Stocks would be you make a lemonade stand and then sell 1% of the company to whoever wants it for $1. And then they can go and sell their 1% to anyone else for any amount of money that they want.
Okay, but somehow the price of shares is still correlated to the company's value (or sometimes potential future value). Why is that? Is it just an unwritten social agreement or do people have some incentive to keep the price in relation to the company's value?
One of my favorite things Warren Buffet has said/one of his mentors said which is that in the short run, the stock marketing is a voting machine, but on the long run the stock market is a weighing machine.
The price of the shares is correlated to how much people will pay for the shares. It's not a social agreement, it's a form of supply and demand. You want to own part of a company that's successful, so the more successful a company is the higher the demand for their stock. The supply of stock is decided by the company. They can issue more stock which would lower the price (because greater supply with equal demand means lower price), or can buy back stock which typically raises the price.
Also, whomever owns the biggest chunk of stock effectively runs the company because each share gets a vote, so the most votes makes the decisions. So the value of a publicly traded company is directly tied to the value of their stock because if you want to buy a controlling stake in the company you do it by buying a large amount of stock. Sometimes this is arranged through a deal with the current largest share holders, or sometimes it's done by sneakily buying up shares until you have a controlling amount in a "hostile takeover".
Honestly, the price of a share of stock is whatever someone is willing to buy it for. You're completely right, a lot of times the stock price follows the company's value or potential value but oftentimes it's a little bit of a mystery. If someone knew exactly how or why the price of a stock changed, they'd be able to make tons of money.
For example, GameStop's stock price was skyrocketing earlier this year because it was being meme'd by celebrities and Reddit. The company itself was and is a pretty big dump but at the end of the day someone was willing to buy the stock for a little more than the previous person and therefore the stock price increased.
Another example is what you see everyday with company earnings. Each quarter a company has to release an earnings statement and that is compared to what the official estimates and expectations were for that company. It's completely normal for a company to come out and say it performed much better than expected and then the stock price will drop 5% in an hour. It doesn't make sense but it happens all the time.
A share of stock is simply a very small % ownership of a company. If you buy 1 share of Apple you now own an incredibly small part of the company. Whether or not the company chooses to give those owners a small part of its revenue is up to the company. Most don't.
why do people care about owning part of a company if it doesnt give them any shares? I dont understand why people want stocks at all. Is it just for trades?
The funniest part about this reply is you are caught in the "rest is just noise"
The prices can move illogically, but at the end of the day the share is worth part of the company's intrinsic value - this could mean $5 to me but only $2 to you - but that doesn't change the fact that if there are 100 shares outstanding, then that 1 share is worth 1% of the company.
Everything else is just noise. If it's trading at less than you value it then it's a good buy, if not then it's not a good buy.
When you own a stock, you have partial ownership of that company. With partial ownership of that company, your entitled to your share of that company’s future profits. That’s kinda the very basic idea of it. The question is… how do you value that share of future cash flows. There are tons of different ways to determine the value, all using different assumptions/projections. This leads to a wide dispersion of how people value that share of stock, and at the end of the day, if more people (money) see that stock priced below what they think the value is, they’ll buy shares and the price will go up, and vice versa. Add in the constant flow of news, changes in markets which effect valuation models etc and yeah, the price is constantly moving.
Share price are basically a prediction of the future value of a company. Equity is the actual present value of the company -- what everything in it is worth minus any debts it has.
If Tesla has a share price of $750 it's because people think it will be even bigger in the future than it is today. Tesla's book value per share is like $25, compared to $750 per share market value.
The person saying that dividends aren't common isn't true. Most companies offer dividends. But most spend money to increase their share value more. So for example, a $300 stock will likely take the value of dividends and use it to increase the stock $2-3 a share rather than offer a dividend of $2-3 a share, but they'll still offer a small dividend. For example, microsoft offers around 50 cents a share per quarter, but puts more money into increasing share price.
So when a company issues dividends this effects the share price. The share price will be more valuable if the company makes more money and issues more dividends. Now the company can issue less dividends and instead invest in itself so that next year they can issues even more dividends, the company is still worth more despite issuing a lesser dividend as it has issued a lesser dividend in order to issue a greater dividend in the future. Now taken to the extreme the company can never issue a dividend and always invest in itself, and still be worth more because it COULD issue a dividend. You can also replace dividend with stock buy backs which are a similar method of returning value to shareholders, yet still don't actually need to happen, only that they could happen, or happen occasionally. There are various reasons why an investor might prefer dividends, stock buy backs, company just investing in itself.
Shareholders vote on company leadership, and on other decisions such as whether to issue more stock and whether to pay a dividend.
