2 ms·

> basically. It doesn't cause amazon to rise in price. Actually, it does. Whenever a company is added to one of the major indexes, it almost always increases

by toss1 8y ago

> basically. It doesn't cause amazon to rise in price. Actually, it does. Whenever a company is added to one of the major indexes, it almost always increases in price, and conversely, when one is removed, it generally declines. This is specifically because of all of the index funds that suddenly must put money into/remove it from the stock when it is added/removed from the index. Supply, Demand, price curves, you know the rest ...

crazygringo 8y ago
But are those short-term artifacts or do they persist? As long as stock prices are set fundamentally by deep-pocketed institutional investors buying and selling, a stock's price should only be based on expected discounted future cash flows, no? I can understand a short-term effect if demand suddenly skyrockets, but that can only last a few days, no? I'm struggling to reconcile traditional supply/demand with the efficient-market hypothesis here.
darawk 8y ago
Yes, but it impacts everyone in the index equally. Index funds are not responsible for amazon in particular's performance.
- toss1 8y ago
  around the time they add/remove Amazon (or company X) to the index, they do enhance or detract from it's performance. Of course, when't it's there for years, it merely adds a relatively steady-state chunk to their price, affecting the level of their price curve, but not so much the slope.
  - darawk 8y ago
    Yep, true. My point is just that indexing has nothing to do with Amazon's meteoric rise. Nor does it make the market less efficient or any other such nonsense.
    - toss1 8y ago
      Yes, I'd guess the effect in the single-digit percentages, and being in the index didn't help GE not get dumped. Interesting question about market inefficiencies. Again, while they're not zero, I'd guesstimate them to be in the minor percentages... If Amazon suddenly adjusts their R&D spend to show the massive profit of which they're capable, or does a massive increase to go after a new market, I'd expect it to go up or down massively more than the index and drag the index along. In that respect, the index may play a dampening effect, as people invested in index funds just go along for the general index ride instead of jumping on/off the AMZN bandwagon.
      - darawk 8y ago
        Ya, if I had to guess at an effect I think that'd be it too. It ought to dampen hysteria, by keeping retail investors out of the market for the most part.

by toss1 8y ago

crazygringo 8y ago

But are those short-term artifacts or do they persist? As long as stock prices are set fundamentally by deep-pocketed institutional investors buying and selling, a stock's price should only be based on expected discounted future cash flows, no? I can understand a short-term effect if demand suddenly skyrockets, but that can only last a few days, no? I'm struggling to reconcile traditional supply/demand with the efficient-market hypothesis here.

darawk 8y ago

Yes, but it impacts everyone in the index equally. Index funds are not responsible for amazon in particular's performance.

toss1 8y ago
around the time they add/remove Amazon (or company X) to the index, they do enhance or detract from it's performance. Of course, when't it's there for years, it merely adds a relatively steady-state chunk to their price, affecting the level of their price curve, but not so much the slope.
- darawk 8y ago
  Yep, true. My point is just that indexing has nothing to do with Amazon's meteoric rise. Nor does it make the market less efficient or any other such nonsense.
  - toss1 8y ago
    Yes, I'd guess the effect in the single-digit percentages, and being in the index didn't help GE not get dumped. Interesting question about market inefficiencies. Again, while they're not zero, I'd guesstimate them to be in the minor percentages... If Amazon suddenly adjusts their R&D spend to show the massive profit of which they're capable, or does a massive increase to go after a new market, I'd expect it to go up or down massively more than the index and drag the index along. In that respect, the index may play a dampening effect, as people invested in index funds just go along for the general index ride instead of jumping on/off the AMZN bandwagon.
    - darawk 8y ago
      Ya, if I had to guess at an effect I think that'd be it too. It ought to dampen hysteria, by keeping retail investors out of the market for the most part.