Share price's relation to company's financials?

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In summary, the current market price of a share may be arbitrary, but investors use sophisticated techniques to determine the risk vs. gain of investing in a company based on financial data. The behavior of players in the stock market is rationalized by the belief that there is a connection between owning a share and the financial success of the company. However, this connection is not clearly defined and dividends do not always guarantee a return on investment. Valuation methods such as price to earnings, q-ratio, and return on capital can help assess the potential growth of a company. The direct advantage of owning a share is the potential for future dividends and the possibility of voting for leadership that will demand a greater dividend. It is also recommended to have a portion of
  • #1
Jacksilver
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If the current "Market Price" of a share is 10$ and I manage to find somebody willing to pay 500$ for it, nothing can stop us from transacting at that price.
So, at least in theory, the price is arbitrary. Yet in reality people employ sophisticated techniques of valuating risk vs. gain when investing in a particular company, based on financial (and other) data about the company.
Why bother? : )

A rational explanation for the existing behavior of players in the stock market is that there is a direct connection between your gain from owning the share (not hoping to sell at a higher price) to the actual "financial success of the company".
However, what that connection is - eludes me to this day!
Dividends are one obvious example but not all companies give out dividends.
I know I'm missing something.. Please help me figure it out.

Thanks
 
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  • #2
Jacksilver said:
If the current "Market Price" of a share is 10$ and I manage to find somebody willing to pay 500$ for it, nothing can stop us from transacting at that price.
So, at least in theory, the price is arbitrary. Yet in reality people employ sophisticated techniques of valuating risk vs. gain when investing in a particular company, based on financial (and other) data about the company.
Why bother? : )

A rational explanation for the existing behavior of players in the stock market is that there is a direct connection between your gain from owning the share (not hoping to sell at a higher price) to the actual "financial success of the company".
However, what that connection is - eludes me to this day!
Dividends are one obvious example but not all companies give out dividends.
I know I'm missing something.. Please help me figure it out.

Thanks

Some numbers you might want to look at are price to earnings, q-ratio and return on capital. Other interesting numbers are, is the net value of the companies assets, and the ratio of assets to liabilities.

You can view earnings as the return on the money you invested so you can make comparison of an interest rate. A price to earnings of 10 would be equivalent to a 10% return. A price to earnings of 5 would be equivalent to a 20% return. According to wkiAnswer's a typical price to earnings is about 5 to 6 times. This sounds quite attractive relative to bonds but the payment of a bond is guaranteed. The earnings of a company are not guaranteed. For instance deflation can erode the value of the earnings. Also a company could try raising capital by diluting it's shares. This represents another risk to investors Finlay unless the company issues dividends the stock owner doesn't see any of those earning directly, rather they only see the market evaluation of the stock.

Now, if a company isn't issuing enough dividends we want to look at how well, the company is utilizing those retained earnings. The return on capital gives a measure of this. By using the return on capital and knowing the percentage of the money the company keeps we can try and estimate it's growth. The q-ratio gives a measure of how susceptible a stocks value is to competition, given that if the replacement cost of a companies assets is less then the market value then in theory a new company could be created for cheaper then purchasing the existing company.

"What Does Q Ratio (Tobin's Q ratio) Mean?
A ratio devised by James Tobin of Yale University, Nobel laureate in economics, who hypothesized that the combined market value of all the companies on the stock market should be about equal to their replacement costs. The Q ratio is calculated as the market value of a company divided by the replacement value of the firm's assets:"

If the Q values are large, it is perhaps a sign to look at the smaller companies to see if they have better valuation in these terms.
 
  • #3
I am familiar with the various valuation methods employed by investors. I didn't know about the Q ratio, so thanks for that.
However you didn't answer my question.
What is the direct advantage of owning a share of the company if it's not paying dividends?
Shares are traded like a commodity on the stock market.. but I fail to see the actual economic value of a share (the way a car for instance gives you an economic advantage - you can use it for something other than selling it at higher price...)
 
  • #4
Jacksilver said:
I am familiar with the various valuation methods employed by investors. I didn't know about the Q ratio, so thanks for that.
However you didn't answer my question.
What is the direct advantage of owning a share of the company if it's not paying dividends?
Shares are traded like a commodity on the stock market.. but I fail to see the actual economic value of a share (the way a car for instance gives you an economic advantage - you can use it for something other than selling it at higher price...)

Well, the company can always issue dividends in the future. The shareholders could vote for leadership which will demand a greater divided. The advantage of a company holding on to earnings is that they reinvest it well and the company grows. As mentioned above how well they do this is measured by the return on capital. Stocks that pay dividends do better in market swings and the older you geater the greater the part of your profile you want paying income. I think it is a good idea to have a good portion of a portfolio in dividend paying stocks.
 
