Are stock prices/values just an illusion?

[disneysteve]

I love to read the column by Marilyn something or other in Parade magazine. She answers questions on any and all topics and always has very insightful and thought-provoking information.

Someone recently asked about something she had written about how all the money supposedly "lost" by investors when the market crashed never really existed in the first place. Her explanation was very interesting.

Let's say a stock is currently selling for $20/share. You own 1,000 shares. Your brokerage statement indicates that your account is worth $20,000. Everyone else who owns the same stock also gets a statement indicating that their holdings are worth $20 times however many shares they own. But is that really true?

All of those investors can't really sell those shares for $20/share. The initial people who sell the stock might get $20/share but as more and more shares get sold, the price would drop and the later sellers would get less money.

So the value listed on your statement is never really accurate since you may never be able to sell your holdings for that exact price.

If your stock drops to $15/share, you will say that you "lost" $5,000 but since you most likely couldn't have actually sold the shares for $20,000, what did you really lose?

This may be more of a philosophical question than anything else. We need some way to value our holdings and the current system is what we've got, but it raises an interesting point of view.

[project15]

But you could have actually sold at $20k (or close to that if you check daily) and therefore not "lost" anything. I understand the point, but it's all a matter of being lucky and selling at the right time. If I sold at $25k, I would say that I made $5k.

[noppenbd]

The price of anything can drop like that. Look at house prices, especially for new homes. I think there is something like 12 months of inventory, meaning supply & demand are out of whack. So if everybody decides to sell at the same time the price falls (as it is now for homes). It doesn't mean the system is really flawed, just that you have to take "paper gains" as just that, with a grain of salt.

[disneysteve]

But you could have actually sold at $20k

Her point was that everyone holding the stock couldn't have actually sold at $20 because as the orders flooded the market, the price would have been impacted.

[noppenbd]

In a way, the idea is probably more valid if you look at the net worth of CEOs who have a large stock ownership in a company. If they sold all their shares at once they would drive the price down. So you have to treat those net worth numbers with skepticism.

[Broken Arrow]

Long story short, I think stock pricing is no more illusory or substantial than what the other person is willing to buy and sell it for....

The other thing brought up has to do with printed statements I think? If so, a printed statement would be printed with the value of the stock price at the time of printing, but yes, the value would have changed by the time the investor receives and reads their statement.

This "data lag" was a much bigger issue for previous generations, but technology has closed that gap considerably. Today, I don't even bother with printed statements, preferring to monitor everything in near real-time online.

[tulsa_sr5]

Kind of similar to that scenario you posted a while ago about the local bank that had a large ask/bid spread. If the holders won't sell for less than 10 and the potential buyers refuse to pay over 9, what is the stock *worth*?

[tripods68]

Today, I don't even bother with printed statements, preferring to monitor everything in near real-time online.

Same here BA...That's how I roll nowadays

[disneysteve]

Kind of similar to that scenario you posted a while ago about the local bank that had a large ask/bid spread. If the holders won't sell for less than 10 and the potential buyers refuse to pay over 9, what is the stock *worth*?

True. In that case, all those stock holders look at their accounts online in real time (for BA )and it says their shares are worth $10 but if they can't actually sell it for $10 at that moment, it isn't really worth $10, is it?

[tripods68]

True. In that case, all those stock holders look at their accounts online in real time (for BA )and it says their shares are worth $10 but if they can't actually sell it for $10 at that moment, it isn't really worth $10, is it?

That's when "triggers" function becomes useful. It automate the decision-making process (buy or sell) limit, market orders, trailing stop etc. This removed any ambiquity in the market place (or in this case "illusion") whether or not to sell or buy a specific stock. But this takes discipline approach.

[kork13]

not totally on-topic here, but when you sell a share of Company X, who buys it from you? Does your brokerage take ownership of it to sell to a buyer when one comes available? Or is there actually somebody there who sees your shares up for sale and says "oh, I'll buy that"? Same thing for buying.... Is there actually a seller who chooses to sell to you, or is there a pool of shares ready to be bought upon demand?

It's just something I've never quite understood about the market....

[Like2Plan]

Her point was that everyone holding the stock couldn't have actually sold at $20 because as the orders flooded the market, the price would have been impacted.

Actually, all the stock could have sold for $20/sh. The thing that is missing from this equation is the number of buyers because demand for the stock is what sets the price. If there were buyers for every single share, they could have been sold for 20/sh or the price could have been set higher than 20/Sh. .

[faithman1012005@yahoo.com]

Sounds like everything els in life, depends on value

Sounds to me like everything els in life, it depends on supply and demand and therefore what it's worth at the moment. I don't know if I'd say I actually made 5,000 etc.. if the market rose, for instance I don't think anyone would say I made 10,000 dollars on my home just because it appraised at a higher amount unless of course they actually sold the house and had the money in hand. Just some thoughts

[Scanner]

As Doc said to Marty McFly in "Back to the Future":

You are thinking 3 dimensionally, Marty. (Marty replies, "Yeah, I have a problem with that")

You are thinking 3 dimensionally, DisneySteve.

Your portfolio is only worth what it is worth what it is at any one time on the open market. As you know, that fluctuates, day to day, week to week, and second to second, depending. . .yes, she is right, if everyone dumps their shares of my mutual fund 2 minutes ago, then it's worth $0 on the market (but the dividends keep coming in, I guess).

[Scanner]

That brings up a couple of other points though. . .this subject may appear deeper than it really is.

What is it you are investing in exactly?

A debt sector investment (CD, bond, etc.) is a promise to repay you, with interest, over a set period of time. Sure, there is a bond market you can always liquidate your bond on, but if you can't sell it, at least you theorectically get your principal + interest.

An equity is only worth as much as anyone will pay at any one point in time.

Everyone should consider these points when making investments. I don't see bonds talked about too much around here (a lot of talk on CD's) but I think they are an underutilzed vehicle.