3 ms·

I am right with you, I've never understood what the actual purpose to owning shares is other than "their price goes up when the company is expected to do well"

I am right with you, I've never understood what the actual purpose to owning shares is other than "their price goes up when the company is expected to do well" -- but what do you get for that price being higher? Without dividends the whole idea of stocks makes no sense to me. With dividends, I would think "I'll buy this stock for $100 with the expectation that I'll get a $10 dividend next year, a $12 dividend the year after that, etc etc, and eventually make my money back!" In the case you buy a bunch of stocks and just hold onto them, they generate value by the company doing well. I could buy shares of a bunch of companies and wait 30 years, and if most of those companies are still doing well, I'll have made a profit from dividends, and I can then sell those to some wide-eyed young person who is hoping the company will continue to do well so they can get their payments for the next 30+ years. If the company instead does well for 20 years and then abruptly goes out of business, I still would've gotten lots of payouts from them, but now I can't sell those shares to someone who hopes for future payouts anymore. But if there are no dividends, none of this makes any sense -- I'm buying the shares, making no money for the 30 years that I sit on them, then selling them to some wide-eyed younger person for a higher price who expects to also make no money for 30 years, but to be able to sell the shares to some new younger person? There's no endgame with a payout here, but there is an end where the company goes out of business. So what value was the share providing the owner over those 30 years??

kgwgk 6y ago
You are not forced to hold onto non-dividend paying stocks, you can sell them gradually to create "dividends" for yourself. As a first order approximation, buying a $100 stock that gives you a $5 dividend but stays at $100 is not different from buying a stock that doesn't distribute a dividend but appreciates 5% every year.
- californical 6y ago
  Thanks for the response! I guess my issue is that there's no actual value in owning non-dividend shares for any amount of time. So I can sell the stock to someone else, but what are they paying me for? The opportunity for the value to increase more? Why is someone interested in paying me more than I paid? I feel like there's never any real money that's made back by owning those shares. What's the goal? Removed from the stock market, if I privately invest in a company for $1m for 10% of the company, it's because I'm hoping that someone else will see that the company has value and purchase it, giving me 10% of that future purchase price. The company sells a product of some sort, and I have a 10% vote in what they do with that money, which I'm hoping is to sell to a larger company. Is the goal the same on all of these non-dividend paying companies -- to be bought by a bigger company? Because otherwise there's no value in the shares except speculation itself, which seems pointless to me
  - kgwgk 6y ago
    Even non-dividend-distributing companies can give real cash to shareholders in exchange for those paper share certificates by buying back shares. But it's true that for some companies it's quite difficult to justify valuations.
  - pgwhalen 6y ago
    Stock gives you a legal claim to a portion of the assets of a company, which as you point out, manifests itself quite clearly during a liquidation event like a dividend payment or an acquisition by some other entity. But tt shouldn't bother you that plans for such a liquidation event might not be clear when you buy the stock. What matters to you (and future investors that might buy your shares from you) is that if such an event happens, you have to be compensated as a result. That's why your shares retain value. To take a more specific example, Google has ~$100B of cash on hand, and it does not pay any dividends. Let's just assume that Google is nothing more than a box containing $100B, and you own a portion of that box amounting to $1000. Even though you can't reach your hand in and take out that $1000, it's yours. In the event it gets released from the box, you're the only one that can get at it because of your ownership. And because everyone else realizes that, there's a pretty clear value to that ownership that they would rationally pay you for. Of course, Google is much more than just a box of money, it is a box of many things, some very intangible (but still valuable). This extra value makes it worth far more than $100B. But it's still a box, and if the value gets released from the box, you're the one who gets it. So who wouldn't pay (at the correct price) for that?
    - californical 6y ago
      This was a really helpful explanation, thank you! I have really minimal experience in finance and economics (other than keeping savings and blindly dumping money into index funds). I really appreciate you for taking the time to respond! So really when you get down do it, you're paying for the prospect that the company will eventually be able to do something that will return money/value to you, but you don't know what. And so when you're buying shares, you're analyzing the risk between them going broke, and the value that they could potentially pay out someday. Same as private equity, but with a less clear path to actually extracting value from the company. Then if the company was really screwed up, the shareholders could technically vote on a way to turn the company's assets into cash, which they would get a portion of. Or do anything else with, since the shareholders get to vote on the outcomes of those things.
ericb 6y ago
There's a couple points you're missing. Even if there's no dividends, as long as the shares represent legal control, they can be purchased by other companies or individual to gain control of the profits, direction, or assets of the company. This gives the shares value independent of dividends.
- sireat 6y ago
  The problem with this idea is that increasingly company founders are opting for dual(or even triple) share structures by issuing massive amounts of non-voting stock to outsiders. It is all a game of musical chairs when you buy GOOG(not GOOGL), FB (class A) Facebook shares which have 1/10 voting power of Zucker class B shares. The list of these abominations goes on and people keep buying and trading them. If you are a company founder and can get away with this (Zynga had some trouble but still got away with it) you'd be selfishly stupid not to do it. And don't get me started on Chinese stocks where you are buying ADR of some entity in Bahamas which has no say at all over the Chinese parent. EDIT: Why is it wrong for a company founder to have full voting control? It is wrong when he/she has less than 50% ownership that's what's wrong. If you have 20% of the company but have the super-voting shares you can decide to take the company into a bad direction and the 80% have no say.
  - ericb 6y ago
    I have no disagreement with anything you've said, actually. It is kind of an interesting swindle, really.

