What Happens When the Stock Market Drops?

You notice it first when you check your 401(k) or investment account and the balance is suddenly lower. You didn’t take any money out or make any changes, but the number on the screen changed anyway.

What’s changed is the value of the investments in the account. When the stock market drops, the prices of many stocks have fallen. If your account holds those stocks, or funds that invest in them, the balance you see can fall too.

And when you hear on the news that “the market is down,” they’re usually talking about a major market index that has fallen as stock prices moved lower.

“The Market” Is Really a Lot of Stocks

News reports can make the stock market sound like a single thing with one price that rises and falls. But thousands of individual stocks are being bought and sold. On the same day, some can fall while others rise.

The numbers you usually hear on the news come from stock market indexes. Each index follows a specific group of stocks and tracks how that group is doing. The S&P 500, for example, follows about 500 large U.S. companies, while the Dow Jones Industrial Average follows 30 large U.S. companies. The Nasdaq Composite follows thousands of stocks listed on the Nasdaq exchange.

So when an index drops, it means the stocks it follows have moved enough overall to pull that index lower. It doesn’t mean every stock in the market fell, or even that every stock within that index fell.

How a Market Drop Shows Up in Your Account

If your 401(k) or investment account holds stock funds, a drop in stock prices can lower the value of those funds. You still own the same shares. Each share is just worth less at that moment, so the balance you see is lower too.

But your account won’t necessarily fall by the same amount you hear about on the news. The S&P 500 tracks one particular group of stocks. Your account might hold several different stock funds, along with bonds, cash, or other investments.

So the market might be down 2% while your account is down by more, less, or hardly at all. The number in your account reflects the investments you actually own, not the market as a whole.

So Where Did the “Lost” Money Go?

When headlines say the stock market lost billions or trillions of dollars, that doesn’t mean all of that money was taken out of the market and moved somewhere else. Much of the “loss” is a change in what the stocks are worth at their current prices.

Stock prices can change when new information changes how investors view a company and what they’re willing to pay for its shares. That could be new information about the economy, interest rates, company earnings, government policy, or a major event affecting businesses. If people become willing to pay less for shares, those shares begin trading at lower prices.

Say a company’s stock was trading at $100 a share and is now trading at $90. The company still exists and shareholders still own their shares, but those shares are now valued at $90 each. Multiply changes like that across millions of shares and many companies, and the total value of the stock market can fall by billions or trillions of dollars.

So when that value is described as being “lost,” there isn’t a giant stock market account where the missing money used to sit. The amount people are currently willing to pay for those stocks has changed.

We’ve only covered the basics of what happens when the stock market drops. There’s a lot more to how stocks, markets, and investing work. If you want to go deeper, Investor.gov has a helpful guide to How Stock Markets Work.