  • #5
John Creighto said:
Well, the company can always issue dividends in the future. The shareholders could vote for leadership which will demand a greater divided. The advantage of a company holding on to earnings is that they reinvest it well and the company grows. As mentioned above how well they do this is measured by the return on capital. Stocks that pay dividends do better in market swings and the older you geater the greater the part of your profile you want paying income. I think it is a good idea to have a good portion of a portfolio in dividend paying stocks.

So, if I understand correctly, there is no other tangible value to owning a company's share (if you don't intend to sell it at a higher price). The only value is either the Dividend or the hope for future dividends? Maybe if you buy enough shares you get to vote on company policy issues, if you want to get involved. I guess it's a form of value..

As to what you mentioned about company growth, I must say again that the actual growth is in and of itself meaningless (as I could, theoretically, find a dummy to buy my shares for 20 times the market share price and that would have NOTHING to do with the company). For the financial system to "work", players must make "rational" decisions. That is to say, you don't buy anything if it doesn't have any value to you. The value is DERIVED from promise of future income in the form of dividends, which of course is closely related to earnings and ROA and other metrics.
 
  • #6
Even if you don't intend to sell a share once you buy it, you are establishing a sale-price precedent at the price you bought the share at. The seller received your payment and either re-invested it in another share, something else entirely, or spent it on chewing gum and antacid.

Why would anyone want to pay you more for a share than they could buy it for from someone else? I once attended a 4H club livestock auction where seemingly comparable animals brought very different per-pound prices. I asked someone sitting near me what the differences in price were based on and he explained that people bid higher for kids they want to give more money to for college. I thought it had something to do with the relative quality of each animal itself.
 
  • #7
brainstorm said:
Even if you don't intend to sell a share once you buy it, you are establishing a sale-price precedent at the price you bought the share at. The seller received your payment and either re-invested it in another share, something else entirely, or spent it on chewing gum and antacid.

Then my question is what did YOU gain by buying that Share.. what is your immediate interest in purchasing it? what will you get by owning it for all eternity? And then obviously another question is why did you agree to buy it at a price which reflects the "well being" or "potential" of some company? What was your rational for behaving this way?
 
  • #8
Jacksilver said:
Then my question is what did YOU gain by buying that Share.. what is your immediate interest in purchasing it? what will you get by owning it for all eternity? And then obviously another question is why did you agree to buy it at a price which reflects the "well being" or "potential" of some company? What was your rational for behaving this way?

My question is why you capitalize the word, "share?" I don't know of anyone who buys shares to hold for eternity, but if you had money that you didn't have any use for, you could theoretically buy shares of a company and hold them indefinitely. It would be less costly than buying real property, which has maintenance costs and taxes. It would also be less of a burden than buying something material that you would have to carry around every time you wanted to move it. Maybe if you're an addict of some kind, you might decide to buy shares to tie your money up so you wouldn't spend it on your fix. Maybe you want to own part of a company just to give yourself an interest in how the company functions and to be able to vote on shareholder issues.

As a long-standing shareholder, your opinion might even be listened to in a way that those of short-term shareholders are not. You could email financial news reporters and tell them you have been holding your shares of the company for 20 years but you are planning to sell if they go through with . . . X. Then, other shareholders might think you know the company so well that you can reasonably forecast pitfalls and value depreciation, and they will follow your lead in selling. If people recognized the power you had, they might even pay to lobby you to influence your opinion in their favor. All just because you have the POTENTIAL to sell your share, not because you actually sell it.
 
  • #9
I must say that I'm very thankful for all the extra knowledge I'm getting here regarding shares and behavior in the stock market.
But I feel that somehow I managed to miss the point! The "holding for eternity" bit was an exaggeration, on purpose. It illustrates that, to the best of my knowledge, the only purpose of owning a share (not capitalized, mind you) is to sell it for a higher price (that is if you intend to make a profit or benefit something financially).

I'll try to define the question clearly: Why do buyers and sellers agree to the convention that a share price should be determined according to the analysis of financial data related to the company?
 
  • #10
Jacksilver said:
I'll try to define the question clearly: Why do buyers and sellers agree to the convention that a share price should be determined according to the analysis of financial data related to the company?

That's a very different question. Buyer's don't agree to any conventions other than the fact that they buy it or sell it at the going rate. They can do so for any reason they want. If buyer's think a price is too high, they won't buy. If seller's think it's too low, they won't sell unless there is some benefit, such as escaping costs or because they need whatever money they can get for some reason.

Analysis of financial data and trends is tricky business. Realize that people intentionally try to stimulate buying and selling with financial news/data, so as a result there is an incentive to generate such data in a way that stimulates the market trend you want to see happen.

On the other hand, some people probably recognize certain financial data and analyses as decoys with the intent of diverting from true trends, and respond accordingly. For example, if you know that there is a bumper crop of oranges but you want people to buy to create an upward market trend so you can short-sell for more profit, then you would publish data/analyses that forecast scarcity due to freeze, disease, or whatever. Then, once the price goes up, you sell all the oranges you can to maximize your revenue (handy if there's a bumper crop), lend them to others to sell (short-sell), and then wait for the market to respond to the surplus by discounting the price.

