trust - REIT

    A REIT is a type of security that invests in real estate through property or mortgages and often trades on major exchanges ...
  3. Section 1231 Property

    A tax term relating to depreciable business property that has been held for over a year. Section 1231 property includes buildings, ...
  4. Term Deposit

    A deposit held at a financial institution that has a fixed term, and guarantees return of principal.
  5. Zero-Sum Game

    A situation in which one person’s gain is equivalent to another’s loss, so that the net change in wealth or benefit is zero. ...
  6. Capitalization Rate

    The rate of return on a real estate investment property based on the income that the property is expected to generate.
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!