I have, and have made some money doing so. I just think that people believe that they are buying something real, when, in most cases, they aren’t.
But, if that company does not pay dividends, and a great many do not, then they are clearly never going to pay you anything for your investment. I absolutely agree that if a company pays dividends, that someone might want to own that stock in order to get the dividends. But, no dividends, means nobody really wants to own the stock. If the company pays no dividends, what does it really matter if the company is making or losing money? It matter because investors think it matters, but that’s the only reason. In other words, if a stock does pay dividends based on its profits, then no matter what I believe, it’s going to make a difference in how much money I make. But, if the stock doesn’t pay dividends, then it’s value is really just a function of my and everyone else’s belief. People believe that the stock of a company that makes money is worth more, and therefore it is. But again, it’s only that belief that makes the stock more valueable
Haha! At least if I’m crazy, I can take comfort knowing that there is at least one other crazy person out there, who, by the way, has done a much better job of explaining my question and my case than I did. So, thanks.
No, I’m sorry, but you are just wrong here. A deed to a house has value because it gives you the legal rights of ownership to the house. When you own a house, you own it, it’s yours, you can do what you want with it (within the boundaries of other legal restrictions, of course, which aren’t particularly relavent to this conversation). You can, for example, live in the house that you own, and thus derive actual value from the ownership.
A stock represents “ownership” in a company in only the loosest sense. That “ownership” doesn’t give you any significantly useful rights. You can’t actually do anything useful with the company. If I own some stock in GM, for example, I cannot walk into a GM assembly plant and just take a car, even if the agreed-upon value of that car equals the agreed-upon value of my stock. My stock doesn’t give me the right to take up residency in one of GM’s offices. It doesn’t give me the right to use any part of the company for any purpose.
There is just nothing of value that you can do with the “ownership” that your stock ownership imparts to you that is in any way significantly useful. Owning a house or a shirt gives you the real value of the thing you own. Owning stock in a company gives you nothing of intrinsic value.
(Yes, I know it gives you the right to vote on certain things. But in the first place, you only get to vote on those things that the people who really run the company decide that you get to vote on. Secondly, since we are talking about normal, typical people in this discussion, the amount of stock that a typical person could ever own is insignificantly small relative to the total number of shares, so that “vote” has insignificant power. Once again, remember the OP. The question is why would people buy stock, not why do billionaires buy up 51% of the stock. Owning enough stock to have controlling interest in a company has some intrinsic value; owning a few hundred shares does not.)
I’ll keep saying this, because it’s just true: Stocks have value only because we all agree that they have value; there is no value to a stock in and of itself, no intrinsic value whatsoever. People buy stock because they hope/think/believe that the agreed upon value will go up, and they will be able to sell it later for more than they paid for it, and thus make money. That’s the only value that stock has.
Not so. They **may never ** give you a return or “pay your anything” for your investment, as in the case of the dot.com craze or the tulip bulb bubble of times past. However, a company such as Berkshire Hathaway does “pay you” in profit on sale of the stock. What you’ve got is an asset, say, like a savings bond where interest is compounded and you get your payout in full at the end.
Again, not so. When a company does not pay dividends, it could be for a number of reasons, including:
It has developed a strategy of non-payment of dividends (yeah yeah back to Berkshire Hathaway
It is “saving” its income to grow. This could be good or bad depending on its strategy to grow.
It didn’t earn the income to pay dividends. And, back to the dot.coms
In the first two situations, it’s easy to think of a number of situations where buying the stock would be a good idea, because of the potential for the company to be worth a great deal more money in the future, therefore making the stock more valuable.
Obviously the stock market isn’t perfect; people can make irrational decisions based on poor information, speculation and rumors and that isn’t just you and me.
And while I think what you may be saying is that shares have value only because of an agreement between investors that this is the case and they also assign a value to it, I do understand what you’re saying, but how is that different for stock, than for other assets, such as the morning newspaper, or services, such as the ability to post here?
Thanks for the thanks. I don’t think you’re crazy, although I’d say that calling the stock market a “hoax” is going a bit far. It’s a house of cards, in that it only exists because of the agreement that stocks have a value.
I mean, let’s suppose (God forbid) that next week, some natural or man-made catastrophe of sufficient magnitude hits the Earth such that most of the infrastructure of governments and businesses are wiped out. Paper money now has no value, because people just won’t take it. Governments are gone, and so people no longer agree that currency has any value.
