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> 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'

> 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.
throw0101a 6y ago
> If a stock isn't issuing dividends, it's either profiting and storing large amounts of cash or losing money. Or it's funnelling the money back into itself to grow. Amazon made "zero profits" for many years because it wanted to growth as fast as it could. If a company finds that it cannot find any productive ways of using cash then it may return the money to investors in dividends or share buybacks. Management may determine that the ROI for owners is better by keeping the money internal. If owners disagree they can presumably get new management at the shareholders' meeting by replacing the board, or ordering a change in cash-use policy: * https://www.investopedia.com/terms/v/votingright.asp https://www.investopedia.com/terms/v/votingright.asp

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.

throw0101a 6y ago

> If a stock isn't issuing dividends, it's either profiting and storing large amounts of cash or losing money. Or it's funnelling the money back into itself to grow. Amazon made "zero profits" for many years because it wanted to growth as fast as it could. If a company finds that it cannot find any productive ways of using cash then it may return the money to investors in dividends or share buybacks. Management may determine that the ROI for owners is better by keeping the money internal. If owners disagree they can presumably get new management at the shareholders' meeting by replacing the board, or ordering a change in cash-use policy: * https://www.investopedia.com/terms/v/votingright.asp https://www.investopedia.com/terms/v/votingright.asp