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You don't buy stocks because the company "makes money" you buy stocks because the expectation is that they will make more money in the future than they are now

You don't buy stocks because the company "makes money" you buy stocks because the expectation is that they will make more money in the future than they are now. Also, stocks don't really produce cash flow either - A dividend drops the price of each stock by the equivelent amount. So if you get a 3% dividend a year, the stock price is dropping by the same amount. I will say, it is easier to quantify that Apple/Google/other company is in an industry and makes things, and has revenue/expense to look at and thats why they are worth xyz today. I can't explain why bitcoin goes up or down. (other than whale buys a bunch, so the sheep follow)

andrewmcwatters 6y ago
No, that’s pretty much the number one reason someone would purchase equity in a company. I don’t know where the concept of dividends dropping the value of a company came from, but from a transactional point of view it doesn’t make sense. Sure, there are more earnings that have not been retained for increasing future earnings, but the value does not drop correspondingly. That’s just not how companies are valued. 3% of earnings going to shareholders just does not at all mean the company drops by 3% in value. Companies are valued in a number of different ways, but not one of them is based on a 1:1 proportion of earnings. Earnings multiples, yes, but what you’re suggesting is companies drop equivalent to being valued at a P/E ratio of 1. A company making 1 billion in earnings is not worth 1 billion dollars. Certainly not a majority of the time, at least. I am well aware of this myth, but not from where it originates. Yes, certainly cash on hand drops which affects valuations, but not by as much as you’re suggesting. I don’t understand your comment about stocks not producing cash flow. You’re buying part of a company. You’re not buying the certificate.
- ur-whale 6y ago
  >I don’t know where the concept of dividends dropping the value of a company came from, Well, there's taxes for example.
  - andrewmcwatters 6y ago
    I should have been more clear in that first line. I don’t understand where the concept of a valuation of a company dropping 1:1 proportionally with its dividend payment came from.
    - dmoy 6y ago
      Because it's roughly what happens, absent other factors on the ex div day. https://www.investopedia.com/articles/investing/091015/how-dividends-affect-stock-prices.asp https://www.investopedia.com/articles/investing/091015/how-d... https://finance.zacks.com/stock-price-change-dividend-paid-3571.html https://finance.zacks.com/stock-price-change-dividend-paid-3... It's not 100% true, but it's a fair bit better approximation than the other end of the spectrum which is roughly "dividends create free money out of thin air".
- im3w1l 6y ago
  Basically companies have an optimal cash reserve. Below that optimum a dollar in the company increases future discounted cashflow of company by more than a dollar -> They should raise money. Above that optimum a dollar in the company increases the future discounted cashflows of the company by less than a dollar -> They should hand out money. Because of transaction costs there is in practice a zone where they should neither raise nor give dividends. Close to the optimum a dollar in dividend will change the value of the company by approximately one dollar.
- thedufer 6y ago
  > 3% of earnings going to shareholders just does not at all mean the company drops by 3% in value. But this is not what's being claimed. Dividends are measured relative to stock price, not earnings. And a 3% dividend - that is, a per-share dividend equal to 3% of the share price - absolutely does cause the price to decrease by 3%. It's pretty clear why this must be the case - it's one of the weakest possible forms of the efficient-markets hypothesis. If it wasn't the case, people would buy (sell) the stock just before the dividend and sell (buy) just after for a nearly guaranteed profit.
shawnz 6y ago
It's true that you would typically expect a stock to drop in value after paying out a dividend, but you would also expect it to grow in value after achieving increased profits.
dasudasu 6y ago
No. A company that doesn't grow but has positive cash flow is still worth something. You can view a stock as a bond with a coupon rate that is not fixed and doesn't have to be paid back to you immediately if the company thinks it can reinvest it to make even more money. A company's stock might drop at the ex-dividend date, but it would have gone up incrementally each day before that.
jussij 6y ago
> So if you get a 3% dividend a year, the stock price is dropping by the same amount. Here is the reason the stock price drops by the dividend amount. Dividends are issued to the person holding the stock at the date the dividend is issued. This means it is possible to buy the stock one day before the dividend issue date, hold the stock for another day which then entitles you to the dividend and then sell the stock the following day. So you can hold the stock for just three days yet still get the dividend and the price drop accounts for this possibility. If the price did not drop that would effectively equate to free money, as you could take out a three day loan to get the dividend and the interest on that loan would be way less than the dividend amount. As such it is capital market forces that is causing the share price to drop.

