NEW YORK (CNN/Money) -
I heard that the U.S. stock market has lost upwards of $9 trillion in market value since its peak back in 2000. What happened to all that money -- where did it go?
-- Alexander H., New York City
Hmm, let's see how I can put this...I guess you could say that money went down the drain, up in smoke, into thin air, down the rat hole...You can take your pick because they all pretty much sum it up.
But to really understand what happened to "that money," you've got to understand the concept of "market value."
Some people -- and based on your question I gather you're one of them -- seem to think of the value of the stock market as if it's an actual pile of money that grows or shrinks as the stock market goes up or down. But that's not the right way to think about it.
Market value isn't a big pile of money
You see, when investment pundits talk about the stock market gaining or losing trillions of dollars in value, what they're really talking about is the change in market capitalization.
The market capitalization for an individual company -- more affectionately known as its "market cap" -- is the number of shares the company has outstanding times the current stock price. General Motors, for example, has 560.4 million shares outstanding. Multiply that figure times GM's recent stock price -- say, 35 bucks a share -- and you get GM's market cap, $19.6 billion.
This figure fluctuates as the price of GM stocks goes up or down. Back in early 2000, for example, when GM shares were going for upwards of $78 a share, its market cap was a much heftier $44 billion or so.
The market cap for the entire stock market is the sum of the market caps of all publicly traded companies. One of the most widely followed benchmarks for the total U.S. stock market is the Wilshire 5000, which, despite the name, amounts to just under 5,700 stocks. (This number fluctuates as new companies issue shares and existing companies merge or bite the dust.)
At the market's high back in early 2000, the market cap of the Wilshire 5000 totaled $17 trillion. By the time of the market's low in early October, the index's market cap had shrunk by about half that amount, or about $8.5 trillion.
What does that really mean? It certainly doesn't mean that someone, somewhere walked off with $8.5 trillion (although corporate bigwigs who exercised options and sold shares at lofty pre-crash prices certainly walked away with substantial sums by selling their shares to other investors who then took the hit).
Rather, it means that investors overall have re-set the dollar value they place both on individual companies and the stock market overall. In this case, investors are saying something like, "Remember back in early 2000 when we thought the overall value of U.S. stocks was $17 trillion? Well, after giving it some more thought, we're revising our estimate downward by about 50 percent." Of course, this kind of re-evaluation goes on every time stocks trade here and around the world.
But market cap does have a practical "value"
As a practical matter, of course, the decline in the stock market's value does mean that investors overall have much less wealth than they had before. The value of our retirement accounts, college-savings funds and any other accounts that were invested primarily in stocks are worth a lot less than they were at the market's peak.
But that value didn't "go" anywhere, except to the extent that investors who sold at the top got a portion of that value by selling to other investors. Obviously, not all investors managed that; all the stocks in the market didn't change hands the day the market reached its peak. That value is just gone.
So in that sense money has "disappeared" for stock market investors, although, if history is any guide, that money will start to re-appear when the stock market eventually wakens from its torpor and begins climbing back to those distant peaks of early 2000. Let's hope it's not too long a climb back.
Walter Updegrave is a senior editor at MONEY Magazine and is the author of "Investing for the Financially Challenged." He can be seen regularly Monday mornings at 7:40 am on CNNfn.