Financial Markets Book Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
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by Robert Hashemian

Page 222

2000 and 2001 proved to be the period that the bubble finally lost a good amount of air.

I also want to cover a concept here that seems to be confusing to some. Many times people ask, if a stock price drops to half of its previous value, where does all the money go? If the market value of a company drops from $2 billion to $1 billion because of a plunging stock price, where does the $1 billion go? Perhaps a good way to approach this is not to think of the stock price as money but just the last price paid for the stock. Think of it this way. If you buy a rare coin for a going price of $100 and suddenly its price drops to $50 (maybe because people discovered that it not so rare after all), the money hasn't gone anywhere (except the fact the seller got your $100 already) but the value of the coin has dropped.

The price of a stock at a given moment is equal to the its last transaction price. People who engage in momentum buying get to know this concept well.When a stock price has hit its peak and is about to turn around and drop, there is always someone who has bought the stock at that peak price and someone who sold at that peak price.With that transaction complete, the stock price becomes that price, but then as it starts to move down it leaves that buyer regretful because his shares now have a lower value, while the seller is happy because she sold her shares at a higher value. Another way to look at where the money has gone is that the money first changes hands and then the stock price is set accordingly. So by the time a stock price falls to half of its value and the company's valuation is cut in half, the money has already changed hands. The money hasn't been lost, but the value of the stock has.


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    Table of Contents Copyright and Disclaimer Foreword Money
    Bonds Futures Stocks Options
    Mutual Funds Retirement Final Words Appendix A
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