Stock market - no connection company/share - money isn't lost?

[CRGreathouse]

I can understand the real world example. The apple and the oranges have measureable pleasure value. I just can't see how (divident-less, voting-less) shares would ever turn into measureable value. Value doesn't have to be defined by books. It comes out naturally from logics of people. If you tell people the apple has no value, they might answer "think whatever you want, but I'm going to eat it now and I don't care what other people think about it". If you tell people that shares have no value, then they think "Damn, it's true that for me they have no value, but I hoped they had value for other people so that I could sell them. But wait, if they think the same then I'm screwed..."

They always have claim to the company's assets in case of acquisition or insolvency. As I explained, this drives their value in a way similar to other ostensibly rare events like foreclosure.

If a person cared only about value, they could buy stock and hold it until the company is sold/goes private/etc. The value in having other people buy stock in the interim is to judge how much your share of the company is worth, and to provide liquidity (because you may not want to hold it that long).

 

[AeroFunk]

When you buy a stock you become a part owner of the company, meaning you are entitled to a share in the profits, in the form of dividends. However some stocks don't pay dividends but instead invest their profits back into the company, raising the expected future profits, and thus raising the value of the stock. A company can keep investing, never paying dividends, but its stock price will continue to rise if those investments pan out.

People trade stock because they have different valuations of expected future profits of the company and because people have different risk sensitivity. For example, when a company decides to invest in a risky project this triggers people holding stock with high risk sensitivity to sell to people with low risk sensitivity.

A stock has real value, the value of the companies future profits. The company may or may not make a profit, but the value is in the expected profit.

 

[Gerenuk]

Hi AeroFunk,
if you look at the thread progress, you will see that such kind of explanations I've heard before, but I do not want to accepts them as statement and rather would like to know where they come from.

When you buy a stock you become a part owner of the company, meaning you are entitled to a share in the profits, in the form of dividends.

That would be great. Then everything would make sense to me.

However some stocks don't pay dividends but instead invest their profits back into the company, raising the expected future profits, and thus raising the value of the stock.

Wait, no. That's cheating. The managers receive money and I'm as an owner don't receive anything? Investment is fine, but I also want to live from owning the company.

A company can keep investing, never paying dividends, but its stock price will continue to rise if those investments pan out.

Strictly speaking there is no (obvious) logical reason why they should rise. Most people think so, but where does this idea come from?

For example, when a company decides to invest in a risky project this triggers people holding stock with high risk sensitivity to sell to people with low risk sensitivity.

I was disappointed when I once went to a counselor at a bank. She talked about risk sensitivity and profit. Then I asked which option has supposedly the highest average profit. She argued that you cannot know the outcome of a gamble and concepts of probability theory were completely strange to her. I would have accepted "I don't know", but not a "I have no idea what you are talking about".
An the essential concept of half-logarithmic plots she didn't know either. I wonder how they test their applicants because she wasn't that good looking either.

A stock has real value, the value of the companies future profits. The company may or may not make a profit, but the value is in the expected profit.

Have you ever questioned if a stock has real value or others your statements? I mean I also read them in books, but how/when are they true?
Books say the sky is blue, but if you know where that comes from, you can say why it is not completely blue or sometimes not at all.

I think we make no progress with these common explanations. To find out the deeper principle you need to use abstract schemes!

 

[CRGreathouse]

Wait, no. That's cheating. The managers receive money and I'm as an owner don't receive anything? Investment is fine, but I also want to live from owning the company.

The money that the managers get isn't yours, it's a loss to you. But the company has to pay the managers in any case.

The company makes profits and can either reinvest the profits in the company (so the company owns more stuff), increasing the value of the company and thus the value of your share. The company can instead decide that it doesn't need to buy any more stuff and give the money to you directly in the form of dividends.

You're confusing pay and reinventment.

 

[Gerenuk]

You're confusing pay and reinventment.

I'm sure that when I own a company, I own it for a reason - to make money. So as soon as it is anyhow possible I will try to live from its profits and reinvest only part of it. I think that's how shares started and at that time it made sense to me.

But without prospect for dividents its like the father saying to his child "Yes sweetie. I made an account for you with a lot of money. It's yours but you can't get any of it."

 

[CRGreathouse]

But without prospect for dividents its like the father saying to his child "Yes sweetie. I made an account for you with a lot of money. It's yours but you can't get any of it."

Well, on, that note, I'll leave you with your thoughts. It's clear that I can't explain what is evident to everyone else posting on the thread.

Perhaps if I were a better teacher I could explain it, and the next more complicated things that make sense only when you understand the foundations, but alas that is not to be.

 

[AeroFunk]

Maybe a simplified example will help you understand, as you seemed to understand my last example.

Assume there is a company AppleCo. Also assume people value the future as much as they value the present. Assume that there is no risk, and assume there is perfect information (none of these assumptions will affect the basic principle but adding them in will complicate things to much)

You own stock in AppleCo say 10% but have no voting rights.

It is year 0.
AppleCo has an orchard that produces apples. It can make a profit at the end of the year of $10. Your stock is then worth $1. As people would be willing to buy that stock up to that price(again assuming no risk and no present/future trade offs, in reality it would be a little less then that because of uncertainty).


It is now Year 1.
AppleCo has now just made a profit of $10. AppleCo's managers have a decision to make, they can either use that money to pay dividends to all the stock holders giving $1 to you right now, or they can use that money to invest back into the company and buy more trees to put in there orchard.

If they invest they can make a profit of 20$ in year 2, with all the extra trees.
This will raise your stock price to $2.

If it chooses to pay the dividends then you will get your $1 now, and the company will make a profit of $10 in year two, so your stock price will be $1.
The one dollar dividend plus the one dollar of your stock price equals $2. You are just as well off either way!

You can add in probabilities, discount rates, and etc, but the basic principal is the same.

hopefully this helps.

 

[AeroFunk]

As for claiming that just because things are in books doesn't mean there true, I agree with you.

But if you claim that stocks have no value then you are left will two conclusions.
People obviously buy and sell stocks you can't deny that, so either

A. people behave irrationally

or

B. stocks actually do have value.


I find A much more unlikely.

 

[russ_watters]

But without prospect for dividents its like the father saying to his child "Yes sweetie. I made an account for you with a lot of money. It's yours but you can't get any of it."

Not accepting the reason people invest will not help you understand the reason people invest. So there really isn't much else we can do for you here. You simply prefer not to understand. Thread closed.