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Ignoring dividends, what intrinsic value do stocks have? I'd be curious to know how the stock market, ignoring dividends, is not a zero sum game. Maybe my under

by tabeth 9y ago

Ignoring dividends, what intrinsic value do stocks have? I'd be curious to know how the stock market, ignoring dividends, is not a zero sum game. Maybe my understanding of "zero sum" is incorrect.

umanwizard 9y ago
> Ignoring dividends This is like saying "ignoring calories, what intrinsic value does food have?" The whole point of stocks is that they pay dividends, or in the case of some high-growth tech companies, they have some probability of paying dividends in the future.
- revelation 9y ago
  But dividends are priced into the stock price.
- tabeth 9y ago
  Hmm. I only invest passively so I can't say I'm super knowledgeable about this. My understanding is that stocks do not inherently give you dividends. Food inherently has caloric value, so I'd say that's the difference. Also, I thought the whole point is that stocks are tied to the (expected) performance of the company itself, and the value is that when you sell if you basically made a return on betting on the company before it appreciated. Finally, even if there are dividends wouldn't that affect the stock price and therefore be irrelevant (as the stock itself already accounts for it)? Are you suggesting that without dividends the stock market would not function?
  - Simon_says 9y ago
    > I only invest passively so I can't say I'm super knowledgeable about this. I'll say. Unless you carefully selected stocks that don't pay dividends, you'll be receiving dividend payments soon.
    - vasilipupkin 9y ago
      And paying taxes on those dividends
      - A_Person 9y ago
        Not necessarily! Australia has a system called "imputation credits" or "franking credits". Say a company BigCo makes an operating profit of $100. They decide to pay that out as a divident to shareholder Mary. Australia's company tax rate is 30%, so BigCo sends $30 to the tax department, and the remaining $70 to Mary. Say Mary's personal tax rate is 50%. On the face of it, Mary would pay 50% of the $70 (ie. $35) to the tax department, leaving $35 in her own pocket. However, this would mean that the original $100 profit had been taxed at 65% ($30 + $35)! This is seen to be inequitable, and a disincentive to owning shares. So instead what happens is this, Mary gets a "franking credit" of $30 along with the $70 dividend. The franking credit is just a book-keeping entry to record the amount of tax that BigCo paid on its original $100 profit. At tax time, Mary's accountant proceeds as follows. (1) Add the franking credid ($30) to the divident amount ($70), thus reverse-engineering BigCo's original profit ($100). (2) Apply Mary's personal tax rate (50%) to that whole profit, getting $50. (3) Ensure the tax department gets that $50, regardless of who and where it comes from! In this case, BigCo has already paid $30 of the $50 total tax obligation on the original $100 profit, so Mary is only up for the remaining $20. By that means, BigCo's original profit of $100 is eventually taxed, in total, at Mary's personal tax rate of 50% - not at the double-taxed rate of 65%. This might just seem like a whole lotta shakin' goin' on - but wait, there's more! Say the dividend was paid to another company (SmallCo) instead of to Mary. SmallCo's tax rate is also 30%, so when you apply the franking credit, you'll find that SmallCo pays no tax on the $70 dividend. Now say it was paid to a self-managed superannuation fund (SMSF) in so-called "transition to retirement" phase. These are only taxed at 17%. 17% of $100 is $17, so the total tax expected by the tax department, on the original $100 profit, has been overpaid by $13 ($30 - $17), and the tax department will refund that $13 to the SMSF! The SMSF gets the $70 dividend, and not only pays no tax on that, but also, gets a $13 refund cheque. Then we get to the apogee of this process, the quintessence of financial wizardry, a situation so warming to the heart as to impose some risk of dangerous palpitations. Say the SMSF has gone into "pension mode". In that mode, it pays no tax. Thus, when the fund receives the $70 dividend, it also receives a full refund of the $30 tax originally paid by BigCo! As I understand it, BigCo can actually choose to pay the full tax, part of the tax, or no tax, on its origial $100 profit. The dividend is correspondingly said to be "fully franked", "partly franked", or "unfranked". A dividend recipient ("X") might get a mixture of franked and unfranked dividends from various sources. "X" would add all franking credits to a notional "franking account", then use that account at tax time to offset their normal tax obligations. [edit: typos]
  - mafuyu 9y ago
