ajtj99's Market Pulse

[arjunah]

snoot: Every penny is accounted for if you measure profits and losses based on actual buys and sells. This is the transfer of wealth. The only dollars that “evaporate” are the paper gains that are measured on a “mark to market” basis.

If Company X with one million shares outstanding trades at a high of $100 and low of $10 the financial media will say that the company’s total market capitalization declined 90% from $100M to $10M and that $90M in wealth “evaporated”. But this 90% loss was only actually incurred by those who bought at $100 and who sold at $10. To the extent that holders of the stock sold into the decline, their loss of wealth (i.e. the amount of their wealth that was transferred) would be the difference in their cost basis and sales price, even though at one point they might have valued their net worth based on the $100 a share price.

To the extent that money represents a store of wealth, it only “evaporates” when it is physically destroyed or when it is devalued by the government. (Money can also “evaporate” in a fractional reserve banking system when a debt obligation is repaid, but that is a different application.)