I never tried to trade stock myself, so my question might be stupid.
Say each of company A and company B is worth $1M at the beginning. Then each company divides themselves to 100 shares. And in some way, let company A own 99 shares of company B, and company B own 99 shares of company A. It seems that in theory someone can still buy both whole companies using only $2M.
But that would mean the 1 other share of company A is worth $1M, and buying it means you own 50.251 of company A and 49.749 of company B directly and indirectly. (Same goes to company B.) And the 100 shares are worth $100M? If someone is going to buy them, they will own most of their own $100M indirectly under company B, though.
So my questions are:
- Did I make some wrong assumptions here?
- If not, does this have a significant effect in reality?
- If no, what prevented it being significant, and if yes, how does the parameters involving market capitalization still make sense?
Edit: My naive hypothetical way getting into this situation, scaled the shares up to 10k times:
- Initially, Each company has 10k shares. Company B has $500k money and possibly other assets.
- Company A issued 5k new shares, which gives it $500k money.
- Maybe the stock price of company A goes too low, but anyway company B bought those 5k shares using $500k money. Let's say company B in fact invested in something else, where their money is actually used to buy the shares of company A, so they aren't aware the following is happening.
- Company B does the same thing, issuing 5k shares for $500k money. Company A bought those 5k shares using the $500k it just got.
- Repeat this process 198 times. So each of A and B has 1M shares, and 995k of them are owned by each other, maybe indirectly. But their market capitalizations skyrocket anyway.
The problem I see is if it can be manipulated this way, it doesn't seem to make sense to take market capitalization, assets in the form of stock shares, or other affected things seriously in investments.
I was stupid. Searching this term in my first language, the first result defined it as a kind of bubble in the first paragraph. I'm not sure why Wikipedia only says it is "wasting capital that could be used to improve productivity", as the capital either comes from nowhere or is freed thereafter to allow them to invest in other things or back again. And by googling I found at least one source (which I'm not bothered to find out what it is basically about yet) mentioned it has adjusted the market capitalization according to cross ownership. But I don't think I'm qualified enough to give a complete answer.