But that shirt you own, that still has value. You can trade it directly for some other goods. You might, for example, find someone who needs a shirt and has an extra flashlight, and they’ll trade you your shirt for their flashlight.
The house you own still has value. You can still live in it, it will still shelter you from the weather. (But let’s not get into the tangent that since the laws have broken down, someone could just take your house from you by force. That’s true, but it actually speaks to the intrinsic value of the house, right? No one would bother to take something that had no value to them.)
Even gold will, probably, still have value and there will be people who will take gold in exchange for their flashlight.
Those stock certificates, though, have no value because, just like currency, the agreement that they have value no longer exists. No one is going to trade you their flashlight for ten thousand shares of GM.
You keep saying it, but I think the problem here is you don’t really understand how stocks work, despite having had other posters attempt to explain it earlier in the thread. Stocks DO have value. A stock represents a unit of ownership in a company. If a comany issues 1000, then owning one stock is the equivelent of owning 1/1000 of the company. If the company itself has intrinsic value, then so does owning 1/1000th of said company. It might not have a LOT of value (or it might have a great deal), but as long as the company itself is worth something, so is your stock…thus giving it value. The key point is…its a PORTION of ownership, not the whole thing (unlike your house example).
Whether I can DO anything directly with my stock (such as the whole voting thing addressed in several posts) is irrelavant. I’m a citizen of the US. I have a vote. My vote is fairly weak when you compare it to all the OTHER folks who have the vote out there. Case in point…the guy I voted for isn’t the current president. In addition, they don’t let me vote on everything…just what they let me vote on. Being a citizen doesn’t give me the right to go sleep in city hall, or go visit the president or live in the white house if I want too. Does all this mean that my citizenship has no intrinsic value?
I really fail to see why this is so hard to grasp. Our entire economic system is built on a fiction. Money itself only has value because we all believe it has value, and roughly agree what the value is. Once you get over that hump though and understand that physical items have value that are tied to money, and that companies have value that are tied to money, then its pretty much a given that if you parse up something that has value and sell those pieces, that as long as the whole retains value the pieces also have value.
-XT
Suppose that I agree to give you 10% of the down payment on your house, with the promise that you will pay me back proportionally when you sell the house? Does my “stock” in your house have any value?
It’s the same with stock in a company. Sooner or later, the thing is going to be sold. In the meantime, it’s churning out good and/or services-- exaclty analogous to “living in a house” until it’s sold.
If you could never sell a company, you would be right. But it doesn’t have to be sold for 500 years to still have value as something that can be sold.
I understand the point you are making, but when you hold the deed to a house, you benefit by having the use of a house. Certainly you gain value if demand for that house increases, but what do you have the use of if you own stock?
Fortunately, I believe Measure for Measure is fighting my ignorance:
This makes a lot of sense. Anticipation of delayed but greater dividends - gotcha.
I understand this as well, but it doesn’t quite address my main question - what is the value that is being taxed by capital gains?
Which, I think you are addressing in your next segment:
So, the factors behind demand for stock are:[ul][li]Dividends paid, either regularly or at some time in the future []The theoretical equity that would be left over if the company were liquidated, after all debts were paid[]The desire by some to gain control over a company so as to run it differently [*]A sort of “bubble” effect, where the price goes up because everyone expects the price to go up, so they bid the price up[/ul][/li]
Is that correct?
Or am I still missing something? That is, what are the ways that increased profits for a company benefit a non-dividend-receiving stockholder apart from the bubble effect I mentioned, assuming nobody wants to control the way the company is run, and the company is not going to liquidate?
Regards,
Shodan
PS - Please excuse the rather tortured syntax. These are intended as genuine questions.
Nope…I’m just correct. Your ownership of those stocks give you specific rights of - you can vote on resolutions, you can buy and sell it, you can attend shareholder meetings. Your ownership is diluted by the fact that there are 1000s of other owners. You can’t just go and steal what you want from the inventory or decide to destroy your portion of the company, but you still have a right to a fraction of the value of that company.
It’s kind of like going in on a timeshare house or a co-op with 1000 other people. All of you own the house. You have rules as to what you can and can’t do. You all share in the success of the house.
