When The Stock Prices Drop, Where Is The Money?

Navigating unpredictable changes in the stock market is full of challenges for investors. Have you ever wondered where the money goes and how it disappears suddenly when you incur losses in investments? A fall in stock prices reflects a change in market valuation of the company. You will know with the help of this guide about what actually happens when stock prices fall drastically. Before that it is important to recognize the factors that drive stock prices to move in a particular direction.

Why do Stock Prices Fall?

Sometimes the market reacts suddenly to unexpected situations and investors should be prepared for such uncertainties. Stock prices may fall due to complex interplay of company specific issues, broader economic and market conditions, investors sentiments and technical factors. Here are several factors that determine a stock’s prices to go up and down.

 Demand and Supply Factor

The stock prices might fall down because of fresh selling in the market or the fall in the demand of a product or services related to the company. Demand and supply has a major role to push the prices in favorable directions and if a stock is not in demand then it might result in dropping of prices. To know in depth how demand and supply works in the stock market, you can enroll into trading in the zone course offered by GTF.

Market Correction or Economic Reaction

The fall in stock prices may occur due to economic activities such as market corrections that are kind of natural adjustments after periods of excessive market growth. Companies have several difficulties in generating revenue or carrying the business activities smoothly during economic recession which represent a decline in economic activity. A major correction in the stock market leads to sudden fall in the stock prices.

Investors Reaction and Behavior

Investors’ behavior towards the stock market contributes to the drop in the prices. A selling pressure in the market creates a situation of panic and stress forcing the investors to sell their shares to protect them from major losses. Investors go through emotional challenges and these responses affect market movements.

Poor Fundamentals

A decline in the company’s stock prices may occur due to its poor financial performance. If the company reports lower than expected earnings, revenue, or profit margins, investors might lose their confidence in the company’s operations and in its future prospects which can be a major reason for the decline in stock prices.

News Impact or Geopolitical Events

A sudden event or negative news about the company such as management scandals, legal issues or adverse events may create a selling pressure in the market because of which the prices can fall to below levels. Political Instability is also a major factor that can cause decline in the stock’s prices.

Where Does the Money Go?

Suppose, you are an investor who has invested Rs 100000 in “XYZ” company where you have purchased 1000 shares each at value of Rs100. Now if the value of each share becomes Rs 50 then the total valuation of an investor remains 50000 with an unrealized loss of Rs 50000. No actual money is involved until the loss is realized by the investor; it is just an estimation of the value. So, it is an evaluation of the net worth of assets owned by the investors. Any gain or loss is called paper loss or paper gain until the value of gain or loss is realized by the investor.

So technically, no one loses or gains money, it’s just the valuation of assets owned by the investors. If you are not selling your shares in losses, no value is lost till it is realized in actual money by selling the shares. Therefore; in real when stock prices fall, the perceived market value of the company decreases. The loss actually represents a reduction in market valuation without physically moving somewhere.

What to do when Stock Prices Fall?

Many investors end up panicking during recession times and are not able to be calm and patient when they see potential losses in their portfolio. This is the time where investors should think intellectually and make wise decisions and be confident in their research. Here are some tips which might prove to be useful during uncertain times.

Avoid Sudden Decision Making

Investors should always be emotionally prepared to deal with market uncertainties.  When the stock prices experience a decline, investors should not make sudden decisions while they should remain confident upon their research and financial goals.

Revisit Your Financial Goals

Instead of panicking out, investors should revisit their financial goals and ask themselves if they are comfortable with market volatility to invest in the market. Market fluctuation is a natural and essential part of the stock market and an investor has to remain comfortable with market volatility by matching their risk tolerance. To sustain the market volatility, you must maintain your peace of mind and revisit your investment strategy.

Increase your Investment

Instead of squaring off your position, market dip is the best time to invest more. As you already know, buying on dip is an investment strategy, so when the prices fall suddenly, there are high chances that in the long term price will increase.

Demand and Supply zone

When the stock price falls rapidly, look for the demand and supply zones in the security to adopt a better approach. Never make a long position in the demand zone without confirmation when prices experience this kind of fall. You can pick a trade with confirmation only when the lower timeframe demand zone is supported by higher time frames.

Demand and Supply theory is one of the most reliable theories on which traders can highly depend in the cases of steep fall in the prices.

Wrapping It Up…

In an investor’s portfolio, losses and gains are not in actual terms until they are realized by them, it just represents their asset valuation. If losses are realized only then it can be described in actual money terms. Demand and Supply is one of the major causes of change in prices which can be learned thoroughly from the Trading In the Zone course offered by GTF. The course offers a well built demand and supply theory which can refine your investing and trading skills.

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