We have read in the news a lot of times something like this → “Stock market crashed – Investors lost Rs 5 lakh crore in 6 days”.

After talking to my friends about this – I got to know that many of my friends actually don’t understand what exactly this means and how exactly is wealth lost during a crash?

Let’s imagine that there are only 2 people who exist in the world. I have a pen. You have Rs.1 crore. Yesterday, you were willing to pay me Rs. 1 crore in exchange for my very special pen. So yesterday, the global Economy was worth Rs. 2 crores. Since there was a pencil worth Rs. 1 crores and of course your Rs. 1 crore.

Today, you change your mind. Instead, you decide that you don’t want my pencil – so the value of the pen went from Rs. 1 crore to Rs. 0.

What happened to the world? Well, the world just lost Rs. 1 crore, since now all that exists is your Rs. 1 crore and my worthless pen.

In 2008, something similar happened. There was a stuff called “mortgage backed securities” which people used to think that they were worth a lot of money. Then suddenly people discovered that they were worthless and actually a piece of garbage since people were defaulting on their housing loans. They went very quickly from being worth a lot to being worthless. It had a cascading effect on the market, making lots of things which used to be worth a lot crash in the value (eg: real estate).

This is how destruction of a lot of the world’s wealth happens!