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Old 05-07-2020, 09:12 PM
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How does the stock market work?


https://www.straightdope.com/columns...k-market-work/

Interesting during these times when companies are being harshly criticized for paying dividends. Thereís only 3 things a company can do with idle cash: save it, reinvest it into the company (including buybacks), or pay it out as dividends. Shareholders are the owners of the company and thus they arenít likely to be satisfied with keeping large sums of cash around doing nothing in the low interest rate environment which has persisted since December 2008.

Also, many critics need to realize that they may have benefited from dividends as they may indirectly hold the stock in their retirement plans through mutual funds or ETFs.
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Old 05-08-2020, 12:07 AM
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Here's what I don't get about stocks (sorry for the hijack dalej42 but I think we normally only have one thread per cecil answer)

Noob question: How do buyers and sellers get matched up, as it were?

So, what I mean is, say there's a bicycle on Amazon for $500. That means there's a seller ready and willing to sell at that price, and as soon as a willing buyer appears, a transaction happens.

But when a stock in Straight Dope Holdings, say, is listed as $50, the implication is both that I could buy the stock for that price, or sell it at that price. But how can there be both a pool of willing buyers and sellers?
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Old 05-08-2020, 02:03 AM
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But when a stock in Straight Dope Holdings, say, is listed as $50, the implication is both that I could buy the stock for that price, or sell it at that price. But how can there be both a pool of willing buyers and sellers?
No, that isn't the implication. What you're seeing reported is the "last" price, i.e. the last price at which a transaction occurred. But there's no guarantee that you can transact at that price. The actual market is always a bid/ask, with the bid price a little lower than the ask, perhaps something like 49.95 / 50.00

If you enter an order to sell "at market", i.e. immediately at the best price available, you will sell at the bid price i.e. 49.95. If you enter an order to buy "at market", you will buy at 50.00, the current ask price, slightly higher than the bid.

You could also enter a "limit" order, at a specified price. That's where the current market bid and ask prices arise - some people have entered limit buy orders with a limit of 49.95, other people have entered limit sell orders at a limit of 50.00.

Last edited by Riemann; 05-08-2020 at 02:05 AM.
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Old 05-08-2020, 03:41 AM
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Originally Posted by Mijin View Post
Here's what I don't get about stocks (sorry for the hijack dalej42 but I think we normally only have one thread per cecil answer)

Noob question: How do buyers and sellers get matched up, as it were?

So, what I mean is, say there's a bicycle on Amazon for $500. That means there's a seller ready and willing to sell at that price, and as soon as a willing buyer appears, a transaction happens.

But when a stock in Straight Dope Holdings, say, is listed as $50, the implication is both that I could buy the stock for that price, or sell it at that price. But how can there be both a pool of willing buyers and sellers?
To add to that, thereís only one bicycle for sale and itís unique. Shares of stock arenít unique.

Thereís also depth of market. When you see a bid-ask quote, it will also represent the actual number of shares available at that price.

Most trades are done by ECNs, electronic communication networks. The Wikipedia article is flawed, but will give you a general idea of how they work https://en.wikipedia.org/wiki/Electr...rk?wprov=sfti1

I simplified some things, but this along with the other explanation, is basically how it works.
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Old 05-13-2020, 07:20 AM
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Originally Posted by Mijin View Post
Noob question: How do buyers and sellers get matched up, as it were?
By using "Market makers" ("Specialists" in the NYSE). Their job is to match buyers to sellers. If someone wants to buy 100 shares of X Corporation, it goes to its market maker or specialist, who then matches the request up to someone who wants to sell.

If there is no match, the market maker (who keeps a stockpile of shares of the companies they're making a market in) has to buy or sell the stock out of their own account.
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Old 05-13-2020, 09:08 AM
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As the OP explained, dividends and buybacks are ways to return excess cash to shareholders. Why are dividends considered acceptable, while some people think buybacks are somehow evil?
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Old 05-13-2020, 05:44 PM
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As the OP explained, dividends and buybacks are ways to return excess cash to shareholders. Why are dividends considered acceptable, while some people think buybacks are somehow evil?
First of all ó what's with the "EVIL"?? Has anyone in the thread used the term other than you? What's the purpose of throwing around inflammatory words? Does it facilitate rational discussion?

