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Recently a lot of finance articles have talked about there being $25B in inflows to US equity markets since the election...what does that mean?

If for every buyer, there's a seller, doesn't that also mean that there were $25B in outflows in the same time period?

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Suppose I purchase $10,000 worth of a particular share today.

If the person(s) I am purchasing the shares from paid $9,000 for those shares, then I replacing their $9,000 investment with my $10,000 investment. This is a net inflow of $1,000 into the market.

Similarly, if the person(s) I am purchasing the shares from paid $11,000 for those shares, then their $11,000 investment is being replace by my $10,000 investment. This is a net outflow of $1,000 out of the market.

The aggregate of all such inflows and outflows in the net inflow/outflow into the market over a given period of time. (Here we are ignoring the effects of new share issues.)

  • Agreed - the change in market value is the change in value in between the time of the current transaction, and the previous transaction. The transaction itself, as pointed out by the asker, involves someone selling for $x, and someone buying for $x (no net change in and of itself, only a change when compared to the value of the company at the time of the seller's original purchase). – Grade 'Eh' Bacon Dec 5 '16 at 21:32
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    @Grade'Eh'Bacon Yes - essentially the gross P&L on the sellers ledger. – Nick Dec 5 '16 at 21:36
  • I guess what I'm trying to get at is the concept of "cash on the sidelines". In your scenario, you buy $10k worth of stock from someone who now has $10k worth of cash. There is no change in cash in the system. The same amount of cash is still "on the sidelines", right? – cph2117 Dec 6 '16 at 0:54
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    @cph2117 The cash received by the seller will only be "on the sidelines" if it was not reinvested. New cash coming into the market will not affect inflows in the way you are imagining. This is because it will simply replace existing equity at a new "book value", and the existing equity has been purchased at a cost. In my example, the $10,000 I have invested may have been "sitting on the sidelines". Inflows are all about equity, not cash on the sidelines. – Nick Dec 6 '16 at 1:35
  • So it would seem then that "cash on the sidelines" is somewhat of a misnomer, and all inflows really means is that there are now more investors willing to pay more for a stock than it was originally purchased for. – cph2117 Dec 6 '16 at 14:02
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If for every buyer, there's a seller, doesn't that also mean that there were $25B in outflows in the same time period?

Yes for every buyer there is a seller. The inflows are not being talked in that respect.

about there being $25B in inflows to US equity markets since the election...what does that mean?

Lets say the index was at X. After a month the index is at X+100. So lets say there are only 10 companies listed. So if the Index has moved X to X+100, then share price S1 has moved to S1+d1. So if you sum all such shares/trades that have increased in value, you will get what in inflow.

In the same period there could be some shares that have lost value. i.e. the price or another share was S2 and has moved to S2-d2. The sum of all such shares/trades that have decreased in value, you will get outflow.

The terms are Gross outflow, Gross inflow. In Net terms for a period, it can only be Inflow or outflow; depending on the difference between inflow and outflow.

The stats are done day to day and aggregated for the time period required.

So generally if the index has increased, it means there is more inflow and less outflow.

At times this analysis is also done on segments, FI's inflow is more compared to outflow or compared to inflow of NBFI or Institutional investors or Foreign participants etc.

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Inflows to the US equity market can come from a variety of sources; for instance:

  • You were paid a year-end bonus and decided to invest it in US equities instead of foreign equities, bonds, savings or debt reduction.

  • You sold foreign equities, bonds, or other non-US equities and decided to invest in US equities.

  • You decided a better use of cash in a savings account, CD or money market fund, was to invest in US equities.

If for every buyer, there's a seller, doesn't that also mean that there were $25B in outflows in the same time period?

Not necessarily. Generally, the mentions we see of inflows and outflows are net; that is, the gross investment in US equities, minus gross sales of US equities equals net inflows or outflows.

The mere fact that I sold my position in, say, Caterpillar, doesn't mean that I had to re-invest in US equities. I may have bought a bond or a CD or a house.

Because of fluctuations in existing stocks market value, bankruptcies and new issues, US equities never are and never will be a zero-sum game.

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    This answer doesn't address the primary point of the question: if 1,000,000 people each bought $25,000 of US stocks [totaling $25B], doesn't that mean that they bought those stocks from people who were selling them? Doesn't that mean that no net money was actually invested, because the people entering the market took the place of people leaving the market? [there are counterpoints to this, but I am attempting to rephrase the OP's question to highlight what is missing from this answer]. – Grade 'Eh' Bacon Dec 5 '16 at 16:05
  • No; the people who sold didn't necessarily reinvest the proceeds of the sale outside of US equities; they may have bought other US equity stocks, for example. – chili555 Dec 5 '16 at 17:00
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    You may be missing the point - when they bought other US equity stocks, didn't they buy them from people who already held them? The question becomes: Why is the following untrue: "Every time you buy stock, you buy from someone who is selling, and therefore no new value ever enters the equity market"? – Grade 'Eh' Bacon Dec 5 '16 at 17:05
  • It is untrue for exactly the reasons in my answer. Not all money invested must necessarily come from the proceeds of sales of US equities. It may have come from a bonus, sales of bonds, sales of foreign equities, sale of a house, etc., etc. – chili555 Dec 5 '16 at 17:12
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    I own a stock I paid 6$ for. You buy it from me for 10$. 4$ just got added. – Ross Dec 5 '16 at 18:13

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