You bought a stock at 50Rs yesterday and today it opened at Rs 45. Where Rs 5 went?

Now, you are having an unrealized loss of Rs 5.

Here is an example of a gap down in Adani Enterprise

Why Prices Gap Up or Gap Down

So where does that Rs 5 went?

A common man starts thinking that his loss is someone else profits. And here, the other investor went rich by Rs 5 in a night. It is true if you are investingĀ for short term but wrong if your horizon is long term.

If you start thinking that your loss should be someone else profit then you are mistaken. If you think, how stock prices are increased then you will be able to understand where the money went.

Let us understand how stock prices fluctuate, in short.

Markets are made up of sentiments and every stock trade based on its company forward earning.

If you see Dmart, it is trading at Rs 1400. which is based on its 2020/2021 forward earnings. So the value of Dmart share is made by its investors based on these forward earnings. Here, you should not confuse share price with the actual price of the share which is very different. The actual price for accounting purpose is based on face value of the stock.

So when investors feel that the forward earning are very high or the company may not perform as estimated, its prices will fall. The reasons for fall in earning could be as small as a closure of 1 store of DMART. It could be also big as a hike in taxes of FMCG products.

This is when we see a gap down. Overnight due to some corporate actions or news the investor sentiments has changed and now Investors have a different perspective about Dmart.

Read: Here are some companies where the smart money is moving.

Now, these Investors are willing to pay less for the same stock. If some other investor is willing to sell it, a trade will occur and will change the Dmart stock price.

If the stock priceĀ is less than yesterday on the opening of the market, it simply means that investors are not willing to pay the same price as yesterday. But your profit was not eaten by another investor as you bought DMART based on these forward earnings which are based on assumptions.

If you invest in the market for less than in a year then definitely it is a zero-sum game but if you invest for years or decades then it is wealth creation game.