This seems illegal to me, but I think any kind of financial/economic analysis/data is protected by freedom of speech - or is it regulated by SEC?
 
  • #11
brainstorm said:
If buyer's think a price is too high, they won't buy. If seller's think it's too low, they won't sell unless there is some benefit, such as escaping costs or because they need whatever money they can get for some reason.

Too high/low for what? Too high compared to the price you think you'll be able to sell? Too low compared to the price you think you'll be able to buy later or from somebody else?
If you're buying something, where is the logical explanation for thinking that you'll be able to sell it later at a higher price (or even the same price, or lower price if push comes to shove)?
What is the rationale behind looking at some board with numbers, thinking to yourself: "Yeah, that's a fair price to sell this share that I have. It's higher then what I paid for it, so I'll make some profit". And more importantly why would anybody look at that same board and think to himself: "Yeah, I think that this number on the board will be much higher in a few weeks so I better buy it now while it's low. That way I'll make a profit!"
 
  • #12
Jacksilver said:
Too high/low for what? Too high compared to the price you think you'll be able to sell? Too low compared to the price you think you'll be able to buy later or from somebody else?
If you're buying something, where is the logical explanation for thinking that you'll be able to sell it later at a higher price (or even the same price, or lower price if push comes to shove)?
What is the rationale behind looking at some board with numbers, thinking to yourself: "Yeah, that's a fair price to sell this share that I have. It's higher then what I paid for it, so I'll make some profit". And more importantly why would anybody look at that same board and think to himself: "Yeah, I think that this number on the board will be much higher in a few weeks so I better buy it now while it's low. That way I'll make a profit!"

People make up any rationale they want to validate their gambling habit. Stock market gambling is just gambling on how well and how quickly you can conform to speculation trends that result from publicly (and/or privately) available information. If you read or see things that you think will cause others to buy or sell, you try to get ahead of the crowd, but it is risky. If you notice what you think is a trend, and you buy into it, it is less risky except for you could be the last one on the wagon before everyone jumps off, and you lose out. It's not about the board. It's about the interaction between the gamblers. People are just pooling their money on a table and cashing out a share of it at any moment based on the amount there. If you're the last one to put your money in, you will get less out than you put in and others will walk away with your money.
 
  • #13
brainstorm said:
People make up any rationale they want to validate their gambling habit. Stock market gambling is just gambling on how well and how quickly you can conform to speculation trends that result from publicly (and/or privately) available information. If you read or see things that you think will cause others to buy or sell, you try to get ahead of the crowd, but it is risky. If you notice what you think is a trend, and you buy into it, it is less risky except for you could be the last one on the wagon before everyone jumps off, and you lose out. It's not about the board. It's about the interaction between the gamblers. People are just pooling their money on a table and cashing out a share of it at any moment based on the amount there. If you're the last one to put your money in, you will get less out than you put in and others will walk away with your money.

So, like you said, the "price on the board" is only a reflection of the going rate for a share - a rate created by the speculation of the players. Correct? Well if that's the case then my point remains the same. Why does this speculation, more often then not, even has anything to do with the company? Recently there was some bad news for TEVA regarding it's new "Copaxone". Then TEVA's shares lost some 13% value last week. That is some correlation! That was a huge fall for a company who's shares are considered in Israel to be amongst the most solid shares you can buy (it's also possible that somebody noticed the impending doom before the news were released and pulled out - that doesn't change the correlation) The CFO appeared on TV claiming that "the market overreacted". I guess the news were stronger than the CFO : )
If the players were creating the price.. What the hell were they doing listening to news about Teva? Why not look at the weather forecast for signs and trends: "Oh crap, the weather seems to be getting cooler, I should sell my share to cut losses"... "Oh yay, it seems that the weather is going to be sunny, I should be able to sell my share for more!"
 
  • #14
Jacksilver said:
If the players were creating the price.. What the hell were they doing listening to news about Teva? Why not look at the weather forecast for signs and trends:
Remember as a trader you are not competing with the company - you are competing with everybody else who is trading.

Suppose I think the company is good long term, I want to buy it's shares - but I want to buy them as cheaply as possible.
I put in a low bid for the shares, other people do the same - some bid lower than me.
Owners of the shares - seeing people offering low bids for them want to sell now before those low bids are the best price they can get. So the price paid for the shares that day (the market price of the company) goes down.
 
  • #15
mgb_phys said:
Suppose I think the company is good long term, I want to buy it's shares - but I want to buy them as cheaply as possible.

My question remains unanswered.. Why do you want to buy it's shares if the company is good? Why the price of the share will go up if the company is good long term (I'm not talking about whether the market will respond accordingly.. you just assume it will)? Where is the unwritten law that all buyers and sellers seem to agree upon that share price has something to do with the company?
 
  • #16
The share price is just a representation of the future value of the company.

