Buying a publicly traded company’s shares marginally increases their price and the price of the company’s corporate bonds in expectation.
I don’t think this is true and I as I understand it this statement is controversial among economists.
Here’s how I think about asset pricing. For an individual stock, there are typically large pools of informed traders (e.g., fund managers) who control sizeable portions of all assets. They each have a “target price” for a stock—the price they think reflects the true value of a stock. They will buy the stock if it falls below their target and sell it if it rises above. Collectively these funds have trillions in capital which they can shift around to buy up stock they think is undervalued. Their demand is so enormous and elastic that you can not apply “supply and demand” thinking to stocks. The price of a stock is set by how large institutions value it, not by trading activity.
Some have argued that large scale shifts towards passive investing have reduced market elasticity. However, if this reduction of elasticity has occurred, it has been because of tens of trillions of dollars of AUM shifting towards index strategies—it is not the kind of thing that even the largest charity could impact.
For counterexamples at the extremes, we have retail-driven stocks like GameStop, AMC and BBBY, but these had small market caps. I’d also guess Tesla stock prices have been affected by retail investors.
Institutions’ price targets could be affected by retail investment, and not all strategies are based exclusively on price targets, e.g. momentum investing. Retail investment interest could be used a measure of sentiment and is evidence for future revenues, especially for companies whose revenues primarily come from consumer sales rather than business-to-business sales. For example, Tesla retail investment levels should be evidence for future Tesla vehicle sales.
Over 40% of Tesla shares are owned by retail investors compared to less than 25% of Microsoft shares and around 30% of NVIDIA and Google shares, so I doubt that the difference in percentages is mostly explainable by passive investing. I’d guess >10% of Tesla shares are owned non-passively by retail investors.
EDIT: The Tesla stock price also seemed to be affected by the first stock split, another reason to believe it is driven by retail investment or at least strategies not based exclusively on price targets. According to your model of markets, stock splits in general seem irrational for companies to do and shouldn’t really affect prices, but I think the point is to increase demand for the stock, by making it more affordable for retail investors (or giving that perception; maybe it’s mostly just buying positive sentiment). NVIDIA and Google have done stock splits in the past few years, too. EDIT2: It seems there are other possibly more important reasons, e.g. “The most common ones are to achieve an optimal price range for liquidity, to achieve an optimal tick size and to signal managements’ confidence in the future stock price.” http://erepository.uonbi.ac.ke/handle/11295/10052
Maybe all of this is less applicable to the companies contributing most to advancing AI, though. But either way, I’d expect our impact on company capital and work (e.g. advancing AI capabilities) to be pretty negligible in expectation anyway, so I don’t think EAs or EA orgs should hold back from investing because of such concerns. We’d still be a tiny share of non-passive retail investment.
I don’t think this is true and I as I understand it this statement is controversial among economists.
Here’s how I think about asset pricing. For an individual stock, there are typically large pools of informed traders (e.g., fund managers) who control sizeable portions of all assets. They each have a “target price” for a stock—the price they think reflects the true value of a stock. They will buy the stock if it falls below their target and sell it if it rises above. Collectively these funds have trillions in capital which they can shift around to buy up stock they think is undervalued. Their demand is so enormous and elastic that you can not apply “supply and demand” thinking to stocks. The price of a stock is set by how large institutions value it, not by trading activity.
Some have argued that large scale shifts towards passive investing have reduced market elasticity. However, if this reduction of elasticity has occurred, it has been because of tens of trillions of dollars of AUM shifting towards index strategies—it is not the kind of thing that even the largest charity could impact.
For counterexamples at the extremes, we have retail-driven stocks like GameStop, AMC and BBBY, but these had small market caps. I’d also guess Tesla stock prices have been affected by retail investors.
Institutions’ price targets could be affected by retail investment, and not all strategies are based exclusively on price targets, e.g. momentum investing. Retail investment interest could be used a measure of sentiment and is evidence for future revenues, especially for companies whose revenues primarily come from consumer sales rather than business-to-business sales. For example, Tesla retail investment levels should be evidence for future Tesla vehicle sales.
Over 40% of Tesla shares are owned by retail investors compared to less than 25% of Microsoft shares and around 30% of NVIDIA and Google shares, so I doubt that the difference in percentages is mostly explainable by passive investing. I’d guess >10% of Tesla shares are owned non-passively by retail investors.
EDIT: The Tesla stock price also seemed to be affected by the first stock split, another reason to believe it is driven by retail investment or at least strategies not based exclusively on price targets. According to your model of markets, stock splits in general seem irrational for companies to do and shouldn’t really affect prices, but I think the point is to increase demand for the stock, by making it more affordable for retail investors (or giving that perception; maybe it’s mostly just buying positive sentiment). NVIDIA and Google have done stock splits in the past few years, too. EDIT2: It seems there are other possibly more important reasons, e.g. “The most common ones are to achieve an optimal price range for liquidity, to achieve an optimal tick size and to signal managements’ confidence in the future stock price.” http://erepository.uonbi.ac.ke/handle/11295/10052
Maybe all of this is less applicable to the companies contributing most to advancing AI, though. But either way, I’d expect our impact on company capital and work (e.g. advancing AI capabilities) to be pretty negligible in expectation anyway, so I don’t think EAs or EA orgs should hold back from investing because of such concerns. We’d still be a tiny share of non-passive retail investment.