During a share market correction or downturn the media will report that a certain market has ‘lost’ billions of dollars. But what happens to all that money and where does it go? Is it really lost?
The answer is that it is purely a book figure – a ‘paper loss’. There is no magical drain other than the metaphorical one to explain this economic concept.
Imagine a real estate agent estimated the value of your home as $450,000. Next week a second agent estimates it would sell for $400,000. Have you lost $50,000? No, even though no money has changed hands, you may feel poorer. This is the difference between value (what someone may be prepared to pay) and the price at which a sale actually happened.
It’s the same with the share market. When there are more buyers than sellers, the price of a share increases and holders of that share feel richer. Conversely, when there are more sellers than buyers, share prices fall. The holder of the devalued shares has not actually lost any money – unless they sell the shares and realise the loss.
Share speculators get burnt by rapid changes in value because they want to realise short-term profits. Investors hold on to their shares in quality companies throughout price fluctuations because they believe in the future of the business and the flow of future dividends.
The secret is to follow your investment strategy not the headlines.