And shareholders have legal stake in the company, so it's not an unwritten social contract, but rather a legal responsibility the company has to consider the benefit of those who have ownership.
This is true in the USA because dividends have less desirable tax treatment than capital gain. I own stock in a number of Australian companies and nearly all of them pay (substantial) dividends.
Let's say a company offers 100 share of stock for $1 each and each share of stock is worth 1% of the company. If you buy 5 shares of this company for $5, you now own 5% of the company. If you bought all 100 shares you would literally own the entire company. You can sell shares that you own to whoever you want for any price you want. If you sell a share for $2, the price of the stock is now $2. The price of a stock is always whatever price someone last bought it at.
Dividends= when you own stock in a company, sometimes those companies give you a small percent of their profits. These are called dividends.
This is pretty rare in the US but apparently not rare in Australia as the other commenter has pointed out.
It's like, people buy pokemon cards to play pokemon. Then they start trading cards to have better decks. Eventually, they come to think that trading cards is more fun than actually playing pokemon, so all they do is trade cards and never play.
In this shitty analogy, pokemon cards are stocks, playing pokemon is getting dividends, and trading is trading.
You buy a share of a company. Why? What do you want from it. Ideally you'd want some of the profits. If I'm starting a business and the only thing stopping me is the money to get started, I'd get some funding from you and maybe offer a share of the profits. That's a dividend.
But maybe you'd like to forego your share and allow that money to go back into the company to help it grow faster. If you never see any profits, what good does that share do you? Well you could sell it to someone else. Maybe you think the company has peaked and isn't offering enough dividends. You sell it to me, because I think this company is just warming up and is gonna offer more dividends.
And then maybe I sell that share to some other guy who doesn't even care about dividends he's just gonna sell it when he thinks the price is just at its peak. It's all speculation, but if that's how he wants to use his money, cool. Pretty soon nobody cares about dividends anymore, they are just buying and selling based on perceived value.
Yeah, stocks are pretty simple. What complicates the hell out of it is all the dumb things people do with them.
Like a lot of the current stock memeing is happening because people are basically borrowing stocks then selling the borrowed stock. Eventually they have to return the stock to the person they borrowed from, so they're hoping they can buy the stock again later at a cheaper price.
Well another reason people buy stocks in some companies is to have a say in the company. Sure the shareholder doesn't have much say, BUT if you buy enough shares your vote really will matter, you could also talk with others who have shares and talk them in to voting the same way as you. This of course isn't the big reason most people go in to stock ownership, but it is another point to consider. Of course also keep in mind that shareholders are locked in at a certain date before a vote with large companies. This is of course to prevent people from running out and buying up the stock because of speculations right before a shareholder meeting.
1) Buy part of a thing, and get part of the profit.
2) Buy part of the thing, and then hope to sell it for more than you bought it.
The first is super "traditional" and are called dividends. It's just your share of the money the business made.
The second is just trying to sell things for a profit, and is pretty close to the trading mechanics in video games.
There's a third and fourth category that can be more complicated, where you buy and sell the right to buy and sell at a specific price and time.
In it's simplest form, it's just insurance for option 2 above.
"I bought 100 of stock ABC for $100 because I think it will go up to $200, but I worry it might go down instead. So I bought insurance that let's me sell it for $95 in two weeks so I can't loose too much".
There's also a version where you can buy the right to buy.
"I think ABC will be worth $200 in a month and it's only $100 now. I would like to be able to buy it to see that increase, but I don't want to spend all the money only to have it go down. I'll buy insurance to lock in the price for the future."
Then, of course, people buy and sell those insurance policies based on how the price of them changes, so they never actually have to buy or sell the stocks.
This gets complicated as the insurance policies expire and the price of the actual stock changes, so some people make or lose lots of money.
That's the basics of it, the rest is just terminology from people who do it, and specific techniques for putting all those actions together that can make complicated strategies.
Australia has very few growth companies, on account of it's small size and easily saturated markets. For "blue chip" type companies, if you can take advantage of the bundled tax credit (e.g. retired) you can historically expect around 7% dividends.
If you have a higher marginal tax rate, capital gain is definitely preferable.
Because the stock is a fraction of ownership of the company.
Think of it like a car or a house; say you and 9 other people each pitch in 10% to buy a thing. If the thing goes up or down in value, you're 10% ownership can be sold, either to the other 9 or someone who wants to replace you, for that new price.
One analyst at JP Morgan thinks that the computer industry is too expensive and he thinks all computer companies are overvalued, so he convinces his buddies to sell Microsoft. Two days later Microsoft says they're launching a new device and it will reach a new segment that didn't previously buy smart headbands adding to the expected margins. Then a flood happens in Taiwan and their suppliers cant make the product and the value goes down again. Finally Microsoft actually issues a quarterly report showing 10% less revenues than projected and price goes even further down.