I mean if you want to talk about extreme situations like a meteor destroys half the planet then yeah. Your stock might not have value if their isn’t any government to enforce the contracts. Even if the government and the NYSE still exists, your stock might be worthless because the meteor landed right on your company, effectively destroying it. Even if it missed your plant, your company might produce something that people in the post-apocalyptic world just don’t need so the company is useless.
So no, stock does not have value in and of itself like food, water, shelter or transportation. But as long as we live in a society with government and laws, it has value.
Bubble effect has bad connotations.
Stock value is based upon net present value of all expected future cashflows. This includes the price one expects to receive for one’s investment at some future date.
Stock value does not work in a vaccuum. The overall economy, the industry, interest rates, government policy and a host of other factors play into how the future value of an investment in the shares of a company is valued today. No one buys stock expecting it to depreciate (there are strategies one can employ if one expects value to decrease). The question an investor should ask hisself or herself, then, will I receive an acceptable rate of return on my investment given the inherent risks.
Microsoft has some ungodly amount of cash on its books, and very little (if any) debt. That’s a tangible asset. Therefore each share of stock must be worth at least its proportional share of cash. If we consider cash to be a non-performing asset (it isn’t), then the future and present values match. If Microsoft adds another $500,000,000 to its cash reserves, the value of the stock must go up (looking at cash in a vaccuum). If instead, Microsoft pays out that $500,000,000 in dividends, then the value of the stock will remain constant.
If you are investing in Microsoft, you are more concerned with how Microsoft will use it’s cash. The reason Microsoft investors pushed for a cash dividend is because cash is a low-performing asset. By sitting on it’s cash, Microsoft was denying its shareholders the ability to utilize their portion of the cash in a better performing asset. An investor expects that the cash that Microsoft retains will be used to increase future revenues, thus increasing the long-term value of the company. Given Microsoft’s lack of significant debt, if Bill, Steve, and Paul were to call it quites, that cash goes to the shareholders. The value of the property upon liquidation goes to the shareholders. The present value of the patents goes to the shareholders. This is all tangible - this is what you own when you own a share of stock. The reason that you choose Microsoft over d_oddsoft is because you believe that the risk/return profile of Microsoft exceeds the risk/return profile of d_oddsoft.
So then why would anyone ever buy a share of d_oddsoft? Some investors are less risk averse. Some portfolios have room for risky ventures without affecting their overall risk/return profile. You’ve researched the company and believe that I truly have a Windows-killer, and at the very least you expect Microsoft to offer me a big chunk of cash to go away, and as an owner you get your share.
Note that word, “owner”. That is what a shareholder is. Owning Google, Con Edison, or the bodega on the corner are all very similar. Google plows its earnings back into the company; Con Edison, like most utilities, pays out its earnings as dividends; and the bodega gets to choose - save earnings to expand or withdraw earning for personal use.
Which is all I’ve been saying from the beginning. We are in agreement. “Government and laws” are how the agreed upon value of the stock is enforced. If the agreement and the enforcement go away, so does the value.
Contrast to a shirt: It has value because it has usefulness. Take away the laws that protect your rights of ownership of that shirt, the laws that govern the “contract” that allows you to exchange currency for the shirt, and people will still view the shirt as valuable.
Yes, but by the same token as other stocks, only because we agree that it has value. If you give me 10% of the down payment, and I give you the right to live in 10% of the house, then you’ve got some actual value, as opposed to just an agreement of value.
Right, we seem to be in agreement.
Look, you seem to be arguing against a point I never made. I have not said that stocks have no value. Never said that. I’ve said that the value they have exists by agreement among people, as opposed to as an intrinsic quality of the stock itself. So what you say here is totally true: the stock has value “as something that can be sold”. But the “can be sold” part exists only by agreement. If you take away that ability to sell a stock, it has no value remaining.
Yet again, contrast to a shirt: Take away the ability to sell a shirt, and it still has value as a think to keep you warm, or from getting sunburned, etc.
Models of business ownership:
(1) You can own a business as a sole proprietor. That means you own all the business’s assets, you can control them as you like, you can dispose of them, and you can even wind up the business, taking the proceeds to use as you wish.
(2) You can go into partnership with others. Then (subject to the partnership agreement) you and your partners own the business, control the business, and can dispose of the business for your own benefit. (You might needto specify in your partnership agreement how you make decisions ifg you and your partners disagree on aspects of running the business).
