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Can the Dow Fall Into Negative Numbers?

stocks; via Flickr

Question: My high school daughter asked me a question I can’t answer. Can the Dow fall to zero or into negative numbers?

Paul Solman: Ah, at last. A question I can definitively answer: ABSOLUTELY NOT! (Those capital letters feel so good; I usually use them for emphasis, like italics, which don’t seem to translate from my world processing program to the software of the Business Desk.)

The Dow is the weighted average of the stock price of 30 major U.S. companies considered representative of the economy as a whole. The stock price of any given company reflects its value in the marketplace. If that value falls to zero, the company goes bankrupt. The owners – the stockholders – can only lose as much money as they’ve invested. So the stock can be worth nothing, but not LESS THAN nothing.

Now, your daughter might be thinking, “Wait a second! If the company has more debts than assets, it’s worth LESS THAN zero, right?”

To which I answer, “Right, BUT….” The “but” is that a company is a “corporation,” a legal person, with this key provision: The “liability” of its owners (shareholders, ie., stockholders) is LIMITED. That’s why and how the corporation, originally called a “joint stock company,” came into existence, so money could be raised for the public for big projects (like exploring the Indies) without the investors worrying about people coming to take their houses if the company went broke.

So, holders of stock have liability (obligations) limited to the money they invested. They can lose all of it, but no more. The Dow is just a lot of such stock.

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