A question for the OP and Shodan:
Do you think of a ticket to a sporting event or concert as having intrinsic value?
If so, then think of the share of stock as your ticket to a shareholder meeting.
If not, then never mind, there’s nothing I can say that hasn’t already been said.
Or group of games, like a casino. In this case you get to select the game, write your own rules and find players of like mind. Then you run into the one game, religion, and find that here again you can write your own rules and play it your way or play it God’s way. You can gamble eternity depending on your response.
The stock market, like all games, depends on a set of ethics to play by the rules.
Throw out the ethics and the real fraud begins, and many lose everthing.
That’s all I’ve ever said.
I completely agree.
Thanks, that’s all I’ve ever said.
Again, I am in total agreement. But I guess I need to keep pointing out this one little thing: Go back and read the OP. I was responding to the specific question raised there. The OP asked why people buy stock, pointing out that stocks don’t have the same “kind” of value that a shirt does. All I did was point out that people buy stock because of the agreed-upon value, that exists by agreement only, not intrinsically.
Again, total agreement by me. It was the OP that made the distinction between the “real” value of a shirt and the “value” of stock. I just answered the question as to how that value arises.
I’m not the OP, I never called it a hoax. I even posted earlier that I think “hoax” is not really the right term to use.
Once again, I agree with everything you say here. I was merely using the end of civilization as a way to make the distinction clear between intrinsic value and the perceived value that you yourself point out here.
Ok…my bad then. I’m glad we agree. 
(I didn’t read every post in this thread btw…thats my bad. Appologies).
-XT
No, because the ability to sell the company (or the stock itself, I’m not quite sure if you really meant one or the other or both) is in no way intrinsic to the stock. You can only sell it if someone else is willing to buy, no? There has to be at least one other person in the world who agrees to buy your stock, otherwise you can’t sell it. I mean really, is that a hard idea to grasp? Are you going to tell me being able to sell something is intrinsic to that thing, regardless of how any other person feels about it? If so, I’d really like to have that explained to me. I mean, I have any number of things in my possession that, I’m quite sure, I could not find anyone willing to pay me a penny for.
And even if you can find a buyer, what’s he willing to pay for it? The “value” of a thing being sold is what the buyer is willing to pay. I think this original, mint condition LP of Led Zeppelin’s “Houses of the Holy” is worth $50. So that’s it’s value, right? Not if the best I can do is find someone willing to pay me two bucks for it. Then it’s value is two dollars. The value exists only by agreement between seller and buyer. Same for stocks.
“Ability to sell” is not an intrinsic part of the nature of anything, because the very act of buying/selling is a construct of humans that exists only by agreement. If you have a stock certificate in your hand, but you can’t find anyone willing to buy it, your ability to sell that certificate doesn’t exist. If you think it’s worth $100, but you can only find buyers willing to pay you $75, then it’s not worth $100, it’s only worth $75.
In contrast, if you have a shirt, you can wear it, period. It does not require any kind of agreement from any other person in order for you to derive the wearable value from that shirt. The value is intrinsic, because it remains, even if you can’t find anyone willing to buy the shirt.
See the difference?
Well, I’m neither the OP nor Shodan, but can I answer anyway?
No, a ticket to an event does not have intrinsic value. It is a contract between myself and the event venue. The venue made an agreement with me that I would exchange money for the ticket, and then they would allow me to see the event.
There is no intrinsic value there, it’s nothing but a contract or agreement between two parties.
I would ask you in return: by what definition of “intrinsic” could a ticket have “intrinsic value”? Dictionary.com says of that word:
And of “inherent”:
The only essential nature of a ticket is the paper and ink. All else exists only by agreement among people.
No problem, I’m just glad I got to a point of agreement with at least one person.
Shodan, Spacely Sprockets is then a bad investment. Not stock, just Spacely Sprockets as you have described it.
However, one day, Mr. Spacely is going to want to take money out of the company. One way he can do so is to increase his salary. Assuming no Board of Directors, you are still screwed. However, a good BoD (and they have been getting much better these past few years) will look out for the good of the shareholders, and will vote down a pay raise (increases expenses, lowers earnings per share and only benefits one shareholder) and force an earnings distribution.
Now enough with the ridiculous hypotheticals. It’s been explained. If the company has 100 shares, and is worth $100, each share has a book value of $1.00. If the company has net earnings of $100 and plows it all back into the company, it is now worth $200, and each share has a book value of $2.00. Trading price will actually be higher, as people are prognosticating how much the company will earn in the next year, and are discounting it into today’s price. This present value constantly changes as assumptions of market conditions change.
