Can the stock market go to zero?
afrugaldoctor.com
afrugaldoctor.com
Even his closing statement contradicts itself:
So in conclusion, rest assured
that as long as you are properly
diversified, your stock investments
won’t go to zero.
This brings up an interesting question: How high is this long-tail risk of a European investor who invests in US stocks? The risk that Europe at some point decides to seize their peoples stocks. Or that the US decides to not respect holdings by Europeans anymore.
What happened to Chinese and Russian people who held US stocks which they bought via the Chinese/Russian stock market? Did those investments got wiped out too? Did their governments seize those? Or did the remeining investors in the US had a gain from the Chinese/Russian investors "disappearing"?
it would depend on what it means to hold stock "via the stockmarket".
If those chinese/russian citizens had a legal entity in the US, and purchased via a US broker, then they ought to be able to claim legal ownership of those stocks they purchased.
If, on the other hand, the stock was purchased on custody by a chinese/russian entity, then the govt would've been able to seize that ownership.
Because that is how the world works today. People from all around the world buy shares of companies all around the world. But the companies don't know those people. If Europe decides to seize all stocks of their citizens, it could do so by just seizing the brokers.
This is a funny sentence if you know how US brokers operate, because: -- The stock is registered at Cede and Co. In your broker's name (not the client's name). -- Most US brokers don't hold all the stock that their clients "have" in their account. They lend out stock with or without the client's approval. -- It has happened that a broker doesn't own the stock that any of their clients bought through them at all. -- Brokers can buy unsettled stock for clients which subsequently "fails to deliver". Meaning: the client gave the broker money to buy a stock, the broker gave nothing in return (but claims that the client has a stock even though it was never delivered). -- In the US it is entirely possible that a company on the stock market offers x amount of stock and market participants short 2x while 3x amount of call options are in the money to be delivered and brokers are on the hook for that. That means that 5*x of stock can "exist" even though that amount was never issued by the company. Source: this is what happened during January 2021 short squeeze.
So yeah, you have legal ownership. Until you suddenly don't at some point in the future.
People say this as if it's evidence of some dark, fraudulent conspiracy.
But it's simply because the exchange allows traders to sell short. If Alice owns 100 troy ounces of gold held in her name at an exchange, and Bob borrows 50 troy ounces and sells them short to Charlie, then Alice owns 100 and Charlie owns 50 when there are really only 100 in the vault.
People own more shares of Tesla than the company has issued, and there are more dollars in bank accounts than the Treasury has issued, and it's all normal and natural and the way the system is supposed work.
that's their own fault and lack of knowledge. Nobody has any responsibility to educate them but themselves.
that's totally fine if it was lent and re-lent out and short sold etc.
After all, you don't bat an eye that similar thing happens with cash!
The only problem i have with your explanation, which is also the only part i dont think is true, is that the broker's "fail to deliver" portion. The broker _owes_ the buyer a stock, and there's a clearing house that ensures the broker is good for their money. Which is why Robinhood stopped the purchases of GME at that short squeeze, because they can't place enough deposit to ensure that they _could_ make whole their buyers at the clearinghouse.
And as far as I can tell, at least with the Shanghai Stock Exchange, it didn't go to zero in 1950. It was simply closed and liquidated, and that implies that people got back whatever the market value was. That isn't going to zero. I don't know if the money was confiscated by the government or not.
So if one's diversification strategy needs to somehow take into account literal revolution, then I'm not sure how one does that. All bets are off.
Public and private corporations are chartered by governments.
Real estate is titled into existence by governments.
Currency and bonds are issued by governments.
When the regime ends, these assets may or may not be recognized by the new regime.
Gold, fine art and crypto are the exceptions to the rule.
Whereas real estate has no value if the state says that it now belongs to someone else.
And if the exchange was closed and liquidated due to a revolution, who are the investors getting whatever the market value was from?
It is obvious that the political power can decide to abolish the market (Russia and China) and that's another issue.
With regards to the last point, a close parallel would be to ask at what happened to people exposed to Russian stocks prior to February 2022. While not going down to zero, suddenly being cut out of the global market has a similar effect.
Sounds like Boltzmann distribution in action but in economics form. ;)
Understatement of the year? About 20-200 public companies go bankrupt in a year [1]. So about 0.01% of the numbers quoted.
"Not all" is doing some heavy lifting there.
[1] https://www.jonesday.com/en/insights/2022/01/the-year-in-ban....
- AND there are no market makers / liquidity pools,
- AND none of the holders of a stock have external pressures to sell (futures/options),
- AND the business itself hasn't filed for bankruptcy
Then no: The last traded price will be non-zero, and all sellers will have withdrawn from that market, as without external pressures, sellers will just wait out until buyers return to the market. In the interim, the price would remain fixed to the last traded price until trades resume.
