Where did all the money in the stock market go?

Since so many people are confused about this, I figured I would try and simplify and help you understand exactly where all this money went. But first you have to understand where it came from.

Let’s take one company for example. When this company (we’ll call it company XYZ) started, it was private, meaning the money to start and operate the company was brought in by its 3 owners, Timmy, Doug, and Jimmy. They each brought 1,000 dollars to the table.

By the end of the third month of operations in selling cat shampoo, they knew they needed to expand, because their business was selling this shampoo like hotcakes. However, their own cash flow was limited – so they knew they had to go outside and find some investors if they wanted to grow larger, faster. So, they decided to go to the investment bank and presented their case for taking their company public to raise additional capital, to buy a new store, and expand on their technology. After the investment bank reviewed their business, they decided they liked these 3 guys and their model, so they would help them write up an initial public offering, to help them raise additional capital. So, company XYZ’s investment bankers go to market, and persuade their investors to buy stock in team 1380. Before you know it, XYZ has raised 10,000,000 by selling 10,000,000 shares. Thus, each share is worth $1.

This money is now that of the XYZ company. They can do with it what they want, hopefully, to make additional money, in some cases these owners would pocket a good chunk of cash – but if they are smart they would use it to generate much more and make the value of the company greater. Now that the first round of capital has been raised, those stocks are held by private investors whom can do with them whatever they want, typically, buy or sell depending on how well the company is performing. They trade their stocks at the stock exchange. Those shares all start with a $1 value, but after the first day – they are only worth what someone is willing to pay for them. Similar to buying a house, the value of the home or stock goes up and down depending on the market and how the consumers feel about that market. Say the next day, a new company came out in the same industry, some may think this company will be a threat to your company, and instantly people want to sell their shares in your company, even at a loss, because they think the stock will be worth much less in a few months, they will take a small loss on their investment, rather than waiting for the stock to be worthless as they see the threat to your businesses as very real. On the flipside, investors may drive up the price of the stock, by thinking it is undervalued.. so they will be willing to pay more than a dollar of the initial share price driving up the stock value. Maybe that’s because they see your sales revenues continuing to grow over a period, and they know people will flock to buying shares in your company as people realize how strong a business it is.

So, real money has exchanged hands when the investors bought shares at the IPO (initial public offering).. money exchanged hands between ownership and investors. After ownership sells as many shares as possible, they stop selling. The only way for investors to buy more shares, is to buy between themselves. One guy may be willing to part with all of his shares if you are willing to pay a premium of 10 cents a share.. but their has to be someone that is willing to buy them, and someone to think what you think.

So, when we see a company’s stock price move up from it’s IPO price of $1 to $10, we are seeing what the investors think the value of the stock is (based upon a number of things). Investor A bought the stock for $1 a share, and after a couple years of steady growth and performance of the company, other investors drive the value of the stock up to $10 as they want in on the company. Investor A thinks he has made all he can with the company and the stock is too high, and it really isn’t worth the $10, so he decides to sell. He instantly makes profit in the difference for which he bought it and the amount it has gone up. Smart man, because news suddenly breaks that research says that there is a chemical you’ve been using in that shampoo, and your product could actually harm precious kittens. Overnight, people try and sell their shares off, knowing that sales and the business will likely fail because nobody wants your products anymore. Throughout the firesale, people are speculating on the value of the stock. Investor B waits until the stock is worth $5 and bails, Investors C thinks the company can still overcome the problem and $5 is a bargain, so he buys.. and so on until the price steadies.. whether that be at 0 value.. or somewhere above that.

Now think of the stock market as a place with thousands of companies like this and you can start to understand where exactly the money went. It’s either in the stock market, or in the hands of the investors. Everyone else that isn’t investing is likely working for one of these companies.

Hope this helps.

Your trusty neighborhood Accountant – Mark

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