(3) You can set up a company (corporation), which must be registered by the state, and must have documents detailaing how the company will be run. Then you sell shares in the company, and the people who own the shares ultimately own and control the company. However, they exercise control by voting at general meetings, and by electing a board of directors to run the business. In turn, the board of directors might employ a CEO to run the business day by day.
If you own 1% of the shares in a company, you can’t exercise very much control by yourself. If you own 51%, then generally you can control it completely. In between 1% and 51%, you get a sliding scale of power.
But all shareholders:
- Have a right to a share in the profits, coming as dividends (though the company, making its decision via the board or through a meeting of shareholders, can decide not to have dividends, but to put the profits back into company growth).
- Have a right to vote as shareholders.
- Have a right to a share of the proceeds if the company is wound up.
(Even the 51% owner can’t deprive the 49% of their ownership rights: if there is a dividend, the 49% must get their share, and if the company is wound up, they must get their share of the proceeds.)
Most companies are not listed on stock exchanges, but with all companies you can buy and sell the shares (though with unlisted companies there may be restrictions on who you can sell shares to).
Part of what stands behind the value of shares in a company is that courts will enforce shareholder rights; and behind that enforcement is the police powers of the state.
I’m not making my question clear.
Suppose I am from Mars. I come to you with sixteen (Earth) dollars, and you offer to sell me one share of Spacely Sprockets, for sixteen dollars.
Spacely Sprockets never, ever pays dividends. Further, every other share of Spacely Sprockets is held by Joe Moneybags, who absolutely will never sell. And he can outvote me because he has almost all the shares, and I would have only one. (Pretend this is all legal - I don’t want to bog down in corporate law.)
Now, you happen to know that Spacely Sprockets is going to double its revenues next year. So you want to convince me to buy that one outstanding share.
Remember, I am from Mars. So I ask you, "If I buy this share, how will I be better off next year after the company doubles its revenues? If I want to sell it, why is it better to own shares in companies that have double the sales, if I don’t get any of those increased sales in the form of dividends?
Maybe these retained earnings will mean Spacely Sprockets will increase their revenues two years from now by ten times. So? If I still don’t get any dividends, what good does it do me, and what good would it do anyone who I try to sell it to?"
I am trying not to be obtuse, but if I am sure I will never get any dividends, and I can’t exert any more control, and the company is not going to liquidate, why does the demand go up?
Do you see what I am asking? Why is it a good thing to own a share of a company that generates a lot of revenue if you never see any of that revenue? Why is it more desirable to not get any share of $10 million than to not get any share of $5 million?
I understand the nature of capital gains and other factors that affect the market. But why is there a market for shares in the first place?
Regards,
Shodan
Thanks for the insult to my intelligence, but I understand how stocks work just fine. I also understand that they work like they do only so long as everyone agrees to the rules of how they work. Change the rules, change the agreement, and they’ll work differently. Do you dispute that? If so, then explain to me how stocks would work the same way they do now if the underlying rules and agreements changed.
Never said otherwise. You are another poster who is arguing against something I never said. Yes, stocks do have value, but only as long as everyone agrees that they have value. Take away the agreement, and the value disappears. I really fail to see why this is so hard to grasp.
No, it’s actually the key to our disagreement. That you cannot DO anything of value with your stock means that it does not have any intrinsic value. The value, again, derives only by agreement.
But if you would actually read what I’ve been writing, you would see that what you say here is exactly what I’ve been saying all along, nothing more. We are in agreement.
This is where you go wrong. I think your problem is that you don’t really grasp the difference between “value” and “intrinsic value”.
Our old friend the shirt has intrinsic value because it can be used for something, well, useful. If all the stocks and currency and government and laws and agreements in the world went away, a shirt would still have value, because there is an intrinsic value to a shirt. If I was the only person left alive on the planet, a shirt would have value to me. Intrinsic value.
If I’m the only person left alive on the planet, a stock certificate, the percentage of the company it represents, the voting rights it represents, have no value to me. There is no intrinsic worth to a stock share because, in and of itself, it has no use.
If you dispute this, then explain it to me. Tell me what the intrinsic value of a stock share is. What is a stock share worth, outside of the agreement among people? How could it be put to a useful purpose, if the agreement about it’s value went away?
