[QUOTE=morgantire]
Well yes, clearly you’re right – lots of people buy stocks without considering dividends. But WHY? Suppose I write “Google Stock” on a piece of paper and offer to sell it to you, claiming this piece of paper will rise & fall with Google’s profits. You reply, “Nonsense, there’s no connection whatsoever between your piece of paper and Google’s profits”. But I counter, “Well, what exactly is the connection between the real Google stock and Google’s profits?”
If Google starts paying dividends, then there’s a connection between the stock and the profits, because the stock entitles you to a share of those profits. But otherwise, what’s the connection? The stock might tank even though the company is doing very well (or vice versa). So if you’re not getting a share of the profits through dividends, the only way to make money is to sell the stock to someone else at a higher price. But the guy who buys it won’t be able to get a share of the profits either, so why does he even care what the profits are? Without dividends, what keeps the stock price connected to the fate of the company?
[/QUOTE]
Some reasons to own stock that aren’t based on dividends:
[ul]
[li]Of course, to buy low and sell high based on other people’s predictions of how well the company will do. I’m sure you understand this, even though it is irrational of these investors.[/li][li]When the economy is doing well, people will have more money available and they will invest more of it in stocks to keep it secure. Thus, one can say generally that the stock market will rise when the economy does well, and buying and selling stocks can be a way of gambling on how well the economy will do generally, which can be tied to all sorts of fun stuff like the likelihood of war. In a sense, it’s a way of gambling on world events.[/li][li]Stocks can be a safe-haven from taxation, making them a reliable place to store wealth.[/li][li]Owning stock indicates a degree of power in being able to control a company. Bigger profits indicate more control. If I get enough stock of a company, after all, I own it, and shareholders can vote on small decisions. I might want to own dividend-less stock simply because I derive satisfaction out of this power.[/li][li]Some day, the company might set up a dividend. High profits show that the dividend will be high. This is well documented above.[/li][/ul]
Buying low and selling high is obviously the primary reason to own stock. I think the root of your question is why stock prices increase when a company is doing well. I think there are several reasons for this.
[ul]
[li]Other people are irrational and believe in a connection between profits and stock price, so that investors can count on this belief and use stocks as an elaborate gambling system. I’m sure you get this one, unsatisfying as it may be.[/li][li]Profits indicate that the company in question is unlikely to go bankrupt any time soon, so that investors will prefer it as a safer place to store money.[/li][li]Since the leadership of a company almost always has a large amount of stock in the company they run, it is safe to assume that they will try everything in their power to raise to stock price. If a company is profitable, it shows that they are successful, which shows that they will likely be successful in raising the stock price as well through other methods.[/li][/ul]
Hopefully this answers your question. I’ve wondered the same thing myself, and the short answer is that it’s a house of cards, just as you suspect.
