XX billions dollars slashed from the stock market! Is this real?

You will quite often hear that either across the entire stock market, XX billion dollars has been slashed from value of the stock market in a single day!

Or it can also happen with one individual stock, where the share price has fallen, for example, 25% in a single day. The headlines report that the company value has thus fallen by 25% in that day!

This is really a distortion. This often can take place with no such change in real value has occurring at all.

Common practice is to speak of company 'market value' by taking the price a share last sold for, and multiplying this by the number of shares.

This can give a very distorted view when things change.
Imagine a company with a share price of $100. If I own one share and sell it for $1, then by this same calculation, I have caused all investors to lose 99% of the value of the asset they hold. Of course these other shareholders have only really lost all this if they also sell their shares for $1 because I sold my share for $1.

In reality the price will only stay depressed if others also decide to sell, but all it takes is a small percentage of shareholders to decide to dump their stock to force a much lower price. If most shareholders still have a view the price is closer to original price, then nothing much has really changed apart from the 'market cap' figure. Every sale requires not just a seller, but a buyer. On a day of bad news buyers may be scarce and can offer really low prices in the hope that someone will need the money and be forced to sell. It is possible for the price to move a very significant amount on the sentiment of a very small amount of people. Sometimes in these situations the company will still be paying a dividend just as before so while there can be very few buyers for a while if you keep the stock nothing has changed. Note that those who do buy, buy because they also think the stock is worth more than the price they are paying.

Note also that the company itself is not really affected by the share price, unless they are in the rare situation of planning to offer more shares, or planning to issue shares, using them as currency to buy another company. In normal day to day business, share price has no impact on the company itself.


Further, a change in the share price may have little or no impact on the cost of buying the company. Certainly a lower price means some shareholders were prepared to sell for less, but how many shareholders? In a negative mood some will sell shares at any price (and without a buyer who conversely feels the price is good no sale will occur) but at this point all you are learning is the price the most negative of all stockholders will sell for, not the price the vast majority will sell
at. Even the person who bought this 'last trade' clearly expects a profit so now will only sell for a higher price.

Next time I am on this topic I will look at some the triggers for misleading falls (and rises) in share prices.