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What happened to all the money lost when the stock exchange crashed in 2000?
Ted J. -- East Granby, CT

As stock investors learned the hard way, much of that money was never really there.

Estimates of the total stock market losses — some $6 trillion from the peak in 2000 to the trough two years later — are based on the drop of market capitalization, a figure that amounted to trillions of dollars. The “market cap” for a company is the total value of all shares outstanding multiplied by the latest closing stock quote that company. Add up all those individual market caps and you get the total value of stocks in public hands. The drop in that total market cap is what most people refer to when they talk about the money "lost" in the market's millennium collapse.

But the "value" of all the stock outstanding at the height of the market bubble was really just an estimate of what owners of those shares would get if they sold them —  based on the price paid for the relatively few shares that actually traded hands. The quotes you see flying across the bottom of the TV screen are just the price of individual trades; if you sold in the next few minutes, chances are you’d get the same price for your shares.

But the “value” of a stock is not the same as, say, the value of a “hard asset” — like a barrel of oil or a chunk of real estate. A share of stock is just a piece of paper representing the earnings power of a business. And if that business stops make money — or worse, starts losing bucketloads of it —  those piece of paper can become worthless. (OK, maybe not truly worthless. You could always use them to wallpaper a bathroom.)

Take, for example, Qwest Communications (one of the few survivors from the telecom frenzy), which was trading at $58 a share in July 2000. Based on the actions of a relatively small numbers of investors willing to pay that much for the stock, all of Qwest’s other shareholders naturally assumed their shares were worth the same amount.

For people who bought at a lower price, those stock gains did represent wealth — on paper. Some people began spending real dollars (much of it borrowed), which helped boost economic growth. If you went to buy a house, your “bubble” net worth may have helped you qualify for a bigger mortgage. If you were a retiree, you may have finally taken that trip to Italy — because you thought you could afford it.

But the money supporting that spending wasn’t really there; paper profits don’t become real money until you sell the stock. Today, those same Qwest shares trade for less than $10 (about where it was trading in mid-1997 before investors took leave of their senses.) As investors quickly discovered when the bubble burst, paper profits are pretty meaningless when everyone heads for the exits at the same time. Who are you going to sell your stock to?

Some losses, though, were very real. If you were one of the unlucky folks who bought shares at the peak, you almost certainly lost money — as does every other investor who buys into a collapsing market hoping the worst is over. But to the extent most holders didn't sell, the paper loss simply wiped out the paper profit that was created by the inflating bubble.

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