Every sharp drop in the stock market, as measured by indexes like the Dow Jones Industrial Average or the S&P 500, leads to news reports about the loss of billions or even trillions of dollars in overall value and the consequent drop in the value of 401(k) plans and other retirement accounts linked to market performance. The lost money may seem to simply vanish, or perhaps wind up in the pockets of bankers and professional traders rather than the ordinary investor. The truth, however, is that the money was never really there to begin with.
A stock exchange is organized for the buying and selling of shares of stocks. The market brings together buyers and sellers, either in a physical space or in an online trading environment. In the United States, the New York Stock Exchange, formally known as NYSE Euronext, is the oldest stock exchange. It is often highlighted on news reports as traders scramble to place bids to buy and sell shares, or as someone of note rings the opening bell to begin the trading day. The NASDAQ is an electronic stock exchange that handles a large volume of stock transactions.
The owners of shares of stock make an offer of a price at which they are willing to sell their shares. Potential buyers make offers as to how much they are willing to pay. When buyers and sellers agree on a price and on the number of shares to change hands, a transaction takes place, and the shares are sold at the agreed price. The price of the most recent transaction is listed as the stock's quote. The listed price is very different from a listed price of an item on a store's shelf. The stock price represents only the most recent sale, but is not a guarantee of the price of any future transaction.
Loss in Market Value
In August 2011, news reports cited the loss of trillions of dollars in the value of the stock market as the Dow lost more than 500 points in a single day, continuing a market slide that began in July. The loss was the result of the combined drop in the value of all stocks traded as individual stock prices fell. However, the apparent loss does not mean that trillions of dollars have vanished. Instead, the loss represents the aggregate revaluation of stock prices.
Long Term Trends
Although the stock market sometimes experiences dramatic swings in overall value, its long-term trends in performance are positive. That is, investments in the stock market tend to grow over time. As of 2007, stock index returns averaged about 10 percent over the long term, according to an article published by USA Today.
- NYSE Euronext: Company Overview
- Museum of American Finance: What is the NASDAQ
- CNNMoney; $2.8 Trillion Lost in Market Turmoil So Far; Aug. 11, 2011
- Associated Press; Where Does Money Lost in the Stock Market Go?; Oct. 12, 2008
- USA Today; Investing 101: Stocks Go Up, Stocks Go Down, But They Average 10% a Year; Jan. 22, 2007
- John Moore/Getty Images News/Getty Images