No.
If the company could not be sold, there would be no stock in the first place. And intrinsic to that concept is that the owner of stock owns a piece of the company.
You are defining “value” too narrowly.
No, nothing about the stock itself has to change in order for the ability to sell it to go away. If there are no buyers, you have no ability to sell, right? The stock itself hasn’t change, but if you got no buyers, you got no ability to sell. Or do you believe that you can somehow compel someone to buy your stock?
See, “ability to sell” is something that exists by agreement among people, and can – if only theoretically – be taken away if that agreement changes.
Contrast to our friend the shirt: “ability to wear” exists as a property of the shirt and cannot – even theoretically – be taken away from the shirt by any change in the agreements that currently exist in our society.
Suppose I own a rock. Does that have no value if no one wants to buy it? Maybe I can use the rock to kill a rabbit to eat. How about if I own a fistfull of mud?
What if I own a seed? Does that have no value until it turns into a plant?
What if I own a poinsonous mushroom? I can’t eat it, but I still own it. Does that have no value? Maybe I can use it to catch a fish, and eat the fiish.
IMHO, there is a core of mystery here that none have worked out.
Here’s my take. There are 2 ways of thinking about the issue. The first way is reflected in Shodan’s succinct list. (To that I would add corporate governance considerations: there is the possibility that a shareholder revolt could occur, and a massive dividend would be granted owing to shareholder pressure (as opposed to takeover). This seems unlikely though.)
The second way is to simply value the company at the present discounted value of the expected earnings stream, or PDV(E). This is the conventional method. It is defendable: PDV(E) is arguably the ultimate source of intrinsic value. But I disagree: at the very least the investor would want to factor in the extent to which a particular management culls these profits via off-the-books accounting maneuvers.
More deeply, one might want to consider PDV(E) to be potential value rather than intrinsic value. Historically, though, this consideration has been dispensed with using a little hand waving.
Here’s another argument in favor of the conventional wisdom. Calculations comparing earnings growth and bond market returns can plausibly justify current PE ratios. But I doubt whether calculations based upon dividend growth over, say, the next 50 years could do the same. Similarly, I’m guessing that those using these sorts of dividend growth models would have shied away from equity over the past 30 or so years, a costly error.
Note: “Conventional wisdom”, may be an overstatement. I understand there are investors who use dividend discount models. Such portfolios will perform better for tax-exempt investors, for whom the US tax code’s favorable treatment of capital gains is irrelevant.
No, I’m accepting that value has a number of definitions. Remember, this is about the question asked in the OP. The OP saw the value of a shirt or a steak, but not of stock. It was actually that OP that was using a narrow definition. I simply tried (and apparently succeeded, at least according to the OP) to explain that “value” can have a broader meaning, as long as people agree to that meaning. You, though, seem to believe that there is a value to stock, without requiring any agreement among people.
One more attempt to make my point on the distinction between true intrinsic value and agreed-upon value. Here are two statements of fact:
You can realize some value from a shirt by putting it on and using it to keep warm and/or protect yourself from the elements. Doing so requires no cooperation from or agreement with other human beings.
You can realize some value from a steak by eating it and gaining calories (energy) and nutrition. Doing so requires no cooperation from or agreement with other human beings.
Now, try the same format with stock:
If you can fill in that blank with something meaningful, I’ll concede.
Stupidfool, you are defining yourself into a dilemma. You accept that things have value because they are worth something to people who want to buy them. But you arbitrarily decide that even though stocks are things people want, they don’t have value. Your dilemma is of your own making.
Perhaps my comments on the below post will help:
I agree with you about value being dependant on perception, but you (like the OP) are only thinking this through to an arbitrary point, then you’re calling that point bedrock.
Why does the shirt have value? It has value because you can own it then wear it when you want to. But that value depends upon the agreement of society around you to let you keep it and wear it.
My nice car in modern law abiding Australia has a value. But if those laws were to break down such that my car was inevitably going to be taken off me, it would have little or no value.
You are trying to draw a distinction between shares and shirts saying that the value of one is dependant on legal systems but the value of the other is dependant upon usefulness. In the current law abiding climate, both shares and shirts are useful. One can be worn, the other can be sold and the proceeds used. If the rule of law broke down, the usefulness of either might stop. Your distinction is created purely by choosing an arbitrary level of the breakdown of the rule of law.
Hey, I think you’re finally beginning to see my point! This is exactly the point I’ve been making: a rock does have value in and of itself, without the need to have another person to sell it to. You can use a rock to kill a rabbit, and that’s useful and it requires no agreement from any other person to do. Selling the rock, however, cannot be done without the cooperation and agreement of another person. And that is the key difference between the intrinsic value of the rock and the value that exists only by agreement.