    Stocks are set up to have some sort of inherent value tied to the company, or nobody would buy them. The typical ways are dividends paid out of profits, company buyouts, and the on hand assets of the company that can be sold. The market is just a pricing mechanism around all that.
    - tabeth 9y ago
      I disagree with the premise. I guess the point I'm trying to make is that stocks would be purchased even if there were no dividends. Case and point, (and to remain on-topic): cryptocurrencies.
      - tanderson92 9y ago
        False. It is not a matter of a disagreement, it is one of fact. Companies like Amazon have nonzero stock price while paying no dividends only because there is a market expectation that eventually a company in the future will pay dividends to shareholders. Also, you are begging the question compared to your remark about how ICOs and stocks are similar in your top level post.
        tabeth 9y ago
        I'm not sure what you're stating to be "False." That stocks would be purchased without dividends? That's obviously true. Stocks need not have dividends to be valuable, only just have someone else willing to pay more than what you did. Which brings me to the next point: this expectation you speak of is part of the irrationality. Suppose there was a company that publicly stated that it would never give out dividends, but it was making bank. People like yourself would assume at some point in the future dividends would be paid out and therefore what you stated would apply, even if no dividends were never paid out (assuming the company's trajectory and what not stayed the same). You also seem to imply the "expectation" of the market is always correct or rational. We both know that's not true, either.
        zodiac 9y ago
  - TheCoelacanth 9y ago
    The shareholders of any company can give themselves a dividend if a majority agree to it and the company has money to pay for the dividend. That is an inherent part of all stock in for-profit companies. So stocks don't inherently give you dividends, but they do inherently come with the possibility of dividends.
- zodiac 9y ago
  other than dividends there's usually 1. rights to vote in the board 2. some claims on the company's assets in case of bankruptcy
Simon_says 9y ago
Stocks are valued off of their discounted future cashflow, so ignoring dividends (and capital distributions) basically takes all of their value off the table.
dragonwriter 9y ago
> Ignoring dividends, what intrinsic value do stocks have? Voting rights, claim on corporate assets in the event of dissolution (coordinated use of the former can trigger the latter; though that's rare in practice because if you don't like the way the corporation is run, you usually just sell out.) Dividends are, in effect, a periodic partial dissolution that a corporation has chosen to conduct. > I'd be curious to know how the stock market, ignoring dividends, is not a zero sum game. Er, because the sum of net returns is not fixed at zero, or fixed at all, so it's not a zero or even fixed sum game.
- tabeth 9y ago
  Isn't the sum of net returns fixed to the total amount of stock multiplied by the purchase price?
  - dragonwriter 9y ago
    > Isn't the sum of net returns fixed to the total amount of stock multiplied by the purchase price? (1) A value which continuously changes over time based on the decisions of participants in the market is not “fixed”, and (2) that aside, no, the value you suggest is not the same as total net returns. If you if ignore the claim on assets (which is the fundamental purpose of stock), then, the sum of all returns must be zero. But you can't meaningfully ignore that. That's like saying “aren't all money-based markets zero sum, if you ignore the use-value of the goods/services sold”?
    - tabeth 9y ago
      In regards to (1), I don't get it. Just because the value changes doesn't mean it's not fixed. A trivial example is 100 = XA + YB + ZC. Fixed, yet weights for each value can change. And with (2), what's the value then?
btilly 9y ago
I recommend that you buy a used copy of https://www.amazon.com/How-Buy-Stocks-Louis-Engel/dp/0316353809 https://www.amazon.com/How-Buy-Stocks-Louis-Engel/dp/0316353... and read it to understand what stocks are, why they have value, what different kinds of stock are, and why they are created. But the long and short of it is that stock is part ownership of a company. Companies are not zero sum, they create wealth through a process that Paul Graham explains in http://www.paulgraham.com/wealth.html http://www.paulgraham.com/wealth.html. The trading of stock itself is a zero sum game - each time it happens someone is trading ownership worth a certain amount for the same value in money. But owning stock goes up and down with the prospects for the company.
quickthrower2 9y ago
Stocks that don't pay good dividends should be reinvesting that money in future growth. At some point in the future the company will then increase its dividends. If stocks are a zero sum game then so is business in general. But business isn't just a giant casino. Useful stuff is produced.

