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Dollars are not really invested in the market. Every buyer is always matched with a seller, so net cash flow into the market is zero. Dollar flows express valua

Dollars are not really invested in the market. Every buyer is always matched with a seller, so net cash flow into the market is zero. Dollar flows express valuations but they do not drive them. This is a technical point, but in my opinion it's also an important conceptual point. Stock market prices do not rise because dollars are flowing into them.

adventured 9y ago
> so net cash flow into the market is zero That's incorrect. New capital flows into or out of the market constantly. Very frequently the market sees immense net cash flow in, for example typically toward the end of an expansion and just before the next recession or crash. Joe & Jane investor tend to be very late to the party, especially after getting burned badly by the last two asset bubble parties, they joined this one quite late into the expansion. Large amounts of capital - trillions of dollars in the US alone - are essentially always sitting on sidelines, sometimes more of it moves into the market, sometimes more of it moves to 'safety' and out of the market. You can track these capital in and out flows, it's mostly public information. For example, this huge burst after the election: "A whopping $63 billion has poured into U.S. stock funds since Donald Trump won the presidential election, according to the latest tally by Bank of America Merrill Lynch. ... Investors have yanked $37 billion from bond funds since the election. Most of that money rotated right into stock funds. This "great rotation" could be a major story in 2017." http://money.cnn.com/2016/12/19/investing/investors-pour-63-billion-into-stocks-after-election/index.html http://money.cnn.com/2016/12/19/investing/investors-pour-63-...
- tedsanders 9y ago
  To be clear, after the headline, the first line of the article says that $63B went into stock funds (as opposed to stocks). To make this more concrete, let's imagine how this actually happens. Joe & Jane send $10 to a stock fund. The fund places a market order to buy stock. The market matches the buy order with the lowest sell offer. The fund sends the money to the seller, and the seller sends the stock to the buyer. At the end of the transaction, both the amount of money is conserved (J&J are down $10, but the seller is up $10) and the amount of stock is conserved (J&J have one additional share and the seller is down one share). Money did not move "into" the market. On the opposite side of every buy, there is a sell. For every dollar that J&J sink into the market, sellers are pulling exactly that many dollars out. As the article you link says, there can be net inflows into stock funds. But that's only possible because there are entities besides stock funds that have equal and opposite outflows. In aggregate, buying stock cannot put money into the market because every purchase is also a sale.
ecesena 9y ago
Beside net cash (adventured already commented), also flow itself is correlated to availability of cash. More people desiring to enter the market = more buyers. And, my personal opinion, more "less-skilled" people entering the market = even easier to raise prices (exactly like in street markets with tourists vs locals).
tpeo 9y ago
I'm having a hard time understanding why you'd say that the net cash flow is zero. If a person who previously owned no stock buys a share from another person at a price above it's current market price, that's a net cash flow. Buy bids/orders being matched with sell orders/bids would imply zero net cash flows only if prices were constant.
- tedsanders 9y ago
  Imagine a stock whose last trade was at $10. The price is therefore considered to be $10. Bob decides he wants to buy a share of stock, no matter the price. He puts out a market buy order. Sally is the seller with the lowest price. She's willing to sell for $11. Bob pays Sally $11 and Sally gives Bob her share. Now the price of the stock is $11. In this scenario, the price of the stock increased from $10 to $11. But still, there was no net cash flow into the market. Bob put $11 in and simultaneously Sally took $11 out. Even when stock prices change, net cash flows are zero. Every buyer is always matched with a seller. Every dollar that goes into a trade comes out on the other side.
  - ecesena 9y ago
    Sorry, but how this example is any different from: > If more people invest more [...] the value increases If you have just Bob, price goes to 11$. If you have Bob, Charlie, and Darrel willing to pay, wouldn't the price possibly go to 12$?
    - tedsanders 9y ago
      Sure, maybe Bob buys a share from Sally for $11. Then Charlie buys a share from Sally for $12. Then Darrel buys a share from Sally for $13. In this situation, there were 3 buys and 3 sells. $11+$12+$13 flowed into the market while at the same time $11+$12+$13 flowed out of the market. At the end of the day, even though the share price rose, there were an equal number of buys and sells, with equal inflows and outflows. A higher stock price does not mean the company has more dollar bills in its vault and investors have less. A higher stock price means that stock traders in aggregate now think the company is worth more. Cash flows through markets, it doesn't flow into markets. (Technically what this means is dollars are not 'invested in the stock market.' People are not investing 'more.' Prices going up does not mean more money is being invested in the stock market.)

