Asset Price Behavior

Asset prices do not move in a straight line. In all timescales they move in a zig-zag, sometimes almost sinusoidal fashion. Asset prices also do not rise forever, though sometimes it can feel like there is no ceiling in sight. Asset prices are based on the same factors that impact markets on the whole, as well as specific factors on the asset itself.

But there is one thing that is particularly certain with stocks: They can go to zero. Think about it, in a bankrupt company the common stock is often the first to suffer, and goes to $0. This is an important principle because it forms a basis for risk assessment. Preferred stocks and company bonds can also go to zero, but they are usually safer with some return at bankruptcy, though pennies on the dollar is not exactly a great return.

Most stocks, however, do not go to zero, and ETFs and mutual funds will almost always safely trade at some value until they are closed in an orderly manner. It does not mean that you can’t take a bath on the stock whether on paper, or realized.