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When money is lost in the stock market, where does it go?

When money is lost in the stock market, where does it go?

Wayne Lee, department chair and professor of finance, replies:

If I build a house and the house burns down, was there a real monetary loss? After all, the money spent on construction did not disappear; it went to pay for labor and materials. But there is a real monetary loss because the expenditures incurred in construction produced no future economic value. My personal loss is the value of current consumption foregone, and I am poorer as a consequence.

By the same token, firms make investments to grow and expand their businesses. High share prices induce firms to increase their level of investments, and firms finance these investments through retained profits, borrowing and the issue of new equity shares. But when these investments generate no future economic value, then money is lost, share prices fall and shareholders are less well-off.

The stock market is not simply a casino. There are real economic consequences when share prices decline. Investors lose their savings and consumption plans are curtailed. As demand falls, firms compensate by reducing prices and by cutting costs to avoid losses. The objective of fiscal and monetary policy is to reverse the contraction in economic activity by stimulating demand and investment.

About The Author

University Relations Science and Research Team

University Relations Science and Research Team

Matt McGowan
science and research writer

Robert Whitby
science and research writer

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