Second, your "ways to return excess cash" is wrong. Big oil companies like ExxonMobil or Chevron borrow on the bond market in order to finance their dividends and share buybacks. I've highlighted here to encourage you to reread the sentence. "Excess cash"indeed!! (I hardly think that borrowing to pay dividends and fund buybacks is limited to oil companies in today's world ó that's just a sector I happened to have had reason to examine.)

Finally, as I tried to explain before, buybacks differ from dividends in that the "cash distributed to shareholders" is not distributed equally. As I already said, Directors may be encouraged to pretend the company is doing well, while selling shares at an inflated price.

But the main point, applicable whenever dividends or buybacks are financed by borrowing was already revealed upthread:

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Originally Posted by septimus View Post
Some corporations ... borrow hugely, but their borrowings are not for exploration, development, or capital expansion ó they're borrowing to pay the dividends and finance the stock buybacks.

In other words, they are seeking very high leverage. This is logical and profitable for them given the low interest rates at which they can borrow, but it does weaken their financial health. If a setback cuts their profits or raises their interest rates, then taxpayers will be asked to help out, perhaps assuming some of the pain which "should" fall on stockholders.

Sooner or later, Big American Capital will come back to the public trough, as it did in 2008, saying "Heads we would have won; but Tails YOU lose. Ha ha!" Sooner rather than later, as it turns out, due to the Covid-19 crisis.
Clear? Would it help if I tried to wedge a word like "evil" into the quote?

Last edited by septimus; 05-13-2020 at 05:48 PM.
  #8  
Old 05-13-2020, 05:55 PM
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Finally, as I tried to explain before, buybacks differ from dividends in that the "cash distributed to shareholders" is not distributed equally. As I already said, Directors may be encouraged to pretend the company is doing well, while selling shares at an inflated price.
A) You are not in a position to explain anything.

B) How is it unequal? $30/share in a buyback vs $.30/share in a dividend ARE being distributed equally.
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Old 05-08-2020, 02:10 AM
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Interesting during these times when companies are being harshly criticized for paying dividends.
Companies are being criticized for paying out dividends when it's seen as a short-sighted move because an extended recession means that they may soon need the cash to survive. Banks are a prime example - don't pay out surplus cash as dividends then come running to the government a year later for a bailout when you're insolvent.
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Old 05-08-2020, 03:50 AM
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Companies are being criticized for paying out dividends when it's seen as a short-sighted move because an extended recession means that they may soon need the cash to survive. Banks are a prime example - don't pay out surplus cash as dividends then come running to the government a year later for a bailout when you're insolvent.
True, but thereís always going to pressure from the owners to pay out that dividend, if you donít, you can be replaced.

Also, large companies have a bit of an advantage in that theyíll always have leverage.

If I owe you $3000 and donít pay, you can always send your buddy Knuckles over to convince me to pay. If I owe $3 million, well, now itís more your problem than mine. Itís similar with large companies. Some local coffeehouse goes out of business, it sucks for the employees and the local neighborhood, but no real effect on the economy as a whole.

Large companies shedding jobs and heading for bankruptcy donít just affect your local neighborhood, they affect the entire USA and world economies. It may not be fair, but itís usually in governmentís best interest to keep them afloat.
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Old 05-08-2020, 03:43 AM
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Thanks guys.
I guessed it might be something like currency exchange (buy at / sell at) but didn't know. Or how the actual transactions happen.

Ignorance fought.
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Old 05-08-2020, 03:56 AM
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Thanks guys.
I guessed it might be something like currency exchange (buy at / sell at) but didn't know. Or how the actual transactions happen.

Ignorance fought.
Getting a bit more deep into the weeds, there are companies that are called market makers and they buy and sell out of their own inventories of stock, helping to insure liquidity in the market.
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Old 05-08-2020, 07:12 AM
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I think our Dear Leader, or his assistant, has misled His followers in that column.

Quote:
Originally Posted by Guest contributor friedo
The first corporate charters were created in Britain as early as the sixteenth century, but these were generally Crown monopolies that resembled what we might think of today as a public corporation owned by the government, like the United States Postal Service. Privately owned corporations came into being gradually during the early 19th century in the United States, United Kingdom and western Europe
Wrong. Yes, early corporations often depended on governments for support and monopolies ó as do many shareholder-owned corporations today ó but they were not "public corporations owned by the government like the USPS." One of the earliest share-holder owned corporations was The Dutch East India Company (Vereenigde Oostindische Compagnie) established in 1602. I cannot find a detailed list of its shareholders but
Quote:
The minimum investment in the VOC [Dutch East India Company] was 3,000 guilders, which priced the Company's stock within the means of many merchants.
Here's a look at Stock Ledger One from 1694 for the Bank of England. For example, Thomas Smith, a chemist from Westminster, invested £25 in Bank of England stock.
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Old 05-08-2020, 11:16 AM
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Originally Posted by dalej42 View Post
https://www.straightdope.com/columns...k-market-work/