andrewmcwatters 6y ago

No, that’s pretty much the number one reason someone would purchase equity in a company. I don’t know where the concept of dividends dropping the value of a company came from, but from a transactional point of view it doesn’t make sense. Sure, there are more earnings that have not been retained for increasing future earnings, but the value does not drop correspondingly. That’s just not how companies are valued. 3% of earnings going to shareholders just does not at all mean the company drops by 3% in value. Companies are valued in a number of different ways, but not one of them is based on a 1:1 proportion of earnings. Earnings multiples, yes, but what you’re suggesting is companies drop equivalent to being valued at a P/E ratio of 1. A company making 1 billion in earnings is not worth 1 billion dollars. Certainly not a majority of the time, at least. I am well aware of this myth, but not from where it originates. Yes, certainly cash on hand drops which affects valuations, but not by as much as you’re suggesting. I don’t understand your comment about stocks not producing cash flow. You’re buying part of a company. You’re not buying the certificate.

ur-whale 6y ago
>I don’t know where the concept of dividends dropping the value of a company came from, Well, there's taxes for example.
- andrewmcwatters 6y ago
  I should have been more clear in that first line. I don’t understand where the concept of a valuation of a company dropping 1:1 proportionally with its dividend payment came from.
  - dmoy 6y ago
    Because it's roughly what happens, absent other factors on the ex div day. https://www.investopedia.com/articles/investing/091015/how-dividends-affect-stock-prices.asp https://www.investopedia.com/articles/investing/091015/how-d... https://finance.zacks.com/stock-price-change-dividend-paid-3571.html https://finance.zacks.com/stock-price-change-dividend-paid-3... It's not 100% true, but it's a fair bit better approximation than the other end of the spectrum which is roughly "dividends create free money out of thin air".
im3w1l 6y ago
Basically companies have an optimal cash reserve. Below that optimum a dollar in the company increases future discounted cashflow of company by more than a dollar -> They should raise money. Above that optimum a dollar in the company increases the future discounted cashflows of the company by less than a dollar -> They should hand out money. Because of transaction costs there is in practice a zone where they should neither raise nor give dividends. Close to the optimum a dollar in dividend will change the value of the company by approximately one dollar.
thedufer 6y ago
> 3% of earnings going to shareholders just does not at all mean the company drops by 3% in value. But this is not what's being claimed. Dividends are measured relative to stock price, not earnings. And a 3% dividend - that is, a per-share dividend equal to 3% of the share price - absolutely does cause the price to decrease by 3%. It's pretty clear why this must be the case - it's one of the weakest possible forms of the efficient-markets hypothesis. If it wasn't the case, people would buy (sell) the stock just before the dividend and sell (buy) just after for a nearly guaranteed profit.

shawnz 6y ago

It's true that you would typically expect a stock to drop in value after paying out a dividend, but you would also expect it to grow in value after achieving increased profits.

dasudasu 6y ago

No. A company that doesn't grow but has positive cash flow is still worth something. You can view a stock as a bond with a coupon rate that is not fixed and doesn't have to be paid back to you immediately if the company thinks it can reinvest it to make even more money. A company's stock might drop at the ex-dividend date, but it would have gone up incrementally each day before that.

jussij 6y ago

> So if you get a 3% dividend a year, the stock price is dropping by the same amount. Here is the reason the stock price drops by the dividend amount. Dividends are issued to the person holding the stock at the date the dividend is issued. This means it is possible to buy the stock one day before the dividend issue date, hold the stock for another day which then entitles you to the dividend and then sell the stock the following day. So you can hold the stock for just three days yet still get the dividend and the price drop accounts for this possibility. If the price did not drop that would effectively equate to free money, as you could take out a three day loan to get the dividend and the interest on that loan would be way less than the dividend amount. As such it is capital market forces that is causing the share price to drop.