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In times of market volatility, you might wonder: Where does the wealth go? The simple (yet also complicated answer) is – it vanishes.READ THE ARTICLE
What is “wealth”? Many view wealth as a liquid; being poured from one cup into another. However, the concept of “wealth” isn’t like energy or momentum. Why? “Because the amount we pay for financial assets changes.” While not physical property, financial wealth consists of how we value things, such as stocks, crypto, houses, etc.
Market-to-market accounting: For a deeper understanding of wealth, you also need to learn the basics of market-to-market accounting. As stated here, this means that “ALL shares or units of an asset are valued at the market price.” And, “the market price is the price of shares that get TRADED.” It’s why stock shares go up and down in price, or why something might be viewed as worth less than it was prior.
The concept of “pulling market money out”: If wealth is intangible, you might also wonder how that applies to pulling your money out of one stock and putting it into another. In theory, this isn’t what happens. Your money might “move” from one stock to another, but nothing is “put in” or “taken out”. In the end, the non-traded stocks take a hit from the traded stocks by going down in value, “even though they don’t change hands.”
Understanding wealth numbers: All this being said, it might appear that the numbers we use for wealth are fake, which is partially true due to something called “price impact”. This means that asset prices are determined by supply and demand. As a result, in order to truly know an asset’s price impact, you must sell. Above all, keep in mind that an asset class going down doesn’t mean money is moving somewhere else in the economy. It ceases to exist, but on the flip side, “paper wealth is as ‘real’ as wealth gets.”