Where Does the Money Go?

With all of the talk about the decrease in the value of the stock market and the huge losses that people are suffering, I thought I would share the following question & answer from a few weeks ago on AskMe.com.

The point is that the wealth that disappeared never really existed. The way the numbskull media are reporting things, you would think Martha Stewart and her gang of delinquent CEOs were breaking into old folks' homes and stealing the cash that they had stuffed under their mattresses for their retirement years.

Anonymous asked this question on 6/21/2002:
When the stock market drops significantly, such as the drop for the past two years, there are a lot of investors losing money. Where did the money go? I know before the market drop, the high price level was supported in part by margin buys. Therefore, the high price level is partially inflated by margin loans. However, for the past two years, it is said that trillions of dollars disappeared in the stock market. After the margin factors are adjusted, where did the trillions of dollars go? Do the trillions line up the pockets of some smart investors who took the money out before the market plunged?

TaxGuru gave this response on 6/21/2002:
You are confusing cash and wealth. The value of the stock market isn't actual cash. It's just an estimate of what people would pay for those shares at a certain point in time. If those perceived values decline, the overall value of the stock market drops accordingly. No cash changes hands.

It's the same with other assets, such as real estate. If your home is considered to be worth $200,000 today and its perceived value drops to $150,000 next year, your wealth will have decreased by $50,000. However, nobody is receiving that $50,000 in cash.

It's the exact same thing with the stock market. Perceived values don't equate to any actual money changing hands.

Kerry
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 7/08/2002 08:44:00 PM Send this post: