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I've never really understand what the price of a stock actually means. My simplified understanding of the stock market is that: 1) you have a company with a go

I've never really understand what the price of a stock actually means. My simplified understanding of the stock market is that: 1) you have a company with a good idea, but the company does not have enough money to fund the idea, so they sell shares of the company to shareholders in exchange for capital 2) using this capital, the company grows and succeeds, and in return it pays portions of its profits back to its shareholders/investors in the form of dividends. However, this all falls apart when the company never issues dividends, as many public companies have yet to ever do so. At this point, what does it matter how well the company does or what their profits are? If no dividends will ever be paid, then the stock price is irrelevant to the company as long as it issues no new shares (or if all remaining shares are held by the founder to retain majority voting rights). Whether the stock goes from $10 to $1,000 has no effect on the company, right? So what does the price mean at this point?

aphextron 6y ago
>So what does the price mean at this point? What does the price of anything mean? You can look at things like fundamentals; EPS, P/E, etc. but ultimately it just comes down to what everyone else agrees on it being worth.
- ivanbakel 6y ago
  There's a difference between a stock that doesn't get you dividends and an item with a sensible expected worth. Sure, it's hard to put a concrete price on a 2x4, but you at least understand what value people see in it - the way supply and demand affect the price are reflections of the worth of lumber as a building material (or whatever else). But the price of a stock is nonsense - if you don't own enough to influence the company, and the stocks don't pay out, then the price is just money that moves in and out of your account. You can't even really say that the price of a stock is an agreement of its arbitrary value; you sell the stock because you expect it to go down, and you sell the stock to someone else who expects it to go up. If you buy a stock at the peak, you are paying the highest ever price for its lowest ever value.
  - esrauch 6y ago
    For voting stocks I can see it making sense that the big players who want some threshold of influence would determine the value. And, if a company could be bought out then your shares can get paid out that way. But Google has nonvoting no-dividend shares, and I don't think they are feasibly going to get bought out without crashing first, so the price isn't from that either though. I think it really only makes sense if you think Google is going to issue dividends some day.
- Xcelerate 6y ago
  > What does the price of anything mean? That's a bit more philosophical than what I was getting at. What I mean is: why do people say it is good for the stock price when a company is doing well if the price of the stock is completely decoupled (in the case of no dividends) from the company's performance? Or am I mistaken and the price is not actually decoupled?
  - aphextron 6y ago
    >why do people say it is good for the stock price when a company is doing well In a normal market, based on fundamentals, you can say a stock is a good price based on a few key factors like EPS and P/E [0] But in our current la la land of free money and infinite liquidity, things are basically worth whatever the hedge funds say they are. [0] https://www.investopedia.com/terms/p/price-earningsratio.asp https://www.investopedia.com/terms/p/price-earningsratio.asp
  - marvin 6y ago
    Immediately decoupled from dividends or traditional metrics like P/E doesn't mean decoupled from the likelihood to achieve good performance on such metrics in the future. Consider e.g. Tesla in 2013. It had a market cap (directly proportional to the stock price, assuming no secondary offerings) in the area of $2 billion. No one would expect it to pay dividends for at the very least the next decade. Most people assumed it would go bankrupt, like all other car startups. Some few believed it would be successful. When the Model S launch proved to be successful during the following year, the market cap (stock price) increased considerably. This was consistent with an increased expectation that the company would survive to the point where it would be able to return money to investors, through dividends, stock buybacks or other measures. But nothing about the Model S launch had any direct effect on dividends or earnings. Looking at the situation today, the company has much better revenues and margins. They could easily choose to have good P/E metrics if their market cap was still $2 billion, meaning that investors who bought in at that price were successful in their bet. Controversy around stock prices are always caused by disagreements about the expected value of the company's future earnings. Unless it's an exceptional case like Gamestop, where the stock price increases for reasons that are mostly technical. (In this case, the potential future requirement for short sellers to buy shares at any cost).
WrtCdEvrydy 6y ago
> I've never really understand what the price of a stock actually means. This plays into the theory of the bigger fool. If a stock isn't issuing dividends, it's either profiting and storing large amounts of cash or losing money. If there's profiting and storing cash (the Apple model), you purchase the stock on the thoughts that the board can be replaced with a board that will take that cash and dividend it out. If the company is just losing money, you purchase stocks on the thought that they can turn it around become profitable for either dividends or for stashing cash.
- Xcelerate 6y ago
  So, if hypothetically you could guarantee and prove somehow that a company would never pay dividends even with a new board, then there would no longer be a reason for the stock price to move, right? People are basically betting on the fact that a company that doesn't pay dividends will change their mind at some point?
  - WrtCdEvrydy 6y ago
    Stock holders are in control of the board. Either dividends are paid constantly or eventually stock holders can force a new more dividend-friendly board.
  - robjan 6y ago
    You still possess a right to a portion of the company which has an underlying value. The company is then essentially a store of value, just like my gold ETF. I have no right to access the gold directly but it has value because of the underlying.
  - jfengel 6y ago
    The company could also be bought out, which has the same effect. In a simplified case, imagine that the company had simply stuffed all of its profits in a mattress. A buyer will have to offer stockholders at least as much money as is in that mattress. The price of that stock is never going to be as simple to calculate as the price of the mattress, because of uncertainties in future revenue. In theory a company consisting just of a mattress would have a true fixed price that never changes, but there isn't any such company. The closest you get is a "blue chip" stock, very large and very consistent in its revenue, often in manufacturing (because there's less innovation and high barrier to entry). Their prices indeed don't change much.
seanhunter 6y ago
The company doesn't have to pay dividends in any particular time period for a share in the ownership of the company to have value. If the company grows in value then you should be able to sell shares for more than you bought them for. It's worth reading Benjamin Graham to get a really good understanding of fundamental valuation, however the short answer is that a company is a stream of (potential) future earnings. That stream is funded by debt and equity. If you price that future earnings stream and discount it back to today, you get a sense for the net present value of the company. If you subtract the debt and the cash on hand what is left is the equity component. Theoretically this should be identical to the market cap of the company but of course there are all sorts of reasons these will diverge (investors will have different risk tolerances and will therefore assign different values to the discount factors etc). From a management perspective, the share price is important for several reasons. Firstly for equity raises etc. Secondly some of the executives personal compensation will be tied to metrics that are in some sense linked to share price. Eg they might have a bonus that is related to return on equity. High ROE will tend to cause the price to rise. Finally if the price multiple trails peers, investors will get antsy and you could have shareholder activism etc.
marvin 6y ago
When you own shares, you own a fraction of the company. The assets of the company partly belong to you, and if you have the voting power, you can decide to pay out some of it. Of course, there's a philosophical argument to be made if the ownership structure is such that a dividend decision like that can never be made. I suppose everyone is confident that if the leadership of such a company actually tried to assert that "no, your class ZZ share is actually just monopoly money, and your ownership share does not entitle you to any rights", such a claim would be struck down in court. Or cause the stock price to crash to such a degree that the class A shareholders would amend the agreement.
jcranmer 6y ago
Investors buy shares of a company generally to make money, and there are two ways to make money from holding shares. The first is to receive dividends. The second is to sell the shares at a higher price. Note that companies can (and do!) buy back their own shares to reward their shareholders. In theory, the meaning of a stock price, or rather, the total market value of a company is how much one should rationally be willing to pay to acquire the company: this is the value of its total net assets plus some accounting for future profits. However, stock prices are also seen as a metric in and of themselves. Upper echelons of most companies are rewarded mostly in stock rather than cash, and so keeping the stock price artificially high can be the easiest way to keep their jobs, which isn't helped by a political emphasis on keeping the stock market from collapsing (it isn't entirely rational that the S&P 500 rose 16% in a year when the economy crashed by several percent).
throw0101a 6y ago
> So what does the price mean at this point? What does the price of anything mean? Why is a Audi "worth" $60K but a VW "worth" $30K? A Porsche "worth" over $100K? Why is a Patek Philippe or A. Lange & Söhne Tourbillon watch worth $100K? Why should I pay $300 for one All-Clad pan when for the same price I can get a 10-piece set at Costco? Surely you have things that you think are worth paying more for while for others you wouldn't spend more than some 'basic' amount. People perceive things as being of different quality. It's not that everyone (!) thinks that GameStop (GME) is "worth" over $300 a share, it's just that the folks at the hedge funds are willing to pay over $300 for each share because they have contractual obligations to fulfill, and if they do not they (a) may be sued for a lot of money and/or (b) go to jail. So each share of GameStop is "worth" this much to the hedge funds because it gets them out of paying the consequences of (a) and (b). Paying $300/share may be "cheap" compared to paying those consequences. And to go back to my first paragraph: a Porsche is not "worth" $100K to me—because I'm not willing to pay for it, or even for an Audi. But it may be "worth" it to someone else because they are willing to pay for it.

aphextron 6y ago

>So what does the price mean at this point? What does the price of anything mean? You can look at things like fundamentals; EPS, P/E, etc. but ultimately it just comes down to what everyone else agrees on it being worth.

ivanbakel 6y ago
There's a difference between a stock that doesn't get you dividends and an item with a sensible expected worth. Sure, it's hard to put a concrete price on a 2x4, but you at least understand what value people see in it - the way supply and demand affect the price are reflections of the worth of lumber as a building material (or whatever else). But the price of a stock is nonsense - if you don't own enough to influence the company, and the stocks don't pay out, then the price is just money that moves in and out of your account. You can't even really say that the price of a stock is an agreement of its arbitrary value; you sell the stock because you expect it to go down, and you sell the stock to someone else who expects it to go up. If you buy a stock at the peak, you are paying the highest ever price for its lowest ever value.
- esrauch 6y ago
  For voting stocks I can see it making sense that the big players who want some threshold of influence would determine the value. And, if a company could be bought out then your shares can get paid out that way. But Google has nonvoting no-dividend shares, and I don't think they are feasibly going to get bought out without crashing first, so the price isn't from that either though. I think it really only makes sense if you think Google is going to issue dividends some day.
Xcelerate 6y ago
> What does the price of anything mean? That's a bit more philosophical than what I was getting at. What I mean is: why do people say it is good for the stock price when a company is doing well if the price of the stock is completely decoupled (in the case of no dividends) from the company's performance? Or am I mistaken and the price is not actually decoupled?
- aphextron 6y ago
  >why do people say it is good for the stock price when a company is doing well In a normal market, based on fundamentals, you can say a stock is a good price based on a few key factors like EPS and P/E [0] But in our current la la land of free money and infinite liquidity, things are basically worth whatever the hedge funds say they are. [0] https://www.investopedia.com/terms/p/price-earningsratio.asp https://www.investopedia.com/terms/p/price-earningsratio.asp
- marvin 6y ago
  Immediately decoupled from dividends or traditional metrics like P/E doesn't mean decoupled from the likelihood to achieve good performance on such metrics in the future. Consider e.g. Tesla in 2013. It had a market cap (directly proportional to the stock price, assuming no secondary offerings) in the area of $2 billion. No one would expect it to pay dividends for at the very least the next decade. Most people assumed it would go bankrupt, like all other car startups. Some few believed it would be successful. When the Model S launch proved to be successful during the following year, the market cap (stock price) increased considerably. This was consistent with an increased expectation that the company would survive to the point where it would be able to return money to investors, through dividends, stock buybacks or other measures. But nothing about the Model S launch had any direct effect on dividends or earnings. Looking at the situation today, the company has much better revenues and margins. They could easily choose to have good P/E metrics if their market cap was still $2 billion, meaning that investors who bought in at that price were successful in their bet. Controversy around stock prices are always caused by disagreements about the expected value of the company's future earnings. Unless it's an exceptional case like Gamestop, where the stock price increases for reasons that are mostly technical. (In this case, the potential future requirement for short sellers to buy shares at any cost).

WrtCdEvrydy 6y ago

> I've never really understand what the price of a stock actually means. This plays into the theory of the bigger fool. If a stock isn't issuing dividends, it's either profiting and storing large amounts of cash or losing money. If there's profiting and storing cash (the Apple model), you purchase the stock on the thoughts that the board can be replaced with a board that will take that cash and dividend it out. If the company is just losing money, you purchase stocks on the thought that they can turn it around become profitable for either dividends or for stashing cash.

Xcelerate 6y ago
So, if hypothetically you could guarantee and prove somehow that a company would never pay dividends even with a new board, then there would no longer be a reason for the stock price to move, right? People are basically betting on the fact that a company that doesn't pay dividends will change their mind at some point?
- WrtCdEvrydy 6y ago
  Stock holders are in control of the board. Either dividends are paid constantly or eventually stock holders can force a new more dividend-friendly board.
- robjan 6y ago
  You still possess a right to a portion of the company which has an underlying value. The company is then essentially a store of value, just like my gold ETF. I have no right to access the gold directly but it has value because of the underlying.
- jfengel 6y ago
  The company could also be bought out, which has the same effect. In a simplified case, imagine that the company had simply stuffed all of its profits in a mattress. A buyer will have to offer stockholders at least as much money as is in that mattress. The price of that stock is never going to be as simple to calculate as the price of the mattress, because of uncertainties in future revenue. In theory a company consisting just of a mattress would have a true fixed price that never changes, but there isn't any such company. The closest you get is a "blue chip" stock, very large and very consistent in its revenue, often in manufacturing (because there's less innovation and high barrier to entry). Their prices indeed don't change much.

seanhunter 6y ago

The company doesn't have to pay dividends in any particular time period for a share in the ownership of the company to have value. If the company grows in value then you should be able to sell shares for more than you bought them for. It's worth reading Benjamin Graham to get a really good understanding of fundamental valuation, however the short answer is that a company is a stream of (potential) future earnings. That stream is funded by debt and equity. If you price that future earnings stream and discount it back to today, you get a sense for the net present value of the company. If you subtract the debt and the cash on hand what is left is the equity component. Theoretically this should be identical to the market cap of the company but of course there are all sorts of reasons these will diverge (investors will have different risk tolerances and will therefore assign different values to the discount factors etc). From a management perspective, the share price is important for several reasons. Firstly for equity raises etc. Secondly some of the executives personal compensation will be tied to metrics that are in some sense linked to share price. Eg they might have a bonus that is related to return on equity. High ROE will tend to cause the price to rise. Finally if the price multiple trails peers, investors will get antsy and you could have shareholder activism etc.

marvin 6y ago

When you own shares, you own a fraction of the company. The assets of the company partly belong to you, and if you have the voting power, you can decide to pay out some of it. Of course, there's a philosophical argument to be made if the ownership structure is such that a dividend decision like that can never be made. I suppose everyone is confident that if the leadership of such a company actually tried to assert that "no, your class ZZ share is actually just monopoly money, and your ownership share does not entitle you to any rights", such a claim would be struck down in court. Or cause the stock price to crash to such a degree that the class A shareholders would amend the agreement.

jcranmer 6y ago

Investors buy shares of a company generally to make money, and there are two ways to make money from holding shares. The first is to receive dividends. The second is to sell the shares at a higher price. Note that companies can (and do!) buy back their own shares to reward their shareholders. In theory, the meaning of a stock price, or rather, the total market value of a company is how much one should rationally be willing to pay to acquire the company: this is the value of its total net assets plus some accounting for future profits. However, stock prices are also seen as a metric in and of themselves. Upper echelons of most companies are rewarded mostly in stock rather than cash, and so keeping the stock price artificially high can be the easiest way to keep their jobs, which isn't helped by a political emphasis on keeping the stock market from collapsing (it isn't entirely rational that the S&P 500 rose 16% in a year when the economy crashed by several percent).

throw0101a 6y ago

> So what does the price mean at this point? What does the price of anything mean? Why is a Audi "worth" $60K but a VW "worth" $30K? A Porsche "worth" over $100K? Why is a Patek Philippe or A. Lange & Söhne Tourbillon watch worth $100K? Why should I pay $300 for one All-Clad pan when for the same price I can get a 10-piece set at Costco? Surely you have things that you think are worth paying more for while for others you wouldn't spend more than some 'basic' amount. People perceive things as being of different quality. It's not that everyone (!) thinks that GameStop (GME) is "worth" over $300 a share, it's just that the folks at the hedge funds are willing to pay over $300 for each share because they have contractual obligations to fulfill, and if they do not they (a) may be sued for a lot of money and/or (b) go to jail. So each share of GameStop is "worth" this much to the hedge funds because it gets them out of paying the consequences of (a) and (b). Paying $300/share may be "cheap" compared to paying those consequences. And to go back to my first paragraph: a Porsche is not "worth" $100K to me—because I'm not willing to pay for it, or even for an Audi. But it may be "worth" it to someone else because they are willing to pay for it.