It depends on the fund. Mutual funds have a prospectus that defines exactly how they’ll behave. Some funds leave room for management discretion while others are almost mechanical. They make their holdings public, so you know exactly what they’re composed of. I don’t think there’s much limit on what they could buy, it’s defined more by the strategy of the fund.
Does that answer your question? I wasn’t really even sure what you were asking just doing my best to be informative.
It’s helpful but I am worried about something else. Imagine an Island with 100 inhabitants and $10 each. If there are only 2 companies for $200, what do the other 60 people buy to avoid inflation?
As they’re a completely disenfranchised social majority on an island with a population tiny enough for everyone to know everyone else and a robust enough technological base to justify something like a stock market, they buy nothing and successfully institute anarcho-communism! :D
But to take the scenario seriously: Assuming that there was still demand for the shares among the population, the people seeking shares would offer more money for them than they were originally worth, until some of the people who own them considered it worthwhile to sell. If this alone doesn’t sate demand then the two stock-issuing companies would almost certainly issue more stock, ideally enough for them to raise more funding but not so much that the increased supply overwhelms demand and drops the price per share. They could also split the stock: Every share in circulation instantly becomes two shares, worth half of an older share at time of split. Depends on which market outcomes the companies are seeking. But basically the response to your scenario is that stock issuance is completely arbitrary (Within regulatory limits, whatever they may be) and up to the issuing company, and a market with demand is a market that will be offered shares because to a company it’s just fundraising waiting for the taking. The only thing they can’t do is disappear stock in circulation, if they wanted to remove stock for some reason they’d have to buy it back from holders on the market.
They also buy back shares and reduce their shareholders.
The ROI will drop if companies have too much money.
That just shifts my question. What can those funds buy?
It depends on the fund. Mutual funds have a prospectus that defines exactly how they’ll behave. Some funds leave room for management discretion while others are almost mechanical. They make their holdings public, so you know exactly what they’re composed of. I don’t think there’s much limit on what they could buy, it’s defined more by the strategy of the fund.
Does that answer your question? I wasn’t really even sure what you were asking just doing my best to be informative.
It’s helpful but I am worried about something else. Imagine an Island with 100 inhabitants and $10 each. If there are only 2 companies for $200, what do the other 60 people buy to avoid inflation?
As they’re a completely disenfranchised social majority on an island with a population tiny enough for everyone to know everyone else and a robust enough technological base to justify something like a stock market, they buy nothing and successfully institute anarcho-communism! :D
But to take the scenario seriously: Assuming that there was still demand for the shares among the population, the people seeking shares would offer more money for them than they were originally worth, until some of the people who own them considered it worthwhile to sell. If this alone doesn’t sate demand then the two stock-issuing companies would almost certainly issue more stock, ideally enough for them to raise more funding but not so much that the increased supply overwhelms demand and drops the price per share. They could also split the stock: Every share in circulation instantly becomes two shares, worth half of an older share at time of split. Depends on which market outcomes the companies are seeking. But basically the response to your scenario is that stock issuance is completely arbitrary (Within regulatory limits, whatever they may be) and up to the issuing company, and a market with demand is a market that will be offered shares because to a company it’s just fundraising waiting for the taking. The only thing they can’t do is disappear stock in circulation, if they wanted to remove stock for some reason they’d have to buy it back from holders on the market.
The problem is that shares cannot rise arbitrarily in price because the value depends on the profits.
On the other hand, if there are no new business opportunities, handing out shares decreases profits per share and thus also their value.
I want to show that not everybody can invest their money in funds or the ROI would crumble.