Ok, I know that I tend to get really verbose, and perhaps that contributes to the confusion. Let me put my point succinctly:
A stock share has value.
A shirt has value.
A stock share’s value exists solely by agreement among people. If the agreement is taken away, the value no longer exists.
A shirt has intrinsic value. No agreement is necessary for a shirt to have value. The shirt does not protect me from the elements by agreement. Take away the agreement that says a shirt is worth X dollars, and the shirt still has value. It’s no longer worth X dollars, but it still keeps me warm.
Go back and read the OP.
This may be getting down to semantics, but take away the abiility to sell a company, and you would split up the assets among the sharholders. You may end up getting nothing more than a pencil out of the company office supplies for your stock certificate, but you still get something.
I don’t get this “if you take away the ability to sell a stock” stuff. You’re saying: If you change the stock into something that it isn’t, then it changes. Of course it does.
It wasn’t meant to be an insult. Perhaps you are engaged in an elaborate game of words here and you really do understand how stocks work. Seems that way to me.
Change the rules change the agreement? Certainly. Decide tomorrow that money has no value and you certainly will change the rules and the agreement. Same goes with stocks…and myriad other things humans think are valuable, but have no intrinsic value in and of itself.
The stocks have a value based on the perceived (and agreed upon) value or potential value of the company. As said company is a physical entity, and as the stocks are a share of that entity, they also have value. As you can trade your stocks in for money, they certainly have value, since you can then turn around and use that money to buy…your shirt. Intrinsic value? Probably not. Lots of things humans prize have no intrinsic value though. A shirt is a shirt…why bother putting all those beads and shells on it, ehe? Doesn’t make the shirt more functional.
Well, I can sell the stock, so its not exactly true I can’t do anything with it. And I can use that non-intrinsic value of the stock and the money I generate to buy things that do have intrinsic value.
Lets see. I have this painting. Its a pretty painting, but I have it as an investment. Does the painting have an intrinsic value? Well, I can’t wear it, nor eat it. I can look at it…thats about it. Like the stock certificate though I CAN sell it to someone else…for money. Which I can use to buy something to wear or eat.
Then I assume you feel the same way about money itself. After all, if the government goes away then the money will be worthless, yes? So, what you are engaged in here boils down to…IF the world collapses and all the governments and every civilization dies out and you are the last person alive, then stocks will have no value…and I agree, you are right. My stock will be worthless if civilization collapses and your shirt will still be a shirt. You win! 
However, as long as civilization remains (and as long as there are companies out there making things like, well, shirts), then stocks WILL have value. Not fantasy value, not made up value, but real value based on what people are willing to pay in order to get it. Will it have intrinsic value? No…but then, a lot of things that humans value has no intrinsic worth, since you can’t eat it or wear it. A lump of gold or a pretty gem stone is valuable because humans value it, not because its intrinsically valuable. A pretty painting, a classic novel, a play, a symphony…none of these things has intrinsic value, but they are valued because humans have decided they are valuable and desirable. Money itself has no intrinsic worth but functions because we believe it has value and collectively have decided what that value is. I’m unsure though why something having or not having intrinsic value is important…as its the PERCEIVED value of something thats important and always has been.
So, how does this discussion on intrinsic value make the stock market a ‘hoax’ in your mind?
No, I don’t dispute the fact that things like stocks and money have no intrinsic value…I merely dispute that it makes any difference at all if stock has intrinsic value or is simply perceived to be valuable. Value is value, and throughout most of human history its the PERCEIVED value of an object or thing that determines its value…not its intrinsic value. I dispute the fact that if something is not intrinsically valuable that means it has no value, or that somehow its value is a hoax…and that extension people value-ing something not intrinsically valuable is somehow a ‘hoax’ as layed out in the OP. To me it seems silly to make your central point (to paraphrase) ‘well, if the civilization collapses THEN your stock won’t be worth anything, as it has no intrinsic value…you can’t eat it or wear it after all!’ If that doesn’t seem silly to you…well, YMMV I guess.
-XT
Roadfood:
Take away the ability to **sell **the stock, and it has no value.
Take away the ability to **wear **the shirt, and it has no value.
The ability to sell the company represented by the stocl is an intrinsic part of the nature of stock. If you take away that ability, it no longer is stock.
Do you see what I’m getting at now?