Who Loses Money When Stocks Go Down?

In early 2021, the entire financial industry was stunned when retail investors, led by members of the Reddit sub-group “Wall Street Bets”, pushed GameStop (GME) share price up more than 1,000 percent in two weeks. Other struggling companies like AMC Entertainment (AMC), Nokia (NOK), and Blackberry also saw growth, thanks to attention from retail investors on social media. 

Investors who bought in early and sold when share prices peaked made an impressive profit in a surprisingly short amount of time. However, those sorts of returns are not typical – and they are unlikely to be repeated. 

Average investors usually make money from stocks in one of two ways. The first method involves buying solid companies while their shares are trading at low prices, then waiting for the market to catch up. This rarely results in rapid profits. It can take months – if not years – to see significant increases in share prices, and the rise happens gradually. 

The second way to make money from stocks has more risk, but it can generate returns more quickly. It involves choosing a stock that is just about to go up – for example, just before it announces an innovative new product or service.

When the announcement comes, investors who bought early can reap the rewards when the rest of the world buys in. In such cases, investors might see impressive returns in weeks or months rather than over the course of years. 

The trouble with trying to get ahead of the rest of the investing community is that there are no sure things. Even the best research doesn’t guarantee success, and the stock may never take off. It may even go down.

Who Loses Money When Stocks Go Down?

Buying and selling stocks is intrinsically risky. The performance of individual stocks and the market as a whole is not guaranteed, and there is always the possibility that stocks will lose value. That brings up an important question: who loses money when stocks go down? 

From a big picture perspective, when stock prices go down, the company as a whole is worth less. However, shareholders don’t actually “lose” money until they sell their stock. If the company is able to recover, share prices tend to recover as well. Shareholders who held onto their stock will see the value return to their investment. 

Of course, if the company doesn’t recover and the stock never regains its value, then shareholders lose their investment.

One example that made history is the collapse of Enron – a company that was once counted among the largest in the United States. At the company’s peak, Enron’s stock price topped $90 per share. Just before Enron declared bankruptcy in December 2001, the stock price went to $0.26. In the case of Enron, shareholders lost their money. 

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Do You Lose All Your Money If The Stock Market Crashes?

A stock market crash feels more alarming than the downfall of a single company. In March 2020, rapid drops impacted markets around the world as shareholders sold their stock due to concerns related to the COVID-19 pandemic. 

The good news is that historically, the stock market has always recovered from crashes. Over time, it regains its value and goes on to achieve new heights. That happened in the case of the March 2020 market crash, as well as every previous economic disaster. As with individual stocks, you don’t lose your money if the stock market crashes unless you sell your shares. 

The exception to this rule is those investors who purchase shares on margin – a type of credit extended by brokerage firms. A market crash can put investors in default of margin agreements, which changes the dynamic considerably. The loan must be repaid, even if the value of your portfolio has dropped. 

Do I Owe Money If My Stock Goes Down?

As long as you aren’t trading with borrowed money, such as a margin account with your brokerage firm, you don’t owe money if your stock goes down.

As with any asset – a home, a car, or piece of fine art – you still own the item regardless of how its value changes over time. 

If you purchase stock with your own funds, you own the stock no matter how much the market is willing to pay at any given moment. You don’t owe money if the value declines, and you don’t lose money unless you sell for less than you paid. 

What Happens If My Stock Goes To Zero?

Stocks dropping to zero is a sign that the company is in trouble. At the very least, the stock is likely to be delisted from exchanges, which makes buying and selling a much more complex process.

Most companies choose one of two options in this scenario – either they go back to operating as a privately held company, or they declare bankruptcy.

In either case, shareholders lose their entire investment. 

What Goes Up When Stocks Go Down?

One of the most effective ways to protect a portfolio from ups and downs in the market is diversification. That means buying a variety of assets that behave differently when market conditions change. 

For example, most investors have noted that bonds have a history of going up when stocks go down because they are considered a safer bet when market conditions are volatile.

Gold (GLD) is another popular choice for investors who want to keep the value of their portfolios stable when stocks go down. 

In addition to choosing several types of assets to offset market changes, it is possible to have a diverse mix of stocks that move differently when the market reverses direction. For example, consumer staples tend to do well when other stocks go down because people continue to buy necessities when economic conditions are poor. 

What To Do When Stocks Go Down

Market ups and downs are a part of life when you invest in stocks. While it can be difficult to watch the value of your portfolio drop, the best thing to do when stocks go down is to wait.

In most cases, stock prices will recover over time – and so will your portfolio. However, if you choose to sell for less than you paid, your losses are locked in – you won’t own shares when they regain their value. 

What Are Day Traders and Swing Traders? 

There are specialized investors known as pattern day traders and swing traders who attempt to grow their portfolios quickly.

Instead of evaluating stocks by the company’s financial health, product lineup, innovation, or any other fundamental characteristic, they analyze historical patterns in an effort to predict future results. This is referred to as technical analysis. 

Day traders buy and sell stocks throughout the day, rarely holding anything overnight. The goal is to predict small changes in share prices and then capitalize on those changes, buying low and selling high in just a few hours. Swing traders take a similar approach, but they hold stocks for up to a week. 

This type of trading requires intense commitment. In addition to the research, day traders must monitor market activity constantly. If successful, you can make money from stocks quickly, but it is important to note that this method is best suited for experienced investors with time to devote to research, analysis, and monitoring the market. 

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