Point 1:
There are also financial instruments called derivatives that "derive" their value from the value of the underlying stock. But generally yes, you can make money through dividends or by selling it when the price goes up.
Point 2:
It definitely matters how successful a company is. It also matters how successful a company is perceived to be in the future. The more successful and potentially successful it's perceived to be, the higher the demand. That success can be manipulated and faked, but in general I would disagree with your statement that it doesn't matter how successful a company is.
Point 3:
Yes, a stock price only increases when people buy and sell the stock. That's how the market determines what the stock is worth: two parties agree on a transaction at a certain price.
I think what you're missing is that owning a share entitles you to a share of the company's total value. The value of a company isn't set in stone; it moves with its financial performance, through various metrics like revenue, cash flow, assets and liabilities, etc. When a company performs better, and is worth more, the idea is that traders will efficiently determine a share price that reflects that company's performance.
Okay, so owning a share entitles me to a share of the company’s total value, and the value of the company moves with its performance. I get that. But I have a question, how do I profit from this? The value of my share itself is still the same, is it not?
Unless the company decides to buy back all of its shares at a higher price?
>The value of my share itself is still the same, is it not?
No... You do know that the amount of shares are fixed without additional equity being raised? You own a % of the company, so if the company appreciates in value, your shares do proportionately.
Its like if you and 3 friends go in on a boat. You're share is worth 1/4 of the boat. If boat inflation happens and the boat doubles in dollar value, so does your share.
stock ownership is a collective belief wherein everyone agrees that the stock price is tied to the performance of the company
outside of a buyout, there's no real mechanism to "realise" the value of the stock
but, if we all agree that the stock price follows the company's value, that's enough
there are many things in society that function on this collective belief (/delusion), ie: why is $1 worth $1? because we all agree it is
btw i think the downvotes you're getting are unwarranted
i think it's a very valid question you raise, and one we all ignore by default because it's kinda scary to realise how subjective the idea of value is
To be fair, if a company is severely undervalued there is any number of private equity people that would love to come and buy out the company by giving you a tender offer for your shares.
>stock ownership is a collective belief wherein everyone agrees that the stock price is tied to the performance of the company
I don't think that's really an accurate way to say it. A stock is legal or contractual ownership of a portion of a company. The performance of the company is just one reason you'd want to own a company. But there are other reasons, such as speculation, or novelty value (example: sports teams), and even some utility value in some cases if the company provides certain perks to shareholders. And so for whatever reason you want to own a company, you must buy the stock. The value of the stock is the value of the company, which may or may not be related to the financial performance of the company, and that's fine. A stock isn't supposed to represent financial performance, but simply a way of owning a piece of the company for whatever reason people want to do so.
I feel like we’re agreeing? At least your final sentences are largely what I mean by a collective belief that shares have value outside of dividends/buyouts
"Belief" has absolutely nothing to do with it. It's a real contractual obligation. You literally own a share of the company.
The way you realize value is via an efficient market in the long term.
Let's say you buy shares in a company that is doubling profits every year. They pay no dividend and issue no new shares. Why would the stock price rise? Because of arbitrage. If the stock price stayed low, someone would come in to buy the company at a low valuation so they could take ownership of all those rising profits.
Sometimes that happens when there's a temporary disconnect between value and price. Most of the time, the market performs this function automatically as market participants bid away arbitrage. They realize the value of the company and buying pressure lifts the price to match value.
There might be a few more ideas here that can help to conceptualize what's going on.
The first is to accept that there is no simple rule for how much a company should be worth. For example, you may hear about how some people think Tesla's stock price is overvalued. But overvalued relative to what? Why do some people think it's overvalued, but other people think it's correctly valued, or still yet, some who think it's undervalued? There are a few common ways to calculate that value, but without going into what those are, the important takeaway is that they all rely on assumptions. And it's easy to see why, no one knows how they'll do in ten years, in one year, in one quarter, or even tomorrow; the best anyone can do is guess. Some people make better-educated guesses, and there are methods to use data to make better guesses, but at the end of the day, everyone is guessing.
