Where Does Your Money Go When Stocks Drop?

Share market loss is the worst fear of any investor. Nobody wants to lose money, but the fact is that losses are part and parcel of share market investment. Losses happen in the share market when stock prices take a beating. However, have you wondered where your money goes when stocks register price drop? Do they get transferred somewhere else or get deposited into an account? Let’s find out.

Money goes nowhere - there’s a drop in the value of investment

If you think your money gets deposited in someone else’s account or vanishes in thin air when stock prices drop, relax. Nothing of that sort happens. When stock prices fall, simply the value of your investment goes down. Let’s understand with an example.

Suppose you had purchased 100 company shares at ₹100 per share. So, you’ve invested ₹10,000 to buy them. If prices drop to ₹50 per share, the value of your investment reduces to ₹5000. However, you own 100 shares as you previously did, and they have no change. You suffer share market loss only when you sell those shares. When you do so, you convert your notional losses (losses on paper) into actual ones.

If you hold onto them, their prices may eventually recover, and your investment could regain or exceed its original worth. So, while your investment’s value may come down, there are no actual losses unless you sell your shares at a lower price.

In several past instances, share markets have crashed, and portfolios have been in the red. However, markets have eventually received and have handsomely rewarded those who stayed committed to their investment.

Approach to take when stock prices drop

It's natural to feel disheartened when stock prices drop. However, what is more important is not to panic and act hastily. When there's a dip in stock prices, evaluate:

• The real reason for drop

Find out the actual reason for the drop in prices. Is it because of economic turmoil or company performance? If it is because of economic upheaval, don't panic. On the other hand, if the drop is because of the company's performance, wait for some time before taking corrective measures.

• Reassess your portfolio

If the market downturn has significantly impacted your portfolio, you can contemplate reassessing your investment strategy. Use market downturn as an opportunity to buy stocks at a lower price and if you feel the company will recover, purchasing at a dip could lead to gains.

In conclusion

If you have lost money in the share market, use it as an opportunity to learn and not repeat the mistakes. Remember, a stock price drop is simply a reflection of changed market value based on demand and supply. Market drops are unsettling, but they are a part of the natural cycle. Keep a long-term perspective and avoid emotional decision-making to navigate downturns and benefit when prices rebound.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. It is not produced by the desk of the Kotak Securities Research Team, nor is it a report published by the Kotak Securities Research Team. The information presented is compiled from several secondary sources available on the internet and may change over time. Investors should conduct their research and consult with financial professionals before making any investment decisions. Read the full disclaimer here.

Investments in the securities market are subject to market risks, read all the related documents carefully before investing. Please read the SEBI-prescribed Combined Risk Disclosure Document before investing. Brokerage will not exceed SEBI’s prescribed limit.