Cash On The Sidelines

Photo Credit: theblackdog2071 || Remember, if some from the sidelines come onto the field, an equal number of others have to leave.

Anytime you hear a bull or bear argument about cash on the sidelines, understand that it is bogus. Ordinary trading does not add or subtract cash on the sidelines, excluding commissions.

If bulls are more motivated to buy, then stock prices go up as they buy, and cash moves into the hands of those they bought from, who were less bullish. If bears are more motivated to sell, then stock prices go down as they sell, and they receive cash from those they bought from, who were less bearish.

In both cases, the amount of cash on the sidelines does not change. Cash moves the opposite direction of shares.

So, when does cash enter the market?

  • IPOs
  • Rights offerings

When does cash exit the market?

  • Dividends
  • Buybacks
  • Acquisitions of companies where cash is a component of the transaction

When cash enters the market, shares are created and cash goes into corporate coffers. When cash exits the market. shares are bought into corporate coffers, and cash exits the corporations.

As such, don’t listen to cash on the sidelines arguments. There is always cash on the sidelines. The question is whether new companies are being created, and whether companies are being consumed, and what the relative profitability levels are.

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