Did an additional $32 billion necessarily get invested into Amazon.com stock on October 26th, 2017?

Question

The share price went up about 6.9%, and the market cap is $466 billion. Does that mean that that much new money had to have been invested after hours? Would it otherwise be possible for the stock price to go up like that?

Answer 1

Stock A last traded at $100. Stock A has 1 million shares outstanding.

• Stock A's market cap is $100 million.

No seller is willing to sell Stock A for less than $110 a share. One buyer is willing to buy 1 share for $110. The order executes. The buyer pays the seller $110. Stock A's new price is $110.

• Stock A's market cap is now $110 million.

An $110 investment increased the market cap by $10 million. Neat trick (for all who own Stock A).

Answer 2

No, a jump in market capitalization does not equal the amount that has been invested.

Market cap is simply the stock price times the total number of shares. This represents a theoretical value of the company. I say "theoretical" because the company might not be able to be sold for that at all.

The quoted stock price is simply what the last buyer and seller of stock agreed upon for the price of their trade. They really only represent themselves; other investors may decide that the stock is worth more or less than that.

The stock price can move on very little volume. In this case, Amazon had released a very good earnings report after the bell yesterday, and the price jumped in after hours trading. The stock price is up, but that simply means that the few shares traded overnight sold for much higher than the closing price yesterday.

After the market opens today and many more shares are traded, we'll get a better idea what large numbers of investors feel about the price. But no matter what the price does, the change in market cap does not equal the amount of new money being invested in the company. Market cap is the price of the most recent trades extrapolated out across all the shares.

Answer 3

The market capitalization of a stock is the number of shares outstanding (of each stock class), times the price of last trade (of each stock class).

In a liquid market (where there are lots of buyers and sellers at all price points), this represents the price that is between what people are bidding for the stock and what people are asking for the stock. If you offer any small amount more than the last price, there will be a seller, and if you ask any small amount less than the last price, there will be a buyer, at least for a small amount of stock.

Thus, in a liquid market, everyone who owns the stock doesn't want to sell at least some of their stock for a bit less than the last trade price, and everyone who doesn't have the stock doesn't want to buy some of the stock for a bit more than the last trade price.

With those assumptions, and a low-friction trading environment, we can say that the last trade value is a good midpoint of what people think one share is worth. If we then multiply it by the number of shares, we get an approximation of what the company is worth.

In no way, shape or form does it not mean that there is 32 billion more invested in the company, or even used to purchase stock.

There are situations where a 32 billion market cap swing could mean 32 billion more money was invested in the company: the company issues a pile of new shares, and takes in the resulting money. People are completely neutral about this gathering in of cash in exchange for dilluting shares. So the share price remains unchanged, the company gains 32 billion dollars, and there are now more shares outstanding.

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Now, in some sense, there is zero dollars currently invested in a stock; when you buy a stock, you no longer have the money, and the money goes to the person who no longer has the stock.

The issue here is the use of the continuous tense of "invested in"; the investment was made at some point, but the money doesn't really stay in this continuous state of being. Unless you consider the investment liquid, and the option to take money out being implicit, it being a continuous action doesn't make much sense.

Sometimes the money is invested in the company, when the company causes stocks to come into being and sells them.

The owners of stocks has invested money in stocks in that they spent that money to buy the stocks, but the total sum of money ever spent on stocks for a given company is not really a useful value.

The market capitalization is an approximation, which under the efficient market hypothesis (that markets find the correct price for things nearly instantly) is reasonably accurate, of the value the company has collectively to its shareholders. The efficient market hypothesis isn't accurate, but it is an acceptable rule of thumb.

Now, this value -- market capitalization -- is arguably not the total value of a company: other stakeholders include bond holders, labour, management, various contract counter-parties, government and customers. Some companies are structured so that almost all value is captured not by the stock owners, but by contract counter-parties (this is sometimes used for hiding assets or debts).

But for most large publically traded companies, it (in theory) shouldn't be far off.

Answer 4

No. The market cap has no relation to actual money that flowed anywhere, it is simple the number of shares multiplied by the current price, and the current price is what potential buyers are (were) willing to pay for the share.

So any news that increases or decreases interest in shares changes potentially the share price, and with that the market cap. No money needs to flow.