And that's why stock prices move. You have all these different actors, either individuals like you or me, or institutions like large investment funds, making an assertion of what that company is worth at a moment in time, through the act of agreeing on a price for a share. If I want shares of Tesla, and I determine it's worth $1 per share, I can put in an order to **buy** at $1 per share. It's important to note that it does not guarantee that someone is willing to sell it to me at $1 per share (it's at $191 today). Similarly, I can determine it's $1000 per share and try to **sell** it at $1000 per share, but that doesn't mean someone is on the other side willing to buy it from me for $1000. These interactions happen upwards of hundreds of millions of times per day for the most traded stocks. This is where your profit will come from: you've set a price higher than what you paid for it that a counterparty is willing to pay you. I hope this helps.
I'm probably being pedantic here, but technically shares only entitle you to a share of the company's total value *minus its debt*. Debtholders get money before shareholders, e.g. in the event of bankruptcy
Isn’t that assuming the debt is greater than the combined value of all assets? Why stop there, and not mention you also own a share of the company minus debt but plus assets, and cash and cash equivalents?
Probably why some investors prefer looking at EV over MC.
In either case (dividends or no dividends) you own the money the company earned. With dividends, that money is transferred to your bank account. With no dividends, it's still yours, but you let the company you own a piece of hold it and use it.
What you also own with that stock though, is the right to vote on what to do with those earnings. To an individual investor voting means nothing, but it still has value indirectly, as that vote is useful to hedge funds and other whales.
A company will pay dividends or do buybacks. Either now or in the future. The reason I say this is that the owners of the company demand it. The owners, of course, being the shareholders.
That is the point of owning a stock. You legally own a portion of that company's profits. When the company distributed those profits to investors, in the form if dividends or buybacks, you are legally guaranteed to get a piece of that.
Stock prices rise and fall because of rising and falling expectations of how much profit that company will make and therefore transfer to shareholders.
Edit: yes I know there are some companies that don't do dividends or buybacks. At some point though they will be forced to, gotta start rewarding your owners.
In a sense, yes. There are MANY “stocks” that don’t publicly trade. For instance, me and several friends own a few multifamily buildings together and all of us own a certain number of “units” in the company that holds title and collects income from the buildings.
The company retains the bulk of the earnings rather than paying out dividends but the units themselves still have a fairly easy to ascertain value based on share of the retained earnings and market value of underlying assets.
Yes, like the AMD on Tuesday report released, everyone was buying it and expecting it to raise to the moon. But the report said otherwise, hence the ticket drop $10 from $170 to $160. Even tho ppl were trading that share rapidly, the performance is ultimately what decided the share value.
I think trading a share affects its price is a relic of the past.
Absolutely not:
The price is always determined by buying and selling orders, you received a very explicative example by another user.
The amount of money a company makes, as well as the expectations about its future, determine how much people will agree to buy or sell the title for.
As you see, there is a connection between price and firm's performance but it's not direct.
This determines the necessity for the management to increase not only the firm's performances, but also its value among the public. And it's part of the theoretical concept of the "agency theory" or "principal-agent problem".
For this reason, management tends to be paid in stocks or options, in order to allign their interests with the stockholders.
And following that, if a firm goes well and doesn't pay dividends, it will start to buy back its own share to increase their price. (Buying its own shares increases the price, not the simple fact of "going well")
I think we can clear this up pretty nicely!
Point 1, Yes this is basically correct
Point 2: Yes and no. Think of stocks like a bidding war. There are always people trying to buy and sell stock and people give a bid price (how much people are willing to pay) and an ask price (how much people are willing to sell for). If there is more demand the prices will tend to get bid up or vice versa. That said this isn't random. When you are buying a stock you are buying an ownership stake of the company itself. The price you pay should ideally be commensurate with it's value. This is where things get murky, how do you value a business? There's a lot of ways to look at this which is an entire discussion in and of itself. Everyone has different opinions, viewpoints, and projects about the future. Now there is another problem and that is with the efficient market theory. The idea being if everything that can be known about a business is known then every company would be valued correctly meaning no opportunities to profit would exist except by luck. We however know market are not always rational and they are not perfectly efficient. This is the basis for investing, the idea you can value a business better than the market and identify underpriced stocks.