Maybe you’ve just misunderstood me and think that I’ve been saying that some things have only intrinsic value (and no agreed-upon value), and other things have only agreed-upon value (and no intrinsic value). I’ve never said that. Clearly, some things have both. A rock, as seen above. A shirt. A house. These things have an intrinsic value, a usefulness that does not depend on the cooperation or agreement of other people. And they have an agreed-upon value, a value that can be realized only through the cooperation and agreement of other people. Like selling it.
However, there are other things that have no intrinsic value whatsoever, they have only agreed-upon value, value that requires another person to agree to that value in order for you to realize it. Stock falls into that category. It has value, as long as people agree to that value. If the agreement stops, the value goes to zero.
Gotta admit, you’ve lost me on this one. I can’t see how it pertains to anything in this discussion, said by you, me, or anyone else.
And, as I’ve said, that gives it some intrinsic value.
“True intrinsic value” doesn’t exist. I’m an Aboriginal Australian who lives a traditional lifestyle. We don’t wear clothes, becase we don’t need them. In fact, it’s so hot that clothes are a negative. I see a White Australian wearing a shirt, so I know what it’s used for. I see a shirt on the ground in the desert. It has no value to me whatsoever. The only value it might have is that I can trade to a white guy for something that is of value to me.
What happened to the “true intrinsic value”?
I don’t wear shirts. I don’t have a job that makes me wear one. I don’t eat in restaurants that require shirts. I live somewhere where the weather is nice all year round. So how much is a shirt worth to me?
Or maybe I have dozens of shirts. So many I can’t possibly wear them all. Now what is the “intrinsic value” of a shirt?
For ANYTHING to have value there must be an agreement between two people. Yes a shirt has a use. If no one needs to use it, it has no value.
The OP is asking “why would anyone want to own stock?” Owning stock allows people to speculate on the success (or failure) of a company and profit from that success (or failure).
The second part of the OP is “is the stock market a hoax?” Presumably by “hoax” he/she means “is there anything to substantiate the value of stocks or is it just some arbitrary price set by the whim of market forces?” The answer to that is “yes and no”. As already mentioned, stock represents actual ownership in a company. There are various methods of determining the value of a company relative to the value of it’s stock price. Given that, once can determine if the price of the stock they own is high or low, relative to what the company is actually worth. It’s not an exact science and there is risk involved so there is no guarantee that your investments wont lose value.
That’s the answer.
You are getting into some abstract philosophical bullshit about “inherent value”, possibly for the sake of being difficult or argumentative. YES a stock only has value so long as people agree it has value. The point is we DO live in a society where we agree that stocks are a valid instrument of investment. The only time everyone is in agreement that a stock has no value is when the company the stock is attached to loses all it’s value (like Enron). So YES, a share of stock has no intrinsic value, but the company it represents does. And as long as that company has some hope of being profitable, your stock is worth something.
Hi, cmkeller -
I don’t think of a ticket as having intrinsic value, but as the representation of a social contract, as Roadfood describes. But that’s fine, I understand that the contract has value, and so I am quite comfortable in my understanding of how a ticket might be something I would want to own, or other people would want to buy, even at a premium. Because they would benefit from being able to go to the concert.
I also understand why some one would want to go to a stockholders’ meeting and vote and try to get a company to run better and make more money - if they then benefit in some way from the company making more money.
That was the part I was missing. And D_Odds put the last piece into the puzzle.
And thus, in keeping with my policy of “questions only”, I will thank those who have defeated my ignorance, and finish by asking if the following is true:
The price of a stock increases because [ul][li]stockholders expect to receive benefit in the form of dividends or other earnings distributions, or []because they are employed by the company and expect to receive higher salaries or bonuses if they exert a positive influence on the direction of the company, or []because the company might be liquidated and the assets distributed among shareholders, or []because other people who want to own or control the company are willing to pay a premium so as to benefit as described in the previous points, or []as a sort of bubble effect (my apologies if this is the wrong term), where the price rises because everyone expects the price to rise, so they are willing to pay a premium, expecting someone else to pay an even higher premium later on.[/ul][/li]
Yes?
Regards,
Shodan
There will always be someone willing to buy the stock. Even it’s virtually worthless. You may loose YOUR ass but there is someone out there willing to take a risk at some price.
What I’m getting at is the stock is always worth something to someone, it may not be to your monetary gain, but it’ll be worth something.