Select Page

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

Looking for an expert?

The University of Arkansas Campus Experts website is a searchable database of experts who can talk to the media on current events.

Trending Topics:
Mars
State and local economy
Environmental economics
Immigration politics

‘A House of the Ozarks’; Exploring Arkansas’ Most Important Architect

The University Relations Science and Research Team

Camilla Shumaker
director of science and research communications
479-575-7422, camillas@uark.edu

Matt McGowan
science and research writer
479-575-4246, dmcgowa@uark.edu

Robert Whitby
science and research writer
479-387-0720, whitby@uark.edu

DeLani Bartlette
feature writer
479-575-5709, drbartl@uark.edu

More on University of Arkansas Research

Visit The Office of Research and Innovation for more information on research policies, support and analytics.

a graph showing research expenditure rising from under $120 million to over $170 million over ten years

Connect with Us