by tabeth 9y ago

Ignoring dividends, what intrinsic value do stocks have? I'd be curious to know how the stock market, ignoring dividends, is not a zero sum game. Maybe my understanding of "zero sum" is incorrect.

umanwizard 9y ago

> Ignoring dividends This is like saying "ignoring calories, what intrinsic value does food have?" The whole point of stocks is that they pay dividends, or in the case of some high-growth tech companies, they have some probability of paying dividends in the future.

revelation 9y ago
But dividends are priced into the stock price.
tabeth 9y ago
Hmm. I only invest passively so I can't say I'm super knowledgeable about this. My understanding is that stocks do not inherently give you dividends. Food inherently has caloric value, so I'd say that's the difference. Also, I thought the whole point is that stocks are tied to the (expected) performance of the company itself, and the value is that when you sell if you basically made a return on betting on the company before it appreciated. Finally, even if there are dividends wouldn't that affect the stock price and therefore be irrelevant (as the stock itself already accounts for it)? Are you suggesting that without dividends the stock market would not function?
- Simon_says 9y ago
  > I only invest passively so I can't say I'm super knowledgeable about this. I'll say. Unless you carefully selected stocks that don't pay dividends, you'll be receiving dividend payments soon.
  - vasilipupkin 9y ago
    And paying taxes on those dividends
    - A_Person 9y ago
      Not necessarily! Australia has a system called "imputation credits" or "franking credits". Say a company BigCo makes an operating profit of $100. They decide to pay that out as a divident to shareholder Mary. Australia's company tax rate is 30%, so BigCo sends $30 to the tax department, and the remaining $70 to Mary. Say Mary's personal tax rate is 50%. On the face of it, Mary would pay 50% of the $70 (ie. $35) to the tax department, leaving $35 in her own pocket. However, this would mean that the original $100 profit had been taxed at 65% ($30 + $35)! This is seen to be inequitable, and a disincentive to owning shares. So instead what happens is this, Mary gets a "franking credit" of $30 along with the $70 dividend. The franking credit is just a book-keeping entry to record the amount of tax that BigCo paid on its original $100 profit. At tax time, Mary's accountant proceeds as follows. (1) Add the franking credid ($30) to the divident amount ($70), thus reverse-engineering BigCo's original profit ($100). (2) Apply Mary's personal tax rate (50%) to that whole profit, getting $50. (3) Ensure the tax department gets that $50, regardless of who and where it comes from! In this case, BigCo has already paid $30 of the $50 total tax obligation on the original $100 profit, so Mary is only up for the remaining $20. By that means, BigCo's original profit of $100 is eventually taxed, in total, at Mary's personal tax rate of 50% - not at the double-taxed rate of 65%. This might just seem like a whole lotta shakin' goin' on - but wait, there's more! Say the dividend was paid to another company (SmallCo) instead of to Mary. SmallCo's tax rate is also 30%, so when you apply the franking credit, you'll find that SmallCo pays no tax on the $70 dividend. Now say it was paid to a self-managed superannuation fund (SMSF) in so-called "transition to retirement" phase. These are only taxed at 17%. 17% of $100 is $17, so the total tax expected by the tax department, on the original $100 profit, has been overpaid by $13 ($30 - $17), and the tax department will refund that $13 to the SMSF! The SMSF gets the $70 dividend, and not only pays no tax on that, but also, gets a $13 refund cheque. Then we get to the apogee of this process, the quintessence of financial wizardry, a situation so warming to the heart as to impose some risk of dangerous palpitations. Say the SMSF has gone into "pension mode". In that mode, it pays no tax. Thus, when the fund receives the $70 dividend, it also receives a full refund of the $30 tax originally paid by BigCo! As I understand it, BigCo can actually choose to pay the full tax, part of the tax, or no tax, on its origial $100 profit. The dividend is correspondingly said to be "fully franked", "partly franked", or "unfranked". A dividend recipient ("X") might get a mixture of franked and unfranked dividends from various sources. "X" would add all franking credits to a notional "franking account", then use that account at tax time to offset their normal tax obligations. [edit: typos]
- mafuyu 9y ago
  Stocks are set up to have some sort of inherent value tied to the company, or nobody would buy them. The typical ways are dividends paid out of profits, company buyouts, and the on hand assets of the company that can be sold. The market is just a pricing mechanism around all that.
  - tabeth 9y ago
    I disagree with the premise. I guess the point I'm trying to make is that stocks would be purchased even if there were no dividends. Case and point, (and to remain on-topic): cryptocurrencies.
    - tanderson92 9y ago
      False. It is not a matter of a disagreement, it is one of fact. Companies like Amazon have nonzero stock price while paying no dividends only because there is a market expectation that eventually a company in the future will pay dividends to shareholders. Also, you are begging the question compared to your remark about how ICOs and stocks are similar in your top level post.
      - tabeth 9y ago
        I'm not sure what you're stating to be "False." That stocks would be purchased without dividends? That's obviously true. Stocks need not have dividends to be valuable, only just have someone else willing to pay more than what you did. Which brings me to the next point: this expectation you speak of is part of the irrationality. Suppose there was a company that publicly stated that it would never give out dividends, but it was making bank. People like yourself would assume at some point in the future dividends would be paid out and therefore what you stated would apply, even if no dividends were never paid out (assuming the company's trajectory and what not stayed the same). You also seem to imply the "expectation" of the market is always correct or rational. We both know that's not true, either.
        zodiac 9y ago
- TheCoelacanth 9y ago
  The shareholders of any company can give themselves a dividend if a majority agree to it and the company has money to pay for the dividend. That is an inherent part of all stock in for-profit companies. So stocks don't inherently give you dividends, but they do inherently come with the possibility of dividends.
zodiac 9y ago
other than dividends there's usually 1. rights to vote in the board 2. some claims on the company's assets in case of bankruptcy

