Stock Market Corrections

Stock Market Corrections – Where Does the Money Go?

We hear about stock market corrections all the time in the media. ‘The stock market lost millions/billions of dollars today’ as though it slipped down between the sofa cushions never to be seen again. But the reality is, that money ‘lost’ is only lost on paper.

In fact, unless you sold your stocks at less than the price you purchased them for, you haven’t lost real money, although if you sell you may have ‘lost’ the difference between selling them at their highest value and the price you sold them for.

Perspective – Value Versus Price

To understand how money is ‘lost’ on the stock market you need to understand the difference between value and price. The value of something is what someone is, in theory, prepared to pay for it. The price is what someone actually pays for it.

For instance, you may have paid $500,000 for your house. When you decide to sell an estate agent may say ‘Your house is worth $1,000,000 dollars.’ But when it comes time to sell the house, the highest bidder might offer $950,000. You haven’t lost $50,000, because you never had it. But you have made $450,000—the difference between what you originally paid for the house, and what you sold it for.

The same is true of stocks. If you bought Widget Stocks at price of $100 per share, and sold them for $120 per share, you have made a real profit of $20 per share.

If, however, the shares rose to a value of $160 at some point before you sold, and then dropped back to $120, you would consider you had lost $40, despite the fact that you had actually realised a profit of $20, and the $40 you ‘lost’ was only ever theoretical, or a ‘paper loss’.

Short Term, Long Term

Generally, the people who get ‘burned’ in stock market corrections are speculators. Those investors looking for quick, short-term profits.

Unless you are very skilled at reading the market and have time to watch the ups and downs on a minute-by-minute basis, not to mention following the financial and political press, you should view stock market investment as a long-term proposition.

Underlying Value

If you have faith in your investment objectives and have done your due diligence on the underlying value of a company and their stock, short term ‘corrections’ should not affect your investment strategy. Quality stocks will almost always regain their position, as you can see in our article on Bull & Bear Markets.

In short, the secret is to stick to your strategy and not be spooked by the headlines.

Getting The Right Advice

As with all things financial, getting the right advice is crucial. Someone who understands stock market trends and is skilled at predicting corrections can save you from both real and theoretical losses.

If you would like to include direct investing in the stock market as part of your portfolio, Manly Financial Services has the knowledge and understanding to help you find the right stocks at the right time. Call us on (02) 9976 3388 or contact us via the below link.

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