I have the impression that many people have the wrong mental model on stock market. I also had it before and it made sense on the surface. However it's not correct and it holds back people from understanding effects of things like interest rate increase, etc..
The first mistake is to think stock market as a kind of entity, like a bank. Like you give the stock market money and buy stocks. And later, you sell your stocks and take the money back.
In reality, you have money and say Alice has 1 share of a company. Alice wants to sell her stock for 100$ and you want to buy it for 100$. You give Alice 100$ and get the stock. That's it. The money is NOT is the stock market. It just changed hands.
You might ask, well but there isn't a “Stock Market” in your example, but it's right there hidden in plain sight. Alice's intention to sell, your intention to buy, and the actual transaction, records keeping all needs an infrastructure which we conveniently name as the “Stock Market”. Think of millions of Alices making billions of $ of transaction daily, you have your Wall Street.
But back to the original insight: The money is not IN a stock or IN a market. It just changed hands from A to B.
Let's say Bob has 500$ and Alice has 500$ and 1 share of Astral-Travel Inc.:
Bull market: Alice sells the stock to Bob for 100$ (setting the initial stock price) because why not. Later Alice reads news on how cool astral travel is and how it's going to boom next year. She wants to buy the stock back. But Bob read the same article and thinks 100$ is too cheap. Haggling back and forth (Stock Market), Alice buys the stock for 200$ from Bob.
Before: Total money in circulation: 600$ (Alice)+400$ (Bob) : 1000$, Bob has 1 share, Stock price 100$
After : Total money in circulation: 400$ (Alice)+600$(Bob) = 1000$, Alice has 1 share, Stock price 200$
Bull market 2: Bob's uncle is an astral travel fan and convinces him to buy the stock back because it's THE thing. Bob goes back to Alice and says he wants the stock back. But now Astral Travel is all the rage. So Alice is not willing to part so easily. She think 600$ is now a fair price. Bob has just that amount of money and he agrees to buy the share for 600$.
Before: Total money in circulation: 400$ (Alice)+600$(Bob) = 1000$, Alice has 1 share, Stock price 200$
After: Total money in circulation: 1000$ (Alice)+0$(Bob) = 1000$, Bob has 1 share, Stock price 600$
Bear Market: Now Bob wants to pay medical bills for 200$ but he spent invested all his money in that stock share. So he goes to Alice and tell her that he wants to sell the share for 800$. But the Astral Travel has now a competitor, the Cosmical Journey. Alice thinks the stock is not worth that much and offers 400$ instead. Having no other options, Bob takes the money and spends some on medical bills.
Before: Total money in circulation: 1000$ (Alice)+0$(Bob) = 1000$, Bob has 1 share, Stock price 600$
After: Total money in circulation: 600$ (Alice)+200$(Bob)+200$(Medical Inc) = 1000$, Alice has 1 share, Stock price 400$
So the price has plummeted.
Market Crash: A banker comes to Alice and offers to take her money and give her, say 5% interest per year. Alice is not happy with how the price fluctuates with her share and decides to take the risk-free interest. She thinks loosing sleep over her investment is not worth it. She goes to BoB and wants to sell back the stock, even without profit for 400$. Although BoB still wants to get the share, he doesn't have the money. He also became cautious and would like to have a kind of emergency fund and not go all-in this time. So he says he can only give 50$. He doesn't have any hope of getting it at that price, since he is already anchored-on the initial offering price of 100$ and doesn't think it can go below that. Bu lo and behold, in this super shallow 2 person market place, his 50$ is the only offer. Alice, now super scared about this steep decline, quickly sells the share for 50$, fearing that it might go even lower in price. Secretly she's happy that she made some money in the “stock market” even though some of her latest moves were not that smart. Bob is clearly in a worse situation before all the share trades. He blames the stock market and the ill-timed medical bill. But he's hopeful that AstralTravel will make a big comeback with the riches in the future. Especially now that he bought the stock real cheap.
Before: Total money in circulation: 600$ (Alice)+200$(Bob)+200$(Medical Inc) = 1000$, Alice has 1 share, Stock price 400$
After: Total money in circulation: 650$ (Alice)+150$(Bob)+200$(Medical Inc) = 1000$, Alice has 1 share, Stock price 50$
So, lot's of drama between Alice and Bob but the money is just changing hands. Not going in anywhere.
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