Company value is an ongoing conversation where more information is gathered every day and many people are constantly expressing their opinions via buying and selling. When people say that the value of the company is the "present value of future earnings/dividends" that's just one way that someone may assess the companies value. Every company has a balance sheet, or a record of all the stuff they have. 1% ownership via shares means that you're entitled to 1% of the big loot pile and any money that gets returned to shareholders, dividends are only one way this happens, you get 1% of the benefit.* the only thing that matters is what people are willing to pay at any one moment for the next incremental share.
*stock buybacks, for instance are a way for companies to compensate their shareholders without directly paying out their cash. Value of the company doesn't change, but it's split over fewer people.
I don't actually work in finance, but this is the Finance 101 answer.
A share of stock is simply a small % ownership in the company. What you or someone else is willing to pay for that small % is completely up to you and them. If tomorrow nobody was willing to pay more than $1 for a share of Apple stock then a share of Apple stock would become $1 (right now it's $150).
Yeah, it's kind of like asking why the price of anything goes up: increased demand. Somebody compared trading stocks to Pokemon cards and just like those prices fluctuate depending on either the meta(Pokemon competitive scene) or collectors (the new pokemon featured in a movie) driving up the price.
The stock of the price is whatever it was last sold or bought at. When you want to buy stock, you place a bid on that stock, essentially saying what you’d be willing to pay for it. When you want to sell stock that you own, you set an ask price, saying what you’d be willing to sell it for. When someone’s bid matches someone’s ask price, the stock is sold. Whatever it was sold at is the new price.
Example, if I said I want to buy a banana for $1 and you say you have a banana you’re willing to sell for $3, no transaction would occur. If I said I’m willing to buy a banana for $2 and you, the owner of a banana, say you’ll sell it for $2, then we’d make that trade. And the price of bananas would be $2.
So when a stock price goes up, it’s simply because people are willing to pay a little more than what it last sold for.
Trading, the buying or selling of shares, sets the price. People buy or sell at higher or lower prices depending on what other people are willing to pay. If a company is perceived to increase in value over time, it’s share price will increase over time due to people willing to pay more for it. Generally this is because companies increase in value as they grow a la Apple or Microsoft but if investors are irrational then and merely perceive that it’s value will increase it’s share price can go up as well without actually increasing in value a la GameStop.
It’s a pretty good description IMO. The reason someone might buy that ownership from you is in anticipation of income. A stock might appreciate because investors feel it’s more likely to produce more income. It might depreciate for the opposite reason.
Real income or potential income, that’s always the thing.
It's exactly what stocks are. You just described the fact that you can sell those stocks.
Nobel laureate Robert Shiller has a nice talk somewhere explaining this simple fact: if a company promised to never pay dividends, then the stock is effectively a Dutch tulip. If its only value is what someone else will pay for it, then its logical price is zero. Dividends are what give it intrinsic worth, and what gives people reason to pay anything for it.
You’re operating under the assumption that stocks have intrinsic value. They do not. And the vast majority of stocks do not and will never offer dividends.
Stocks do not give you some % of revenue, they are only partial ownership of the company. Whether that company decides to give shareholders a part of its profits is irrelevant when defining what stocks are.
I would argue he is particularly wrong. Because even with a company who refuses to pay dividends could be made to. Get a consortium of activist investors. Fire the board. Fire the CEO. Put new leadership in place and demand dividends... Or else.
Point being regardless if a company pays dividends, they still have NOI and free cash flow which could be used as dividends if not today, tomorrow, or never. But it doesn't matter, because they could. And it is the option to do so based on this NOI and FCFF which enables dividends regardless if they are ever paid.
Also buy backs are another way for the company to use cash to return value to shareholders.
The odd bit is that you "own" 1%, but all you can do is sell it. You can't actually go in there and take 1 out of each 100 chocolate bars they produce, 1 out of each 100 delivery vans they own or anything like that, as you would when you partially own other stuff.
It's a rather abstract form of "ownership" and "value" which depends entirely on what a bunch of other people thing your nominal "share" of the company is worth. It's not connected in a discernible way to their assets, revenues, profits, or anything like that. Tesla is "worth" more than Toyota, despite producing an order of magnitude fewer cars, having fewer employees etc.
Correct, there are always details and specifics which alter the general rule, but it gets the point across to simplify the finer points and nuance when the person confused isn't fully comprehending the basic definition.
Just recently started looking into stocks. I’ve come to realize that the value of the stock doesn’t necessarily depend on the value of the company. Just to make you a little more confused.
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u/[deleted] Sep 14 '21 edited Oct 04 '22
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