Interesting during these times when companies are being harshly criticized for paying dividends. Thereís only 3 things a company can do with idle cash: save it, reinvest it into the company (including buybacks), or pay it out as dividends. Shareholders are the owners of the company and thus they arenít likely to be satisfied with keeping large sums of cash around doing nothing in the low interest rate environment which has persisted since December 2008.

Also, many critics need to realize that they may have benefited from dividends as they may indirectly hold the stock in their retirement plans through mutual funds or ETFs.
It's not dividends that critics have recently objected to, it's buybacks.

The public rationalization for the corporate tax cuts was that the companies could use the money for R&D, or to build new plants, or increase production, or any of the many uses that would benefit the broader economy.

Instead, the companies have largely spent their billions on buying back stock. This does, admittedly, put the money back into the economy. The difference is that it has a limited multiplier value. The stockholders get richer, driving more wealth into ever-smaller percentages of the population. The workers in the company and the smaller businesses in the supply chains that could have benefited from internal investment get next to none of this effect. Moreover, spending their cash-on-hand leaves the companies vulnerable for emergencies, exactly like the one we are having now. Instead of being able to ride out the slowdown for a few months, the companies are getting bailed out with yet more dollars, dollars that are coming out of lower tax revenues. It's a lose-lose for the country, the government, and the economy. Well worth criticizing.
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Old 05-08-2020, 01:34 PM
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It's not dividends that critics have recently objected to, it's buybacks.
Buybacks aren't really much different than dividends other than the investors have no choice but to get taxed on dividends, whereas they can decide not to sell during a buyback program and only have unrealized gains. Both are the company shedding cash and that cash ending up in the hands of their shareholders.

I don't think currently there's as much pressure on buybacks as there was before the epidemic. The stories I've seen are basically about large companies that are shedding workers but still paying out their regular quarterly dividends. This is likely because the executives have stock options and don't want to tank the price of the stock by signaling that they don't have faith in the company to pay out its regular dividend and stay solvent through the crisis. On Caterpillar's web site listing all the dividends it's paid, it proudly announces that it has paid a dividend every year it has been in business, and a quarterly one every quarter since 1933. Ok, sure, they could keep that streak alive by issuing a 1 cent dividend instead of the $1+ dividend they did declare recently, but that would essentially give the same signal to the market. They (the executives) would rather put on a show that everything's going to be fine. Credit markets are being flooded with money to lend and interest rates are low. If they need to borrow money, they probably can.

A good reason why they're cutting jobs is simply that there's no work for them to do. Why continue to pay people to do nothing when you instead can just let them go and rehire who you need later? Finding people when you need them should be no problem with our nearly 15% unemployment. It's bad optics to pay dividends instead of workers, but it's completely rational from the executive's point of view. The people in the market for buying Caterpillar products probably aren't going to be swayed in their purchase decisions by these kind of business decisions; more consumer-oriented ones might be though.

Last edited by glowacks; 05-08-2020 at 01:35 PM.
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Old 05-09-2020, 03:15 AM
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Buybacks aren't really much different than dividends other than the investors have no choice but to get taxed on dividends, whereas they can decide not to sell during a buyback program and only have unrealized gains. Both are the company shedding cash and that cash ending up in the hands of their shareholders....
Your point is correct. Yet, even setting aside taxation details, there is one conceptual difference: Buybacks are done deliberately to prop up share prices. Companies buying shares back believe ó or pretend to believe ó that their shares are undervalued.

Have there been studies of insider trading of corporations buying back shares? Are men who pretend that shares are undervalued when wearing their Directors' hats, themselves selling shares when wearing their Stockholders' hats?
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Old 05-09-2020, 11:18 PM
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Increasing dividends tend to "prop up" share prices, as well.

Do you have a problem with those, as well?
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Old 05-10-2020, 06:44 AM
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Increasing dividends tend to "prop up" share prices, as well.

Do you have a problem with those, as well?
Buybacks explicitly raise the P/E ratios of shares, which dividends do not. The higher P/E ratios then cause share prices to rise as a consequence: so the P/E ratios can be restored to "normal levels."