If I think a company like Apple is going to make good products in the future then I assume that it will have money and so will be worth something - I further believe that other traders will believe this and it's value will go up.

It doesn't really matter that it's valuation based on share price is a ridiculous multiple of the amount if income it gets from selling iPhones - I just have to believe that other people believe it won't go bust in order for it's share price to go up.

The value of a company is at least a little more tangible than buying and selling artwork or tulips. A company that is bankrupt is worth zero and a company with $$$ in the bank or assets is worth $$$.
 
  • #17
Jacksilver said:
If the players were creating the price.. What the hell were they doing listening to news about Teva? Why not look at the weather forecast for signs and trends: "Oh crap, the weather seems to be getting cooler, I should sell my share to cut losses"... "Oh yay, it seems that the weather is going to be sunny, I should be able to sell my share for more!"

I think what's happening to you is that you are experiencing awareness that all discourse geared toward business news or analysis consists of "floating signifiers" (Lyotard?), which means language that makes sense without necessarily having any true referent. In other words, you're exactly right that if everyone decided to sell on rainy days and buy when it's sunny, stock prices would appreciate on sunny days and depreciate on rainy ones.

Theoretically, by issuing good news about a company's business, the company is trying to raise its share price on the basis of success and thereby increase its ability to raise more investment capital. However, this does not change the fact that this is only one interest driving financial news, among others such as the desire to make easy money on buying low and selling high, or short-selling. My question is what happens when interest in money-making from speculation overshadows the interest in raising investment capital to pursue economic projects? At that point, has the economy degenerated into pure fiscalism?
 
  • #18
mgb_phys said:
The share price is just a representation of the future value of the company.

That statement is the problem. The thing I can't understand is how come a share price, which is determined entirely buy buyers and sellers, is a representation of anything at all?
 
  • #19
brainstorm said:
I think what's happening to you is that you are experiencing awareness that all discourse geared toward business news or analysis consists of "floating signifiers" (Lyotard?), which means language that makes sense without necessarily having any true referent.

Could you please elaborate on that issue, and how it relates to stock valuation?

brainstorm said:
Theoretically, by issuing good news about a company's business, the company is trying to raise its share price on the basis of success and thereby increase its ability to raise more investment capital.

What is the rationale to think that a share, the price of which is determined by the buyers and sellers, would appreciate because of these good news?
 
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  • #20
Jacksilver said:
Could you please elaborate on that issue, and how it relates to stock valuation?
Well, I started to refer you to wikipedia but I just googled it and it is very vague. All I meant is what you said, that business and financial news feels as if it refers to something, because that is what gives it its effect, but in reality it is just an arbitrary promotion to participate in the market. All speculation produces market activity. As long as the price of things is going up and down for any reason at all, people can buy in and sell out to make or lose money. The people who make money are getting it from the people who lose money. Whoever ends up with the least money has to work in food service or house cleaning or whatever else they can do to pay their bills. Those who make money get a more privileged lifestyle including the consumption of services of those who lost their money in the stock market. You might as well play rock/paper/scissors and whoever loses has to give the winner a pedicure. That's stock trading or any other form of gambling for that matter. The difference with stock trading is that rock/paper/scissors, or a deck of cards is replaced with business and financial news and other information.

What is the rationale to think that a share, the price of which is determined by the buyers and sellers, would appreciate because of these good news?
Because if many people take the bait of the good news and buy shares, the share price goes up. It's a self-fulfilling prophecy. It's like saying, "wow, this company developed a cure for HIV - I think I'll celebrate by giving them money so they can make me some profit from the people who pay for the medicine." Then, if many other people think the same thing and put their money into the market, you can just sell your shares and cash in on the share price increase - but of course it pays to wait to do that until you suspect the price is going to fall, because as long as you hold your share you could get dividends - which works as an incentive to get people to hold their shares and maintain the share price for as long as possible (to stimulate as many people to buy in as possible before the downturn).
 
  • #21
I think I will throw in a couple things here to clarify what exactly the value of any business venture. By the purely financial definition the value of any business is the present value of all of their future net revenues. What a share price should represent is some fraction of that value depending on how many shares have been issued. But, you have to remember that shares of stock are a form of equity and equity holders are not the only stakeholders in a company. Outside factors such as debt covenants, regulation, customer sentiments, ect., contribue significantly to the value of those future revenues. This is why financial statements are just a sliver of evidence as to the true intrinsic value of any company. Corporate management does not share every detail and the ones they have to are typically burried in the 10k, annual report, or some proxy statement which are not the easiest to decipher or interpret their bearing on the future revenues. The sad fact of the matter is for all of the "stock pickers" (active portfolio management) out there, once you integrate trading fees, most do not out perform the market indexes. Again, many outside of the company factors come into play when valuing stocks. If you want to see less volitile stock prices don't focus on the darlings of the financial news networks. There are thousands of lesser known publicly traded companies that don't have the same hype contributing to their fluxuating values. If you want to see an even more representive market then also look at fixed income such as the bond market (don't include financial derivitives here such as CMOs), and US treasuries.
 