kgwgk 6y ago

You are not forced to hold onto non-dividend paying stocks, you can sell them gradually to create "dividends" for yourself. As a first order approximation, buying a $100 stock that gives you a $5 dividend but stays at $100 is not different from buying a stock that doesn't distribute a dividend but appreciates 5% every year.

californical 6y ago
Thanks for the response! I guess my issue is that there's no actual value in owning non-dividend shares for any amount of time. So I can sell the stock to someone else, but what are they paying me for? The opportunity for the value to increase more? Why is someone interested in paying me more than I paid? I feel like there's never any real money that's made back by owning those shares. What's the goal? Removed from the stock market, if I privately invest in a company for $1m for 10% of the company, it's because I'm hoping that someone else will see that the company has value and purchase it, giving me 10% of that future purchase price. The company sells a product of some sort, and I have a 10% vote in what they do with that money, which I'm hoping is to sell to a larger company. Is the goal the same on all of these non-dividend paying companies -- to be bought by a bigger company? Because otherwise there's no value in the shares except speculation itself, which seems pointless to me
- kgwgk 6y ago
  Even non-dividend-distributing companies can give real cash to shareholders in exchange for those paper share certificates by buying back shares. But it's true that for some companies it's quite difficult to justify valuations.
- pgwhalen 6y ago
  Stock gives you a legal claim to a portion of the assets of a company, which as you point out, manifests itself quite clearly during a liquidation event like a dividend payment or an acquisition by some other entity. But tt shouldn't bother you that plans for such a liquidation event might not be clear when you buy the stock. What matters to you (and future investors that might buy your shares from you) is that if such an event happens, you have to be compensated as a result. That's why your shares retain value. To take a more specific example, Google has ~$100B of cash on hand, and it does not pay any dividends. Let's just assume that Google is nothing more than a box containing $100B, and you own a portion of that box amounting to $1000. Even though you can't reach your hand in and take out that $1000, it's yours. In the event it gets released from the box, you're the only one that can get at it because of your ownership. And because everyone else realizes that, there's a pretty clear value to that ownership that they would rationally pay you for. Of course, Google is much more than just a box of money, it is a box of many things, some very intangible (but still valuable). This extra value makes it worth far more than $100B. But it's still a box, and if the value gets released from the box, you're the one who gets it. So who wouldn't pay (at the correct price) for that?
  - californical 6y ago
    This was a really helpful explanation, thank you! I have really minimal experience in finance and economics (other than keeping savings and blindly dumping money into index funds). I really appreciate you for taking the time to respond! So really when you get down do it, you're paying for the prospect that the company will eventually be able to do something that will return money/value to you, but you don't know what. And so when you're buying shares, you're analyzing the risk between them going broke, and the value that they could potentially pay out someday. Same as private equity, but with a less clear path to actually extracting value from the company. Then if the company was really screwed up, the shareholders could technically vote on a way to turn the company's assets into cash, which they would get a portion of. Or do anything else with, since the shareholders get to vote on the outcomes of those things.

ericb 6y ago

There's a couple points you're missing. Even if there's no dividends, as long as the shares represent legal control, they can be purchased by other companies or individual to gain control of the profits, direction, or assets of the company. This gives the shares value independent of dividends.

sireat 6y ago
The problem with this idea is that increasingly company founders are opting for dual(or even triple) share structures by issuing massive amounts of non-voting stock to outsiders. It is all a game of musical chairs when you buy GOOG(not GOOGL), FB (class A) Facebook shares which have 1/10 voting power of Zucker class B shares. The list of these abominations goes on and people keep buying and trading them. If you are a company founder and can get away with this (Zynga had some trouble but still got away with it) you'd be selfishly stupid not to do it. And don't get me started on Chinese stocks where you are buying ADR of some entity in Bahamas which has no say at all over the Chinese parent. EDIT: Why is it wrong for a company founder to have full voting control? It is wrong when he/she has less than 50% ownership that's what's wrong. If you have 20% of the company but have the super-voting shares you can decide to take the company into a bad direction and the 80% have no say.
- ericb 6y ago
  I have no disagreement with anything you've said, actually. It is kind of an interesting swindle, really.