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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

by 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.)
- tpeo 9y ago
  Now I've realized what I thought was so funky. It's a rather semantic issue. Markets aren't just a pipe or a screen where stuff goes through, at least in economics. The market isn't just the market mechanism, but rather that mechanism plus the collection of all possible buyers and sellers at any given time. If all we have is Sally and Bob talking over the phone with their portfolios in stocks and cash, that's the market. Now, you're right that no money entered the market when Bob bought that share. But if someone who had no interest in either buying or selling stock handed either Bob or Sally $11, that would be $11 going into the market. If Bob took those $11 as a loan from Chad while Chad himself had no interest whatsoever in what Bob would do with it as long as he paid them back, that would be money going into the market. Also, I reckon I changed my initial position. But I'm also rather drowsy right now.

by tpeo 9y ago

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.)
tpeo 9y ago
Now I've realized what I thought was so funky. It's a rather semantic issue. Markets aren't just a pipe or a screen where stuff goes through, at least in economics. The market isn't just the market mechanism, but rather that mechanism plus the collection of all possible buyers and sellers at any given time. If all we have is Sally and Bob talking over the phone with their portfolios in stocks and cash, that's the market. Now, you're right that no money entered the market when Bob bought that share. But if someone who had no interest in either buying or selling stock handed either Bob or Sally $11, that would be $11 going into the market. If Bob took those $11 as a loan from Chad while Chad himself had no interest whatsoever in what Bob would do with it as long as he paid them back, that would be money going into the market. Also, I reckon I changed my initial position. But I'm also rather drowsy right now.