  • #22
Ronnin, it doesn't matter if it's news or not. I can go to google finance and look up the financials myself. I can even talk to the CFO, if I know him! Even if I'm an all mighty prophet and I can with a 100% certainty predict the future revenue of a company:
The failure in the logical chain, for me, is why do I bother looking at the company to evaluate something I can buy/sell at whatever price I can agree upon with somebody else? And ultimately, how come the system still works?
 
  • #23
You bother to look at the financial statements and any other information to determine if you are buying said commodity at a premium, discount, or par. Your friendly corner store owner would be glad to sell you a package of bacon, but you are paying a premium for it compared to the grocery store. Yes, you did agree to a price, but at a premium. Just because YOU paid a premium for it doesn't mean the market value for bacon has changed. And if you had to resale the bacon you'd be hard pressed to find a "bigger fool" (look up bigger fool theory to see what I'm talking about) to pay a higher premium than what you paid. Don't forget all markets are also slave to the laws of supply and demand.
 
  • #24
Jacksilver said:
Ronnin, it doesn't matter if it's news or not. I can go to google finance and look up the financials myself. I can even talk to the CFO, if I know him! Even if I'm an all mighty prophet and I can with a 100% certainty predict the future revenue of a company:
The failure in the logical chain, for me, is why do I bother looking at the company to evaluate something I can buy/sell at whatever price I can agree upon with somebody else? And ultimately, how come the system still works?

I must start off with the fact that this thread makes almost no sense whatsoever to me. As a new investor, I only buy stocks that I think will go up in value. Either because the stocks are undervalued, or the company has tremendous growth potential. Just yesterday, one of my favorites jumped 24%. Two weeks ago, my other favorite jumped 30%. Do I plan on selling these two stocks in the near future? No! I see them both growing by a factor of 10 in the next 10 years. I got into the market in December of 08, when the market was in the initial stages of crashing, and have invested monthly in undervalued and high growth potential companies.

So I suppose my answer to your last question, "how come the system still works?", is, people like me.

And my answer to your first question, "why do I bother looking at the company to evaluate something I can buy/sell at whatever price I can agree upon with somebody else?", would be: How could you not? Only a fool would buy stock in a company which they haven't researched. But there are apparently lots of fools out there. My stock jumped 24% yesterday simply because some "expert" adviser gave the company a thumbs up. My guess is that 99.99% of the people that bought stock in the company yesterday don't even know what the company makes.

On a side note, Wall Street lingo never fails to entertain me. The thumbs up was properly called a HUGE ALERT.
:rofl:

I wonder if they have "Leviathan" and "Monster" alerts as well?
 
  • #25
Ronnin said:
"You bother to look at the financial statements and any other information to determine if you are buying said commodity at a premium, discount, or par"... ..."Don't forget all markets are also slave to the laws of supply and demand."

If you claim that a share is a commodity (with which I don't disagree) then indeed the laws of supply and demand hold true. No question. But this is what I meant in earlier posts when I was going on about the IMMEDIATE or ACTUAL value of the share. For supply and demand to work as a system, the commodity should have some value for the purchaser otherwise what would be the interest to purchase it at all? If the only value is an ability to sell it later at a higher price then there's no actual value. Not to mention the fact that if you get "stuck" with it, and unable to sell it, it's like throwing money out the window. Whereas if you can't sell an apple - you can eat it, a car you can drive and even precious metals you can sell to somebody who makes jewelry, or make jewelry yourself!
So please answer me this: why do people go and buy and sell shares that have no actual value and that only represent a possible desire of the people to buy these very shares in the future? And what does it have to do with the company?

(I understand that the world did not go mad. I'm clearly just missing something)
 
  • #26
OmCheeto said:
So I suppose my answer to your last question, "how come the system still works?", is, people like me.

And my answer to your first question, "why do I bother looking at the company to evaluate something I can buy/sell at whatever price I can agree upon with somebody else?", would be: How could you not? Only a fool would buy stock in a company which they haven't researched.

Thanks for your input! I would like to clarify that my question (the first one, and it's variants later on) was not intended to state any form of concern or "beef" I have with the way the market operates. It really is an honest attempt to try and gap a hole in a very basic logical understanding of the thought mechanisms of players in the stock market. And particularly how these mechanisms are shaped by the rules of the game. It's a question about the very model of trading shares. The basic and intuitive motivation for people to make certain actions.
 
  • #27
OmCheeto said:
I must start off with the fact that this thread makes almost no sense whatsoever to me. As a new investor, I only buy stocks that I think will go up in value. Either because the stocks are undervalued, or the company has tremendous growth potential. Just yesterday, one of my favorites jumped 24%. Two weeks ago, my other favorite jumped 30%. Do I plan on selling these two stocks in the near future? No! I see them both growing by a factor of 10 in the next 10 years. I got into the market in December of 08, when the market was in the initial stages of crashing, and have invested monthly in undervalued and high growth potential companies.

