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A stock's fundamental value is based on current Shareholders Equity (SE) + future earnings potential. Dividends and share buybacks are just a way to return Sha

A stock's fundamental value is based on current Shareholders Equity (SE) + future earnings potential. Dividends and share buybacks are just a way to return Shareholders Equity to the shareholder. In Dec 2018, MSFT had 92B of SE with a market cap of 1.2T. In Dec 2020, MSFT had 130B of SE with a market cap of 1.7T. They earned money which added to their SE, and they returned some SE to shareholders via dividends and share buybacks over those 2 years. If in Dec 2020 MSFT sold all of its assets, settled all of its liabilities, and closed its doors, it would theoretically be able to pay 130B in dividends to shareholders. The share price would drop by 92% (1 - 130B/1.7T). So 92% of its share price is based on its future earning potential. This number goes up or down as the market expectations for their future earnings potential goes up or down. Dividends reduce SE, which is typically why the share price drops by the amount of the dividend on the ex-dividend date. Share buybacks reduce SE and reduce the number of shares outstanding, which increases each Shareholder's equity stake. GMEs share price is out-of-whack because some market participants are making decisions based off what they believe the fundamental value to be, and other market participants are ignoring the fundamentals and buying at any price.

tremon 6y ago
Dividends reduce SE By what mechanism does this happen? Paying dividends doesn't affect the amount of shares outstanding nor meaningfully impact the market cap?
- mrep 6y ago
  It absolutely does, it is just hard to notice because it is small enough and distributed over time thus making it hard to see in a market cap graph especially when most of the value in the market cap is dominated by expected future earnings. If apple were to do a 1 time 150 billion dollar dividend, you would almost certainly see their market cap drop by a similar amount the day after. However apples market cap is 2.39 trillion so that is still only 6.27% of their market cap and could get drowned out by normal daily swings. Highly doubt it though and I would expect to see a corresponding runup to the event to claim the dividend and a corresponding drop after.
throw0101a 6y ago
> GMEs share price is out-of-whack because some market participants are making decisions based off what they believe the fundamental value to be, and other market participants are ignoring the fundamentals and buying at any price. GME's share price may be out-of-whack to those interested in the retail business. But to the people who have (shorting) options contracts to fulfill then the share price may be reasonable, as the alternative to these people is to renege on a contract, which could bring all sorts of unappealing consequences. GME having a price of even $1000/share may be "cheap" to these people. The same item can be valued differently by various individuals, each for their own particular reasons. This is what auctions are all about.

tremon 6y ago

Dividends reduce SE By what mechanism does this happen? Paying dividends doesn't affect the amount of shares outstanding nor meaningfully impact the market cap?

mrep 6y ago
It absolutely does, it is just hard to notice because it is small enough and distributed over time thus making it hard to see in a market cap graph especially when most of the value in the market cap is dominated by expected future earnings. If apple were to do a 1 time 150 billion dollar dividend, you would almost certainly see their market cap drop by a similar amount the day after. However apples market cap is 2.39 trillion so that is still only 6.27% of their market cap and could get drowned out by normal daily swings. Highly doubt it though and I would expect to see a corresponding runup to the event to claim the dividend and a corresponding drop after.

throw0101a 6y ago

> GMEs share price is out-of-whack because some market participants are making decisions based off what they believe the fundamental value to be, and other market participants are ignoring the fundamentals and buying at any price. GME's share price may be out-of-whack to those interested in the retail business. But to the people who have (shorting) options contracts to fulfill then the share price may be reasonable, as the alternative to these people is to renege on a contract, which could bring all sorts of unappealing consequences. GME having a price of even $1000/share may be "cheap" to these people. The same item can be valued differently by various individuals, each for their own particular reasons. This is what auctions are all about.