adventured 9y ago

> so net cash flow into the market is zero That's incorrect. New capital flows into or out of the market constantly. Very frequently the market sees immense net cash flow in, for example typically toward the end of an expansion and just before the next recession or crash. Joe & Jane investor tend to be very late to the party, especially after getting burned badly by the last two asset bubble parties, they joined this one quite late into the expansion. Large amounts of capital - trillions of dollars in the US alone - are essentially always sitting on sidelines, sometimes more of it moves into the market, sometimes more of it moves to 'safety' and out of the market. You can track these capital in and out flows, it's mostly public information. For example, this huge burst after the election: "A whopping $63 billion has poured into U.S. stock funds since Donald Trump won the presidential election, according to the latest tally by Bank of America Merrill Lynch. ... Investors have yanked $37 billion from bond funds since the election. Most of that money rotated right into stock funds. This "great rotation" could be a major story in 2017." http://money.cnn.com/2016/12/19/investing/investors-pour-63-billion-into-stocks-after-election/index.html http://money.cnn.com/2016/12/19/investing/investors-pour-63-...

tedsanders 9y ago
To be clear, after the headline, the first line of the article says that $63B went into stock funds (as opposed to stocks). To make this more concrete, let's imagine how this actually happens. Joe & Jane send $10 to a stock fund. The fund places a market order to buy stock. The market matches the buy order with the lowest sell offer. The fund sends the money to the seller, and the seller sends the stock to the buyer. At the end of the transaction, both the amount of money is conserved (J&J are down $10, but the seller is up $10) and the amount of stock is conserved (J&J have one additional share and the seller is down one share). Money did not move "into" the market. On the opposite side of every buy, there is a sell. For every dollar that J&J sink into the market, sellers are pulling exactly that many dollars out. As the article you link says, there can be net inflows into stock funds. But that's only possible because there are entities besides stock funds that have equal and opposite outflows. In aggregate, buying stock cannot put money into the market because every purchase is also a sale.

ecesena 9y ago

Beside net cash (adventured already commented), also flow itself is correlated to availability of cash. More people desiring to enter the market = more buyers. And, my personal opinion, more "less-skilled" people entering the market = even easier to raise prices (exactly like in street markets with tourists vs locals).

tpeo 9y ago

I'm having a hard time understanding why you'd say that the net cash flow is zero. If a person who previously owned no stock buys a share from another person at a price above it's current market price, that's a net cash flow. Buy bids/orders being matched with sell orders/bids would imply zero net cash flows only if prices were constant.

tedsanders 9y ago
Imagine a stock whose last trade was at $10. The price is therefore considered to be $10. Bob decides he wants to buy a share of stock, no matter the price. He puts out a market buy order. Sally is the seller with the lowest price. She's willing to sell for $11. Bob pays Sally $11 and Sally gives Bob her share. Now the price of the stock is $11. In this scenario, the price of the stock increased from $10 to $11. But still, there was no net cash flow into the market. Bob put $11 in and simultaneously Sally took $11 out. Even when stock prices change, net cash flows are zero. Every buyer is always matched with a seller. Every dollar that goes into a trade comes out on the other side.
- ecesena 9y ago
  Sorry, but how this example is any different from: > If more people invest more [...] the value increases If you have just Bob, price goes to 11$. If you have Bob, Charlie, and Darrel willing to pay, wouldn't the price possibly go to 12$?
  - tedsanders 9y ago
    Sure, maybe Bob buys a share from Sally for $11. Then Charlie buys a share from Sally for $12. Then Darrel buys a share from Sally for $13. In this situation, there were 3 buys and 3 sells. $11+$12+$13 flowed into the market while at the same time $11+$12+$13 flowed out of the market. At the end of the day, even though the share price rose, there were an equal number of buys and sells, with equal inflows and outflows. A higher stock price does not mean the company has more dollar bills in its vault and investors have less. A higher stock price means that stock traders in aggregate now think the company is worth more. Cash flows through markets, it doesn't flow into markets. (Technically what this means is dollars are not 'invested in the stock market.' People are not investing 'more.' Prices going up does not mean more money is being invested in the stock market.)