So I suppose my answer to your last question, "how come the system still works?", is, people like me.

And my answer to your first question, "why do I bother looking at the company to evaluate something I can buy/sell at whatever price I can agree upon with somebody else?", would be: How could you not? Only a fool would buy stock in a company which they haven't researched. But there are apparently lots of fools out there. My stock jumped 24% yesterday simply because some "expert" adviser gave the company a thumbs up. My guess is that 99.99% of the people that bought stock in the company yesterday don't even know what the company makes.

What this post is basically saying is this:

"There's a table that I think people are going to keep putting money on because there are people at the table who are going to invest it in activities that are going to make it grow. I am going to stick with this company and not sell it out so you don't have to be afraid of losing your money by putting it on this table."

Then, if you buy this stock-sale pitch you put your money on the table and nothing is preventing anyone from cashing out early while you sit waiting for the crash. Maybe the way to prevent this would be to sell fixed-duration share packages, meaning the shares are non-transferable until some set time when all shares may be bought or sold. That would put all the shareholders "in it together." Of course, the company could still go out of business and leave you with no dividend and no chance of reselling your shares when the time came.
 
  • #28
Jacksilver said:
If you claim that a share is a commodity (with which I don't disagree) then indeed the laws of supply and demand hold true. No question. But this is what I meant in earlier posts when I was going on about the IMMEDIATE or ACTUAL value of the share. For supply and demand to work as a system, the commodity should have some value for the purchaser otherwise what would be the interest to purchase it at all? If the only value is an ability to sell it later at a higher price then there's no actual value. Not to mention the fact that if you get "stuck" with it, and unable to sell it, it's like throwing money out the window. Whereas if you can't sell an apple - you can eat it, a car you can drive and even precious metals you can sell to somebody who makes jewelry, or make jewelry yourself!
So please answer me this: why do people go and buy and sell shares that have no actual value and that only represent a possible desire of the people to buy these very shares in the future? And what does it have to do with the company?

(I understand that the world did not go mad. I'm clearly just missing something)[/QUOTE

Your logic here is flawed. You argue that a stock in and of itself represents zero value except for whatever dollar amount it can be traded. This is incorrect. A share of stock is a share of corporate ownership with all of the rights and privledges afforded to that share by that corporation's articles. This fact may seem insignificant because most people hold such a small share of ownership that any voting rights afforded to the minority shareholder would be so deluted that those rights could be almost dismissed. But, begin aggrigating that control and suddenly the share's current market value can be directly influenced by the shareholder. This is why it has everything to do with the company. Shares represent ownership. Ownership defines the company's direction and therefore has a direct influence on the company's earnings. This is why the major mutual funds and pention funds have so much influence on the finance of the firms they are invested in. CEOs, CFOs, and the board of directors of any major corporation are very intuned to the interests to their major shareholders.
 
  • #29
Ronnin said:
Your logic here is flawed. You argue that a stock in and of itself represents zero value except for whatever dollar amount it can be traded. This is incorrect. A share of stock is a share of corporate ownership with all of the rights and privledges afforded to that share by that corporation's articles. This fact may seem insignificant because most people hold such a small share of ownership that any voting rights afforded to the minority shareholder would be so deluted that those rights could be almost dismissed. But, begin aggrigating that control and suddenly the share's current market value can be directly influenced by the shareholder. This is why it has everything to do with the company. Shares represent ownership. Ownership defines the company's direction and therefore has a direct influence on the company's earnings. This is why the major mutual funds and pention funds have so much influence on the finance of the firms they are invested in. CEOs, CFOs, and the board of directors of any major corporation are very intuned to the interests to their major shareholders.

I see. I must follow that with another question. Even if I managed to get my hands around some 40% of the shares of a company, does that mean that I start making money from this ownership? Do I benefit something tangible from that ownership? (other then the good feeling I get from knowing I own something :) )
 
  • #30
Jacksilver said:
I see. I must follow that with another question. Even if I managed to get my hands around some 40% of the shares of a company, does that mean that I start making money from this ownership? Do I benefit something tangible from that ownership? (other then the good feeling I get from knowing I own something :) )

A 40% share would be incredibly significant in any major corporation. Major shareholders have the normally (as defined by the articles of incorporation for that company) have the power to elect board members and therefore have a direct influence on who the corporate officers are. Even if the articles stipulate that board members are elected by some other means, he who carries the big stick has much influence, even if not officially. Remember, the last thing any company management wants is a significant sell off of shares because it would signal to the market that those shares have dimished in value for some reason. This is exactly why any corporate officer is required by the SEC to report any trades of personally owned shares of stock. Also, major shareholders have the power to influence if dividends are paid out and also what percentage of net income should those dividends come from. These are the most basic influences I would cite.
 
