I do think that you get the full effect by trading abstract financial instruments, because investors are comparing those opportunities to other opportunities in individual companies and other places, ready to take the best return slash do arbitrage of various types, so you absolutely move investment into everywhere that investment is being demanded by increasing the overall investment supply. You also push up the value of the thing you purchase, and the things it’s tied to, relative to other things.
I don’t think that makes cata’s comment a red herring, though, because it’s another way to think about it slash another method of action. And it points out that exactly how you invest does, to some extent, matter—if you want the maximum effect you’ll want something as tied to the things you want as you can, which you trade off against returns.
But it is sounding like the main effect is just “create more demand for investment” and that infinitesimally changing the price of the particular instrument you buy is just a side effect. Right now my impression is that the side effect is much smaller than the main effect—and also more sensitive to questions like does the company own equity in itself or plan on issuing more equity, which don’t matter for the main effect.
To put it another way, in the case where the company itself is the marginal seller/issuer of equity, then it matters which company you invest in. And yes, this is more likely if you buy the company’s stock rather than an abstract financial instrument. But it’s still not very likely, if the company has issued a lot of stock.
From your response it’s clear that I didn’t do a good job explaining.
Another short-form attempt: The details matter, but the magnitudes aren’t that different. If you invest in a financial instrument, the people who sell it will hedge or redirect their funds into other instruments until it’s all diffused into various places, driving down remaining supply of available investment by the amount you invested. Now supply and demand must match, so price goes up to do that. If there’s lots of similar available investment opportunities this will mostly be more supply and the price won’t move much. If there’s no remaining places to invest, it will mostly raise prices and reduce demand, instead. If the additional value in the companies slash making the funds available to those companies doesn’t itself increase supply, a fair prior would be 50⁄50 here, so it’s somewhat more than that, plus in addition there’s the anticipation effect—you’ve made past returns look better and future returns look better as well, so investment is now more attractive. (Plus any acausal effects, if you think they count).
The price change being a ‘side effect’ isn’t quite right, it’s more like it’s an intermediate effect.
I hope that helped but I worry the best way to understand this is actually to just understand microeconomics, and that would require a full blogpost. Although I’m not convinced it requires two!
It sounds like you are responding to my first paragraph, in which case I agree with your criticism. I think my second paragraph is closer to the way I am thinking about things. For me the main question here is whether it matters what company you invest in, not whether the price change should be counted as a “side effect”.
I do think that you get the full effect by trading abstract financial instruments, because investors are comparing those opportunities to other opportunities in individual companies and other places, ready to take the best return slash do arbitrage of various types, so you absolutely move investment into everywhere that investment is being demanded by increasing the overall investment supply. You also push up the value of the thing you purchase, and the things it’s tied to, relative to other things.
I don’t think that makes cata’s comment a red herring, though, because it’s another way to think about it slash another method of action. And it points out that exactly how you invest does, to some extent, matter—if you want the maximum effect you’ll want something as tied to the things you want as you can, which you trade off against returns.
But it is sounding like the main effect is just “create more demand for investment” and that infinitesimally changing the price of the particular instrument you buy is just a side effect. Right now my impression is that the side effect is much smaller than the main effect—and also more sensitive to questions like does the company own equity in itself or plan on issuing more equity, which don’t matter for the main effect.
To put it another way, in the case where the company itself is the marginal seller/issuer of equity, then it matters which company you invest in. And yes, this is more likely if you buy the company’s stock rather than an abstract financial instrument. But it’s still not very likely, if the company has issued a lot of stock.
From your response it’s clear that I didn’t do a good job explaining.
Another short-form attempt: The details matter, but the magnitudes aren’t that different. If you invest in a financial instrument, the people who sell it will hedge or redirect their funds into other instruments until it’s all diffused into various places, driving down remaining supply of available investment by the amount you invested. Now supply and demand must match, so price goes up to do that. If there’s lots of similar available investment opportunities this will mostly be more supply and the price won’t move much. If there’s no remaining places to invest, it will mostly raise prices and reduce demand, instead. If the additional value in the companies slash making the funds available to those companies doesn’t itself increase supply, a fair prior would be 50⁄50 here, so it’s somewhat more than that, plus in addition there’s the anticipation effect—you’ve made past returns look better and future returns look better as well, so investment is now more attractive. (Plus any acausal effects, if you think they count).
The price change being a ‘side effect’ isn’t quite right, it’s more like it’s an intermediate effect.
I hope that helped but I worry the best way to understand this is actually to just understand microeconomics, and that would require a full blogpost. Although I’m not convinced it requires two!
It sounds like you are responding to my first paragraph, in which case I agree with your criticism. I think my second paragraph is closer to the way I am thinking about things. For me the main question here is whether it matters what company you invest in, not whether the price change should be counted as a “side effect”.