Simon_says 9y ago

Stocks are valued off of their discounted future cashflow, so ignoring dividends (and capital distributions) basically takes all of their value off the table.

dragonwriter 9y ago

> Ignoring dividends, what intrinsic value do stocks have? Voting rights, claim on corporate assets in the event of dissolution (coordinated use of the former can trigger the latter; though that's rare in practice because if you don't like the way the corporation is run, you usually just sell out.) Dividends are, in effect, a periodic partial dissolution that a corporation has chosen to conduct. > I'd be curious to know how the stock market, ignoring dividends, is not a zero sum game. Er, because the sum of net returns is not fixed at zero, or fixed at all, so it's not a zero or even fixed sum game.

tabeth 9y ago
Isn't the sum of net returns fixed to the total amount of stock multiplied by the purchase price?
- dragonwriter 9y ago
  > Isn't the sum of net returns fixed to the total amount of stock multiplied by the purchase price? (1) A value which continuously changes over time based on the decisions of participants in the market is not “fixed”, and (2) that aside, no, the value you suggest is not the same as total net returns. If you if ignore the claim on assets (which is the fundamental purpose of stock), then, the sum of all returns must be zero. But you can't meaningfully ignore that. That's like saying “aren't all money-based markets zero sum, if you ignore the use-value of the goods/services sold”?
  - tabeth 9y ago
    In regards to (1), I don't get it. Just because the value changes doesn't mean it's not fixed. A trivial example is 100 = XA + YB + ZC. Fixed, yet weights for each value can change. And with (2), what's the value then?

btilly 9y ago

I recommend that you buy a used copy of https://www.amazon.com/How-Buy-Stocks-Louis-Engel/dp/0316353809 https://www.amazon.com/How-Buy-Stocks-Louis-Engel/dp/0316353... and read it to understand what stocks are, why they have value, what different kinds of stock are, and why they are created. But the long and short of it is that stock is part ownership of a company. Companies are not zero sum, they create wealth through a process that Paul Graham explains in http://www.paulgraham.com/wealth.html http://www.paulgraham.com/wealth.html. The trading of stock itself is a zero sum game - each time it happens someone is trading ownership worth a certain amount for the same value in money. But owning stock goes up and down with the prospects for the company.

quickthrower2 9y ago

Stocks that don't pay good dividends should be reinvesting that money in future growth. At some point in the future the company will then increase its dividends. If stocks are a zero sum game then so is business in general. But business isn't just a giant casino. Useful stuff is produced.