  • #31
Ronnin said:
A 40% share would be incredibly significant in any major corporation. Major shareholders have the normally (as defined by the articles of incorporation for that company) have the power to elect board members and therefore have a direct influence on who the corporate officers are. Even if the articles stipulate that board members are elected by some other means, he who carries the big stick has much influence, even if not officially. Remember, the last thing any company management wants is a significant sell off of shares because it would signal to the market that those shares have dimished in value for some reason. This is exactly why any corporate officer is required by the SEC to report any trades of personally owned shares of stock. Also, major shareholders have the power to influence if dividends are paid out and also what percentage of net income should those dividends come from. These are the most basic influences I would cite.

Okay, so it's quite stunning! You don't actually get any money from owning this big chunk of the company's shares. Sure, you get plenty of respect and control over certain aspects of the company's inside politics. But, as my father would say, "you can't buy groceries with that".
If the company does not pay out dividends, is there any other financial benefit to be a "big chunk" owner? (Could, by law, the article of incorporation state that there will be no dividends?)
 
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  • #32
Jacksilver said:
Thanks for your input! I would like to clarify that my question (the first one, and it's variants later on) was not intended to state any form of concern or "beef" I have with the way the market operates. It really is an honest attempt to try and gap a hole in a very basic logical understanding of the thought mechanisms of players in the stock market. And particularly how these mechanisms are shaped by the rules of the game. It's a question about the very model of trading shares. The basic and intuitive motivation for people to make certain actions.

Well, it's probably way more complicated than you and I can imagine. There are quite a few very diverse sets of buyers and sellers that I've noticed. From the peanut gallery investors like myself, to the mult-giga buck investors like Goldman Sachs. And there are variations of each type. Looking at the top 10 investment picks from the pauper crowd that I hang out with, it looks like a mishmash of "These people know what they are doing" to "These people like Pepsi, so they invest in Pepsico".

So there is no single motivation, other than perhaps varying degrees and types of greed.

Types of greed, you may ask? Greed is about what people want. Most equate it with money, or big flashy shiny thingys. Although it is good not to be poor, I've never understood the motivation behind the effort involved in obtaining monstrous wealth. So I am probably not your typical investor. And as such, a poor choice for an example of "motivation" of why people invest the way they do.

I have invested in 8 stocks. The motivation is partially monetary greed of course. Though I would classify my investments more as "where I want the country to be in the next 10 years". My #1 and #2 stocks are, as far as I can tell, potentially the Apple Computer's of this decade. Someone else may have noticed this yesterday with their HUGE ALERT on #2. I expect #1 to jump 20% on Monday as well.

Look to the future. Buy educated low. Sell before the hysteria wears off high.

The share price's relation to a company's financial's is directly related to the perception of several hundred million people, who may, or may not, be as smart as you are.


:smile:
 
  • #33
Jacksilver said:
Okay, so it's quite stunning! You don't actually get any money from owning this pig chunk of the company's shares. Sure, you get plenty of respect and control over certain aspects of the company's inside policy. But, as my father would say, "you can't buy groceries with that".
If the company does not pay out dividends, is there any other financial benefit to be a "big chunk" owner? (Could, by law, the article of incorporation state that there will be no dividends?)

Is there any benefit to owning a car that doesn't run? Not really, but you do own it and can do with it as you see fit. Would I buy a car that doesn't run? No, I would be looking for a car that functions well and delivers measurable utility (gets me to work, ect.). Same with owning a company, some are better than others. With managerial control you have influence that can make the value of the company grow or shrink. Money in and of itself is useless just like a share of stock until you trade it for something. Hopefully that trade nets something of greater value than what you traded for the money/stock in the first place.

There are many reasons to own equity in something. If you believe the equity in a certain company will appreciate in value greater over a given amount of time than say owning a bond paying a 6% annual coupon with comparable risk then the equity share would be a better investment. The whole reason people invest in things other than just holding the cash is there is a penalty for that. It's called inflation. People invest with the hopes that their money will grow vs. the almost certainty of it losing value by just holding on to it in a cookie jar. Even if you decide to invest in a commodity such as gold. You purchased it with the intent of reselling it at a later time at an appreciated value not so you can melt it down and make jewelry out of it (you could but that would incur an additional cost to do so and will reduce your net return). Everyone's investment style is determined by their investment goals and the amount of risk they are willing to take on to meet those goals.

As to the dividend issue, most company's hold their dividends as constant as possible because big swings can send signals to the market and may change sentiment regarding the value of the underlying stock. Like I said before, dividend policy is decided by management. I've never known of a company specifically restricting the payout of one in their charter.
 
  • #34
I guess this thread has been dead a while, but yes, the theoretical value of a share of stock in a company is the present value of all expected future dividends. Theoretically, this extends into infinity, but practically, there is almost no difference between an annuity of greater than twenty years and a perpetuity, regardless of the discount rate, plus neither companies nor investors are immortal.