It is fundamentally irrational to sell a stock at 0 under these narrow circumstances, when compared to the infinitely better option of just waiting until market trades resume.
Otherwise, yes.
- MMs/LPs create 'synthetic buyers' by facilitating order fulfillments, taking on some risk in hopes of making a return via the spreads in between buy & sell orders. Their participation, even in extreme circumstances, mean that price discovery continues even when everyone wants to withdraw from the market.
- Futures & options create obligations for buys/sells in the future due to the nature of said instruments.
- The bankruptcy portion is self-explanatory: A stock is worthless is there's no business to back the claim up.
I am the backstop. If the stock market goes to $1 I will personally buy all public companies in the US using the change I found underneath my couch. I am willing to make this personal sacrifice to maintain the financial stability of the free world.
It's not a burden I take lightly, but it's one I take of my own volition.
The article itself presents a much better reasoned account of all this than your comment.
When a company goes bust it isn't worth 0. Its actually worth way less year 0. (In other words it owes creditors money.)
Yes, it'll own some assets, customer lists, trade marks, copyrights, maybe even property, vehicles, desks, a coffee machine, whatever [1].
The liquidator will come in, assess quickly how much everything is worth, then plan how to spend as much time as possible disposing those things so their bill more-or-less matches the money raised. (Cynicism maybe... but as a stiffed creditor it sure seems that way.)
So you can't "buy" the company for $1. The company has lots of (hopefully) valuable assets. But it also has lots of creditors.
[1] one of my distributors declared bankruptcy, leaving us an unpaid (thankfully software) bill. The liquidator sold all the assets and surprisingly the most gained was on their customer list. That alone would have made all the creditors whole. Instead the liquidator bill swallowed 95% of all the monies raised.
There's a lesson in there somewhere for creditors and owners to work together to extract maximum value -before- formal bankruptcy starts. Probably easiest to do if the big creditor is not a bank.
Absolutely true.
I've seen scenarios where creditors and owners work together. In practice what this means is that one or two big creditors - usually friends with the owner, or unofficial partnership - get their money back, dozens of small suppliers and other unsecured creditors get shafted.
If there is no prospect of people buying and selling the thing any more, or the thing doesn't even exist any more, then the price went to $NaN, obviously!
Stock markets are more likely than that but it is also something I wouldn't lose any sleep over.
As Hamlet would say, aye, there’s the rub. Economic collapse is actually far more frequent than is commonly believed, here survivorship bias of the US economy plays a staring role.
In the past century Chinese and Russian investments went to zero, not just stock but land, businesses, private property, it all went to zero. This is the largest country by land area and the largest by population. Given the average lifespan of empires is around 250 years, and the USA is going to be that soon in 2026, it may be even more likely.
Mathematically, do you believe perpetual growth in stock values and in concomitant asset inequality is feasible or even possible? Dubito ergo sum.
Indeed this is true for normal inflation too. Stocks, commodities, and so on are hood hedges against inflation primarily because the thing they are based on is "not cash".
In an inflation world it is -only- cash which deflates. Everything else (that is real), more or less, has steady value.
Time goes on forever, and present day capitalism is not the most effective economic system possible nor is it indefinitely sustainable, so in that sense it’s eventually guaranteed to go to zero.
Stock market != economy. If the stock market crashed overnight, the economy would take a hit, but the expectation would be for it to be functional.
Argumemts about rationality and arbitrage are good for quantitative finance books and the make-believe worlds they construct. They dont define the limits of what can actually happen in human economies.
No there are not. As a shareholder you cannot be held accountable for losses of the company you're holding the shares of. In the worst case, your share becomes worthless.
This is true. This could also change on the whim of a government. I don't think that's likely, but in a revolution? Who can say.
you frantically try to sell but there are no buyers at any positive price
finally a dodgy person shows up and is willing to "relieve" you of your stock, but at a price
the question is whether one can rationalize what can happen before it does.
that requires understanding in depth what the system is and how it might behave in extremes
open any quantitative finance book older than a few years and it will tell you that interest rates cannot go negative because... blah blah... some cash arbitrage
it turns out that arbitrage is not implementable...
I’m not aware of a recent example of public company shareholders being held liable, but it’s only one Supreme Court decision away.
I can imagine a circumstance where people want to get rid of their stocks because of reputational reasons.
People downvoting can't differentiate what is likely to happen from what is possible to happen.
Negative electric rates could be used to increase load on a grid that would otherwise be generating too much electricity.
Is there any kind of liability that comes with owning stock in a company? I don’t see any motivation to ever pay for somebody to take ownership of your stock.
clearly the company behind that stock is not viable if that sentiment persist but the negative market price is theoretically possible
While stocks have limited liability, there can still be costs associated with holding them which could theoretically drive their prices negative.