Market Mystery: What Happens To Investor Money "Lost" In Crashes?

Particularly after a market crash, puzzled investors wonder, "What happened to all the money I invested in Company X?" 

How did your $10,000, $100,000, or $1,000,000 investment just seem to evaporate, in whole or in part, when Wall Street stocks suffer a mini or major crash?

You know that your hard-earned cash that you'd hoped would be multiplied, will never fill your pocket or bank account again. You had big plans for that investment--perhaps it was going to fund a college education, a retirement, a second home, or an entrepreneurial venture--but, even if the market comes back stronger than ever, your money isn't coming back.

Where did the money go?

Is it in a coded account in the Cayman Islands? Is some Wall Street One-Percenter living it up at your expense? Is it funding a corporate executive's lucrative bonus...or golden parachute?

Follow the money.

Let's go back to the beginning when you had that $10,000 or $100,000 or $1,000,000 in cash. Though you could have requested those sums in paper currency, the cash-equivalent you had in the bank wasn't currency. Your savings account wasn't a cubby-hole at the bank with stacks of $100 notes crammed into it. Your money was in the form of electronic credits, key strokes, in the bank's computer.

When you gave your broker a check for $10,000 or $100,000 or $1,000,000, your bank transferred that electronic credit from your account to the brokerage account. The brokerage firm, in turn, transferred that amount to the company in which you had chosen to invest, and ultimately that company's assets were increased by that amount.

That's where the money trail ends.

In your transaction with your broker, you were well aware that your $10,000 or $100,000 or $1,000,000 was being converted into a certain number of shares of Company X. Those shares not only gave you part ownership of Company X, but if Company X prospered, you're shares would yield dividends that could be converted into cash or into more shares. You were happy to convert your cash into Company X and its success.

Company X performed admirably...in fact, it out-performed for several years. You congratulated yourself for your market savvy in investing in Company X back when it was just another start-up. But, slowly--so slowly that you weren't alarmed, Company X faltered. You made excuses for Company X...and for not selling it when you could have profited handsomely.

The faltering of Company X was gradual. It was volatile--one week up, the next week down.  There was always hope that it could regain its upward momentum. But then, conditions within the company--and within the broader market rapidly changed for the worst, and you watched, horrified and helpless, while shares in Company X first lost 90% of their value. Eventually the doors of Company X were closed, chained, and permanently locked.

"What happened to my money?" you wonder.For some time you benefited by owning part of Company X, but no longer. Not only had you lost benefits of ownership, but you'd now lost your investment, your money. In farmer's language, you'd not only lost this year's crop--you'd lost the seed for next year's planting.  All that money seemed to have gone down the drain, or to have popped into thin air like a soap bubble.

Gradually the fuzzy picture clears. 

Your cash stopped being cash at a certain point...and it stopped being yours. That point was when your cash was converted to shares in Company X.Furthermore, Shares were converted to Value...and Value fluctuated daily, momentarily. Furthermore, Company X no longer tied your investment to you in cash terms.  Company X was the beneficiary of your cash, but there was nothing in your brokerage contract that enabled you to demand a refund of your cash from the company--or the brokerage--except by selling some or all your shares.

What you ended up with was the VALUE of your shares.You traded dollars for Value--market value.And when the market (the market is all the sum total of all the participating investors) comes to see No Value in Company X shares, you lost the Value of your shares, plus, you lost the cash that you had once been happy to convert to shares.

Company X had taken your investment--your cash--and had, in turn, invested it in the Company. It invested in all sorts of things...capital improvements, equipment, research, development, marketing, employment, pension fund, stock buy-back, executive bonuses, etc. In the end, Company X had little to show for its efforts...and the little it had left was considered more a liability than an asset.

That's where your cash had gone by the time Company X...and the Market...bit the dust.