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When the stock’s move they move the index. Can index move the stocks

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    The pedantic answer is no (since the index derived from the stock prices). However, your question could be rescued if you change it to ask if changes in the index can move the stocks. So it's not the index value that matters, but the amount and direction of its changes. – Oscar Bravo Jan 11 at 9:09
  • @Oscar you don't think a large volume trade in SPY or SPY options could move the needle on some of the S&P500 constituents? – quid Jan 11 at 17:14
  • Could the indirect effect of a dropping index causing some people to pull out of the market or a rising index encouraging some people to buy in be included with this? Or would this be too indirect, since there are likely some people who view a dropping index as a good time to look for deals? – Michael Richardson Jan 11 at 20:43
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    @quid You've missed my point. Mathematically, the index is derived from share prices. So the index can't actually move unless the share prices change (it's just cause and effect). However, there is feedback in the so, of course, if some shares drop in price and cause the index to move south, some investors will notice this and sell other shares, thus dropping their price. That's why I said he should re-write his question to ask if changes in the index can move the share prices. – Oscar Bravo Jan 12 at 9:27
  • @oscar, sure, I suppose I mentally added the word fund to the question, making it about index funds not just the underlying index – quid Jan 12 at 15:30
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The tail absolutely wags the dog in the equities markets. For a long time and this has been an active area of discussion.

More pragmatically, market microstructure - such as an index or even hedging against an index in the options market - can drive market direction in periods of low liquidity, as in when there are not larger counteracting forces such as a large index component stock having a large news event.

Edit: The index itself cannot move stocks, but financial products based on the index do (such as options, futures, ETFs, and buying strategies)

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Per definition not - the Index is only a published number and when you add the price of certain things and report this number, the number can not change the price of the items.

Now, if you have financial products that trade of the price of the index - futures, ETF - then yes, someone going long a large amount WILL change the index because unless someone sells him for speculation, a market maker will enter the short (vs the long of the investor) and offset the risk by - buying the underlying instruments or a basket that closely behaves like that.

But technically, this is not the INDEX changing and driving the market - it is a product BASED ON the Index

  • And the index drives the product which drives the market... – user253751 Jan 11 at 13:03
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    Nope, the index does not. The index FUND may, but the index can not drive anything. The index is just a number that is calculated from the prices of the included elements. You literally pretend someone can "buy the index" - that is not possible. You always buy ANOTHER instrument that REFLECTS the index. – TomTom Jan 11 at 13:20
  • The index drives the index fund. No index, no index fund. Index goes down, people may pull out of the index fund. Etc. – user253751 Jan 11 at 15:45
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    Yeah, but you seem to have serious problems understanding cause and effect. When the index fund is bought, it is not "magically" changing the index - it is changing the index because (and only if) the other side (maret maker) opens a position in the elements of the index. Allso, the index FUND is NOT THE INDEX - so, buying the index FUND is NOT BUYING THE INDEX. An dyes, they are not always 100% correlated. – TomTom Jan 11 at 15:55
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    Sorry, there is exactly ONE definition of what an index is, as per investopedia. An index FUND is NOT AN INDEX - it is a fund that is (trying to mimic, sometimes it fails actually) the index. There are no two definitions. There is one, and there are people making up definitions. investopedia.com/terms/i/index.asp – TomTom Jan 11 at 20:22
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The index is an average of the stocks in the index. A very simplistic index consisting of 3 stocks might be calculated as:

(share 1 price + share 2 price + share 3 price) / 3 = index price

In practice the calculation will be more complicated, but the principle stands that you put in a set of share prices and get out an index price. By that definition, the index price does not directly affect the price of any share.

However, the fact that a share is in an index, and the performance of that index may affect investors choices when they decide on their trades.

For example, the FTSE 100 is an index of the 100 most valuable UK companies. Every three months the list is reviewed, and some companies will be removed, while other will take their place. Any fund that is tracking the FTSE 100 will need to buy shares in the incoming companies, and sell shares in those that have dropped out. This causes a rise in the price of a share that is likely to enter the index, and a fall in the price of a share about to leave it.

  • +1 for being the only answer to actually mention index funds, which are the obvious answer to this question. – Mason Wheeler Jan 10 at 21:47
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As others have mentioned, the index itself is an imaginary construct derived from the prices of its constituent stocks. Therefore the index can't be changed externally and therefore have an effect on those stock prices.

However, as also mentioned, there exist actual commercial products such as ETFs which actually buy stocks in an attempt to simulate indices. These products are priced independently of the index itself (but obviously tend to be highly correlated to it).

The existence of these products allow an index to indirectly impact its constituent stocks in myriad ways, but usually not significantly more than other stocks which are correlated to the index (but don't belong to it).

One exception, however, is moments where the index changes, either adding or removing a company from its ranks (or changing its weight in the index's calculation). When this happens, ETFs are forced to realign their portfolios to match the index in relatively short order. And since ETFs are a massive market, these changes to the index can apply dramatic pressure to the affected stocks as they are bought or sold by the ETFs.

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2

Several answers mentioned that derivatives of the index can move the stocks but none provided examples so I though that I'd offer one:

The price of index futures equals the underlying index value only at expiration. Prior to that, they reflect the future price of a stock index given pending dividends and current interest rates. The long futures trader does not receive dividends from the index stocks whereas the owner of those stocks do.

When index futures prices deviate from the fair value of an index, it presents an opportunity for arbitrage via buying or selling of the stocks.

If the index futures price moves far enough away from fair value, institutional traders will step in. If the futures trade at a premium, they will sell the index futures and buy the component stocks. If the futures trade at a discount, they'll buy the index futures and sell the component stocks.

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