A question from a reader
When you buy stock and it goes down, as was the case with you and Microsoft, and you sell it, you lose money. When a stock goes up and you sell it you make money.
Yep, that's about it in a nutshell. As I understand it, part one of the question is essentially this:
When you have stock (such as Microsoft) that is high right now but you do not sell, how do you treat the hypothetical money you could make by selling?
Well let me just say right off the bat that I treat our investments by almost pretending they do not exist.
Almost. Anyone who's ever seen me check how the market is doing knows that's a bit of a stretch!
So when I say I pretend our investments don't exist, I mean we do not treat our investments as money we can tap into now. It is treated as unavailable and off the table. Unless there are unexpected expenses and I must sell something, these investments do not figure into our budget/living expenses.
It can be dangerous to spend money based on what you own in stock. People who live beyond their means are especially at risk when there is a market downturn. In recent years alone there have been a number of crises of epic proportion. In 1987 the stock market crashed. The dotcom bubble of the late 1990s burst in 2002. And In 2009, we watched yet another major market "adjustment" where many people saw their hard-earned 401ks shrink as much as 50%.
Fortunately the market has recovered well since all of these events, but like so many things in life, the market runs in cycles. That's why investors like Warren Buffet espouse the buy quality & hold philosophy.
While I still think investing in the stock market is the way to go (and can say that after weathering a storm or 2), treating stock investments as cash is a terrible idea. Remember: It's not cash until it's sold.
We could opt to sell a stock like Microsoft right now-- it's been soaring along quite nicely this year, and next year's projections are somewhat less exciting. There are schools of thought that suggest you should sell stock (or even just part of your shares) when the price is high and re-buy it when it goes lower.
I see nothing at all wrong with that, and I have done exactly that a few times with another stock we own called Stryker. That does get into capital gains and taxes territory (topics for another day). It also gets into how to buy & sell as well as how to place orders.
And it also involves that none of us have a crystal ball to know exactly when to buy and sell. When I find one, I'll let you all know.
Part 2 to the reader's question--
The money (in a stock) is not really yours and you can’t treat it as a constant because the market can change at any time, so what can you use your invested money for?
Pretty much everything we own can fluctuate in value. Owning stock means that over time prices will change. But the shares in the companies you own ARE in fact yours. No, you can't physically touch the shares, they have not been converted to cash, and you don't carry them around with you (no Microsoft earrings, for example). And yes, the market does change on a daily basis, depending what in the World is going on!!
Change is pretty much the nature of the universe, I'd say. But before this gets too deep, let's look at a few basic concepts.
How do I look?
Money in investments-- stocks, bonds, mutual funds and ETFs-- are part of your net worth. Your net worth can be estimated to show how you are doing financially. Stocks, bonds, mutual funds and ETFs are all assets that are part of your net worth.
Assets are what you own outright. Other assets are things such as a home you may own, other real estate properties or rentals that you may own, your 'stuff' in general, like cars, jewelry & furniture, and art & collectibles.
The things I'll wear for treats...
Net worth is calculated by subtracting your liabilities (what you owe other people: money on loans for things like college, cars, home mortgages, & credit cards) from your assets.
Positive net worth means you own more than you owe. Negative net worth means you owe more than you own.
So why do these ideas matter if you are not selling your assets? It matters for the long haul, in that you have a nest egg for some future use of your investment assets. Having money for a rainy day, a big life event like a wedding, furthering your own or your kids' education, or putting down a deposit on a home is a beautiful thing! If you buy a stock and its price goes up, you do not pay taxes on that stock until you sell it.
It also matters because you can use your assets (investments) as collateral for borrowing money.
Collateral is essentially an asset that you can promise to a lender (such as a bank) as a form of insurance for repayment on a loan. Banks lend to people they feel are a safe bet for repayment. The agreement would be that you would give up your collateral to the lender (in this case, we're talking about your stocks) if you don't pay back the loan.
Banks can make what are called security-based loans to people with eligible securities as collateral (those stocks, bonds, mutual funds and ETFs we've talked about). This may be useful for people with solid assets so that they can borrow money without having to sell their stocks, bonds, mutual funds or ETFs.
Circumstances where you may want to borrow money would include buying a car, a home, or borrowing for education.
As long as we don't have to wear these on our walk, it's fine.
Of course you may choose to sell your stock rather than get a loan. But if your stock is doing nicely, you may do better getting a loan if you need one than dipping into your investment portfolio. Your investment returns may be higher than the interest rate you get charged by a bank for your loan. Also, you will pay taxes on any capital gains (the money you make on your investment when you sell) where the interest on many loans is actually tax-deductible.