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Since stock index funds buy the same stocks as the index, won't their prices become artificially inflated?

May 7th, 2010

My understanding of the DOW or S&P500 index funds is that if GE represents say 1% of the S&P500, it will represent 1% of the value of the S&P500 index funds.

Since many people invest in these index funds to represent the market, won’t any company in the index be artificially inflated in price due to heightened demand?

Another way to ask this is: Do companies that join an index experience a bump in share price & do companies that leave experience a drop within a short amount of time?

Thanks!