Where does money go when the stock market crashes

January 27, by Rajat Sharma 1 Comment. I got asked this really interesting question:. Where does the money go when stock markets crash? After all, those who sell stocks, because of which the price corrects must do something with their sale proceeds?

Who makes money in a crash? Why this is particularly interesting for me is because 8 years ago I had the very same question, post the market crash — Those who are selling stocks must be doing something with their money? This is how one of my former professors explained it to me that time:.

No, they are doing nothing with their money. Think of it this way — Rs was not Rs really. The collective foolishness of people resulted in Rs.

Central bankers only printed what was right based on production and consumption patterns. People took the money in circulation, started leveraging it and inflated prices of all sorts of things. The value of money just dropped back to reality.

The price of gold was appreciating and I believed that everyone had started buying gold — that asset classes have their cycles.

Then gold prices started correcting sharply after Since then, stocks have performed poorly, commodity and oil prices are near multi year lows and real estate promoters are in jail. No one knows the answer.

What is stock market crash? definition and meaning - laqenyberegi.web.fc2.com

There is no correct answer. People regularly over and under value money, mostly based on how fearful or greedy they feel. Value of things is bloated out of proportion which gives a sense of enormous riches and availability of more money than there actually exists. In this endless cycle, those who buy more of asset classes like stocks, the price of which depends upon the assessment of people suffer the most when the value of money corrects itself.

Stock market crash - Wikipedia

The reason is simple — things here are priced based only on what somebody else will be willing to pay for it. What you have in your bank account is real money. Nothing else is real! Gold, real estate, stocks, commodities are all priced on the basis of human assessment.

Sometime back I had written a larger post on this subject here. Here is an excerpt from that post:. Markets may be fundamentally weak but could nevertheless keep getting irrationally expensive.

Conversely, fundamentally strong markets may not get the price they deserve for many reasons. Certainly, if you look around carefully you will see some obviously overvalued and undervalued businesses.

I am sceptical of the billion dollar valuations for some of the start-up companies these days, but could you be sure — of course not. Who knows how future might pan out? The right thing to do is to keep enough cash in your bank or in safe fixed income products, at all times. An advice repeated many times but seldom ever followed.

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Rajat Sharma is a well known stock market analyst and commentator.

He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.

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