I'm not sure in what context septimus' own problems are under discussion here. I do see issues for the long-term stock market health and U.S. economic health. Some corporations, e.g. Big Oil companies, were continuing with highish dividends AND with stock buybacks. They also borrow hugely, but their borrowings are not for exploration, development, or capital expansion ó they're borrowing to pay the dividends and finance the stock buybacks.

In other words, they are seeking very high leverage. This is logical and profitable for them given the low interest rates at which they can borrow, but it does weaken their financial health. If a setback cuts their profits or raises their interest rates, then taxpayers will be asked to help out, perhaps assuming some of the pain which "should" fall on stockholders.

Sooner or later, Big American Capital will come back to the public trough, as it did in 2008, saying "Heads we would have won; but Tails YOU lose. Ha ha!" Sooner rather than later, as it turns out, due to the Covid-19 crisis.

HTH.

Last edited by septimus; 05-10-2020 at 06:47 AM.
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Old 05-15-2020, 10:33 AM
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Companies are managed to achieve the goals of the corporate board. If the board is interested in the growth of the company in its ability to provide more of the products or services the company has been successful with, it may well make sense not to pay large, or even any dividend. When capital is costly, operating out of current income may be much better for the company as a whole than increasing the price per share to make the company "more valuable." If capital is plentiful, and cheap, using current income to pay dividends, and buy back shares might be more beneficial. Board members, and managers who receive considerations based on only one of those factors will favor the one which puts money in their own pockets. Benefit to managers, and benefit to shareholders, and benefit to the viability of the corporation are not the simple matter proposed by some.
Keep in mind the actual processes of issuing, buying, and selling shares is an expense, and it does not actually provide a benefit for the company. Issuing new shares to raise capital is a risk, but in some economic climates it is less of a risk than taking out loans, or selling existing shares.
Buying shares of other companies may be more beneficial in some particular situations.

It's not rocket science. Rocket science is pretty straightforward.
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Old 05-19-2020, 03:58 PM
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It's certainly true that if companies buy back stock, that increases Earnings Per Share (which is what septimus was presumably going for originally) by lowering the denominator and if they don't need the cash, it doesn't change the numerator. If they have to borrow in order to finance the stock buybacks, that decreases earnings by increasing interest expense, but they presumably only do this when the reduction in the share base more than makes up for it. The extra buying pressure on the stock may itself cause prices to go higher in the short-term, but the market will presumably work out the correct effect of the company losing the cash and perhaps even taking on additional debt to finance it.

In terms of borrowing to issue dividends or buy back stock, it's more along the lines of "we're borrowing money because we have the ability to pay interest on it at a lower rate than our return on assets, so we're going to leverage ourselves more" followed by "we now have all this extra cash we don't need, and will use it to buy back our stock". There's absolutely nothing wrong with this as long as you actually don't need the cash. The problem with this is when they do end up needing the cash and don't have the ability to borrow any more. It's the massive piles of debt that companies acquire because it's so cheap that causes recessions in the first place most of the time as they are unable to weather a small sag in demand, and why interest rates need to be raised once the economy gets back on track in order to curb over-speculation.

Companies stuck in this situation of needing cash after having bought back their own stock should accept their poor investment in their own stock and sell it back on the market. Unfortunately, no executive that gets paid mostly in stock is going to like that, and that's part of the problem with stock-based compensation - a concern more about the current stock price than the stock price 10 years from now. There has in general been a trend of making stock grants not sellable for longer periods time, but when you're competing for top talent, it's not necessarily possible to get the best people if you can't gratify them relatively quickly.
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Old 05-22-2020, 02:24 AM
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Google keeps presenting me with new results from old searches.

Harvard Business Review in "Why Stock Buybacks Are Dangerous for the Economy" claims that in 2018 S&P 500 companies returned a whopping 109% of net income in the form of buybacks and dividends. Wow! Think of it. That's not a few outlying companies: that's the S&P 500 universe in the aggregate returning more than they took in. Obviously bond sales were huge. And this despite that 2018 was a year with after-tax profits suddenly inflated by GOP generosity.

Google also presented me with numerous examples of CEOs and Directors cheerfully selling shares (implying they thought the price was high) while approving buybacks (pretending the price was low).

(Note that the HBR article speaks of "Dangerous for the Economy." "Evil" is an altogether different type of word and signals that its speaker views economics as just a backdrop for politics or as a morality play.)
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