When the stock market falls overnight with bad news, and opens lower the morning where did the money go?
My understanding is that for every share sold there is a share bought. Someone is betting it will go up and some one is betting it will go down. Look at this scenario: Tom sells 100 shares of XYZ at $14.00 per share, Kay buys 100 shares of XYZ at $14.00, this is all on Friday afternoon before the bell. I do suppose the exchange gets a few cents for doing the trade, does any one know how much? The shares that Kay bought at $14.00 I assume had to be sold at $13.95 or so to give the exchange a profit? Is this right?
The next morning before the bell there is bad news out and overseas trading was down while we slept. The whole market opens way down. XYZ is $2.00 dollars down when the opening bell rings. Where did the $2.00 go. Kay had just bought that afternoon 100 shares for $2.00 more than what the share price opened at. Where did this $2.00 go?
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4 Comments to When the stock market falls overnight with bad news, and opens lower the morning where did the money go?
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It went no where because at the time of the price drop it was an UNREALIZED transaction. Think of it like a brand new car. The second you drive it off the lot the value of the car is 30% less. The money did not “go” anywhere. Same with stocks. They are priced on perceived value, NOT physical value. One day it is worth one amount, the next day it is worth something else.
How much he could sell his 100 shares RIGHT AFTER he bought them at $14 depends on how liquid the stock is. For a highly traded stock around $10 to $20 (ex. Back of America), the spread is most likely just 1 cent. So he could immediately sell them at $13.99 plus commission paid to his broker, again assuming the market had not moved during this time. However, for less liquid stocks, the spread can be quite high. As for exchange and clearing fees, retail investors generally don’t worry about them because almost all brokers these days adopt a bundled fee structure, that is, all exchange and clearing fees and credits are included in the commission, which is either a fixed rate (ex. $10) or calculated on per share basis (ex. $0.005 per share).
As for where the $2.00 went, well, it just disappeared into thin air, or “evaporated” as the media like to call it, especially during bear markets. In other words, all investors holding shares of XYZ overnight sustained a capital loss of $2 per share.
You haven’t quite got it right.
14.00 means 14.00 not 13.95. The exchange does not make a profit buying or selling stock. They charge a processing fee so small that it can be ignored in trading strategy. I just sold 500 shares for just under $7000 and my fee was 17 cents. Not 17 cents per share; just 17 cents for the whole trade.
The missing 2.00 in your example is called a “loss” because it is lost the same way 2.00 would be lost if 2.00 fell out of your pocket into the ocean, sank to the bottom and rotted to dust. It’s just gone.