The decision to either distribute or not distribute a dividend is a complicated, but the simplest way to think of it is that a company will invest in all projects with a higher expected rate of return than their investors required rate of return (a weighted average of the required returns from common stock holders, preferred stock holders, and creditors). All net cash flows generated each quarter in excess of this invested capital is released as a dividend, so that, theoretically, equity holders can invest the money elsewhere in some form with a greater expected yield than the projects the company rejected.

High growth companies will not distribute dividends because there are many projects available to them with a greater return than the company's weighted-average cost of capital, but growth like that is not sustainable and all companies are expected to eventually distribute future dividends if they continue to exist.

Of course, the actual price you pay for a share of common stock is determined by market factors, but market factors mostly just means the price the marginal buyer is willing to pay. Practically speaking, large institutional investors are close to being price setters in the stock market, which is not anti-competitive because there are so many of them, but the price they are willing to pay is determined by an actual consideration of a company's risk and its expected future dividends. Because of this, so is the price you are able to get if you're an individual seller, or the price you're able to pay if you're an individual buyer.

So the actual price of a share and its fundamental price (the present value of all expected future dividends) are usually pretty close to each other, hence the efficient market hypothesis.
 
  • #35
loseyourname said:
I guess this thread has been dead a while, but yes, the theoretical value of a share of stock in a company is the present value of all expected future dividends.

So when is Berkshire Hathaway going to start paying dividends?

wiki said:
Berkshire Hathaway traces its roots to a textile manufacturing company established by Oliver Chace in 1839...
...
Berkshire's class A shares sold for $99,200 as of December 31, 2009 (2009 -12-31), making them the highest-priced shares on the New York Stock Exchange, in part because they have never had a stock split and never paid a dividend,

171 years is a long time to wait. :wink:
 
<h2>1. How does a company's financial performance impact its share price?</h2><p> A company's financial performance, such as its revenue, profits, and growth, can directly impact its share price. If a company is performing well financially, investors may have confidence in its future prospects and be willing to pay a higher price for its shares. On the other hand, if a company's financials are declining, it may negatively affect investor sentiment and lead to a decrease in share price.</p><h2>2. Is there a specific financial metric that has the strongest correlation with share price?</h2><p> There is no single financial metric that has the strongest correlation with share price. Rather, it is the overall financial health and performance of a company that influences its share price. Some commonly used metrics to evaluate a company's financials include earnings per share, price-to-earnings ratio, and return on equity.</p><h2>3. Can a company's share price be affected by factors other than its financials?</h2><p> Yes, a company's share price can be influenced by factors other than its financials. These can include market conditions, industry trends, geopolitical events, and even speculation. For example, a positive news story or announcement about a company's future plans can drive up its share price, even if its current financials are not particularly strong.</p><h2>4. How often should investors consider a company's financials when making investment decisions?</h2><p> It is important for investors to regularly monitor a company's financial performance, as it can provide valuable insights into its overall health and potential for growth. However, it is also important to consider other factors, such as market conditions and industry trends, when making investment decisions.</p><h2>5. Can a company's share price be a reliable indicator of its financials?</h2><p> While a company's share price can provide some indication of its financial health, it should not be relied upon as the sole indicator. Share prices can be influenced by various factors, including market sentiment and speculation, which may not always accurately reflect a company's true financial performance. It is important to conduct thorough research and analysis of a company's financials before making any investment decisions.</p>

1. How does a company's financial performance impact its share price?

A company's financial performance, such as its revenue, profits, and growth, can directly impact its share price. If a company is performing well financially, investors may have confidence in its future prospects and be willing to pay a higher price for its shares. On the other hand, if a company's financials are declining, it may negatively affect investor sentiment and lead to a decrease in share price.

2. Is there a specific financial metric that has the strongest correlation with share price?

There is no single financial metric that has the strongest correlation with share price. Rather, it is the overall financial health and performance of a company that influences its share price. Some commonly used metrics to evaluate a company's financials include earnings per share, price-to-earnings ratio, and return on equity.

3. Can a company's share price be affected by factors other than its financials?

Yes, a company's share price can be influenced by factors other than its financials. These can include market conditions, industry trends, geopolitical events, and even speculation. For example, a positive news story or announcement about a company's future plans can drive up its share price, even if its current financials are not particularly strong.

4. How often should investors consider a company's financials when making investment decisions?

It is important for investors to regularly monitor a company's financial performance, as it can provide valuable insights into its overall health and potential for growth. However, it is also important to consider other factors, such as market conditions and industry trends, when making investment decisions.

5. Can a company's share price be a reliable indicator of its financials?

While a company's share price can provide some indication of its financial health, it should not be relied upon as the sole indicator. Share prices can be influenced by various factors, including market sentiment and speculation, which may not always accurately reflect a company's true financial performance. It is important to conduct thorough research and analysis of a company's financials before making any investment decisions.

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