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That's a passive failure mode I haven't seen before. To elaborate on what you said: Imagine an index, and an index fund tracking it. The index fund will own x%
by im3w1l 4y ago
That's a passive failure mode I haven't seen before. To elaborate on what you said:
Imagine an index, and an index fund tracking it. The index fund will own x% of every stock in the index. Someone buys the index fund, and the index fund now try to achieve x+epsilon% in every stock.
But what if 100-x% of the stock is owned by diamond-hands hodlers, that wont sell at any price? The index fund bids higher and higher, and the sellers refuse to let their shares go, making the price reach ridiculous levels.
The price reaching 0 seems less likely, as there will always be bargain hunters.
- dsr_ 4y agoYou're leaving out three factors: indexes are not static over long terms; the creation/destruction of new public corporations; and the possibility of existing public corporations offering more stock.
- nradov 4y agoIndex fund managers aren't idiots. Their trading systems still have a degree of sanity checking and human oversight, so they won't attempt to track the index exactly if things get weird. But for large-cap indexes like S&P 500, the "diamond-hands hodlers" lack the capital reserves necessary to really manipulate the market. At some point many of the underlying companies would also take advantage of excessive stock prices by issuing secondary offerings, thus increasing the supply.
- lupire 4y agoYah stock won't go to infinity. But TSLA joining the S&P 500 created synthetic demand that synthetically increased price/valuation.
- HALtheWise 4y agoThere's two key ways new stock can be created to avoid this risk: companies can issue it, or short sellers can create it. If the company sees its stock rising, it can and should see that as a cheap source of capital and absorb some of it through a stock sale to do more of whatever business they're in.
- ItsMonkk 4y agoYou think that companies are going to issue new stock in order to ensure that the value of their company doesn't go UP? If anything, the more they take out loans and buyback their stock, the faster it goes to infinity. And the faster it goes to infinity, the more collateral it has, to take out another loan, to buy more stock... And you think short-sellers are going to risk infinite losses? This is a prisoner's dilemma that you aren't going to win.
- jbay808 4y ago> If the company sees its stock rising, it can and should... absorb some of it through a stock sale That's ultimately down to the incentives in place. If the board members have a lot of options in their compensation package, they might prefer to see the stock price climb and climb. In fact if the incentives are set up that way they might do a buyback to help fuel the rise, even at the cost of longer-term harm to the company.
- nightski 4y agoShort sellers do not create stock. They are selling borrowed stocks. What am I missing.
- svnt 4y agoSynthetic longs.
- nly 4y agoPrivileged market participants can definitely lend out more stock then they hold, provided eveurnting is collateralised
- deleted 4y ago[deleted]
- lupire 4y agoThe person they borrowed it from also still owns the original share. The borrow creates a share, and the repayment destroys it. Fractional reserve stockholding.
- blibble 4y agothe genius thing about ETFs is they don't have to buy or sell the stock: others do it for them have a read about the creation/redemption mechanism and you'll see why this won't heppen
- thoughtstheseus 4y agoThey issue the person redeeming the the actual underlying securities. Then it’s up to them to sell it. Fun model.
- im3w1l 4y agoYeah, I knew about that. I had to look up their relative size to mutual funds though. Turns out mutual funds manage $23.9T compared to $5.4T in ETFs. I guess passive funds are more likely to be ETFs. But it could mean there is enough passive mutual fund money to pose a problem. https://www.investopedia.com/articles/exchangetradedfunds/08/etf-mutual-fund-difference.asp https://www.investopedia.com/articles/exchangetradedfunds/08...