When the Market Crashes: Are Stocks Worth Anything Without Buyers?

The value of stocks is inherently linked to the demand from buyers. When no one wants to purchase a stock, it does not hold any intrinsic value in the immediate market context. This is a profound lesson drawn from historical events like the Stock Market Crash of 1987, when vast portions of the stock market experienced a complete lack of buyer interest.

The 1987 Stock Market Crash: An Unprecedented Event

The infamous Stock Market Crash of 1987 was an alarming event that dramatically impacted the market on October 19th, 1987, known as Black Monday. However, the true crisis occurred the following day, October 20th, when the stock market locked up due to a complete absence of buyers. The market's opening bell rang without any willing purchasers, resulting in some of America's key companies' shares technically having no value for several hours.

During this critical period, the shares of significant companies were essentially worthless as no one was willing to buy them. This event underscores the crucial role of buyer demand in determining the value of stocks. The story serves as a stark reminder of how panic and fear can erase all investment value in a matter of hours.

Theoretical Value and Practical Scenarios

While in immediate terms, shares lose their value when no buyers are present, this does not mean that the business represented by those shares loses its value. Theoretically, under the right conditions, some value might still be present. This is because shares represent a proportional ownership in the business. Therefore, it is possible that someone might eventually buy these shares purely to own the company, irrespective of investment or speculation.

For example, investment companies like Baker Brothers have capitalized on this situation. They purchase a significant number of undervalued stocks in a company and then facilitate the sale of the company to interested parties at a premium price. This strategy leverages the undervaluation of companies due to market panic.

The Future Value of Shares

In the long run, shares can hold value if they represent a share of a company that is actually worth something. While no one may buy these shares at the moment, the company itself might retain value. This value can materialize through dividends paid to shareholders or through the company reinvesting profits back into the business.

Intuitively, the future profits of a company are a strong determinant of the value of its shares. Companies often distribute a portion of their profits through dividends, which can provide shareholders with a return on their investment. Furthermore, companies often reinvest their earnings to grow the business, which can further enhance its value over time.

Conclusion

While a glut of company shares with no buyers can dramatically reduce their value, this does not negate the underlying value of the business itself. The stock market is a dynamic and unpredictable entity, and past events like the 1987 crash serve as powerful illustrations of its volatility. Understanding this, investors must approach market crashes with a balanced perspective, recognizing both the temporary nature of share value and the long-term potential of businesses.