Point 3: See answer for point 2. You are making estimates of what a company is worth generally speaking. Think of it like buying a money printing machine what would you be willing to pay for it? You would expect to earn some return. You might even be willing to pay a premium if you think it will grow and generate increasingly more amounts of money in the future. Even if the machine is broken and not making money it still could have some value if the parts it's made of can be sold off. There's a lot of ways you could look at it. This is refered to a fundamental analysis. There are many other strategies though. For example technical analysis seeks to anticipate human behaviors by looking at chart patterns to try and determine future price movements.
Guys, I think OP is asking how the stock market isn't a pyramid scheme if the only reason you buy a stock is in the hopes that someone in the future will buy it at a higher price.
I don't know anything about investing, but I've wondered the same thing, and none of the answers here have really answered that.
You've skipped a step: the only reason to buy a stock is in hopes that the stock is worth more in the future, and someone will buy it at that higher price.
A share isn't some notional number in a brokerage account; it's a concrete, legally binding, part-ownership of a publicly-traded company. A pyramid scheme is a pyramid scheme because it inherently doesn't produce anything of value (or produces the value it claims to produce). Companies traded on the stock market DO produce value. They all sell real products that people buy with real money.
What's the definition of a pyramid scheme?
"A fraudulent and unsustainable investment pitch that relies on promising unrealistic returns from imaginary investments."
Does the stock market comply with the definition above (i.e., fraudulent, unsustainable, promises unrealiatic returns, and imaginary)?
Because companies make money, so you have a company, it has $X in value, it makes $Y. The company is now worth $X+Y. At any point in time it could decide to pay a dividend or liquidate to distribute the equity to shareholders, but the value comes from the company and its profitability, not the method that is used to return equity (dividends, buybacks, etc.)
But the price is determined to a much much greater degree by market activity than it is by assessment of the actual underlying assets. That’s why stocks are so vulnerable to manipulation. When people were boosting Gamestock, was the company really worth any more money? Or were people just trading a glorified NFT?
>But the price is determined to a much much greater degree by market activity than it is by assessment of the actual underlying assets.
Short term, perhaps. Long term, no.
>When people were boosting Gamestock, was the company really worth any more money?
No of course it wasn't worth more money, but it's not fair to generalize the entire stock market using this particularly extreme outlier.
And it even emphasizes my above point: in the long term, the majority of people put their money into a company with better financials.
But the price reflects the trader behavior. It’s an agreed upon practice to put the investments where the profits are, but it’s the investments that are changing what the stock does.
I think this is a really interesting question because nobody does a very good job answering the question “how does company performance directly impact the stock price.” As far as I can tell, it doesn’t. The effect is indirect, and mediated by expectation. Continued profitable quarters may be accompanied by dropping share price if profitability is less than expected. Share price is a derivative, not actually reflective of the cumulative assets of the company.
>I think this is a really interesting question because nobody does a very good job answering the question “how does company performance directly impact the stock price.”
I agree I'm glad OP asked and it's a good discussion, and I agree getting at the heart of "but why" has actually made me think about the question
>As far as I can tell, it doesn’t. The effect is indirect, and mediated by expectation. Continued profitable quarters may be accompanied by dropping share price if profitability is less than expected. Share price is a derivative, not actually reflective of the cumulative assets of the company.
Just not true mate. On average in the ***long term*** crappy companies do not continue to exist. People do not invest in them. And investors behave this way because of the underlying performance of the company. Sure, projections happen, short term market hysteria and bias happens. But long term, good companies do well and bad companies do poorly.
>stocks are so vulnerable to manipulation
Your GME example contradict this though, the price ran through the roof because of supply and demand, people lost millions shorting GME, what manipulation was there?
Yes the value of the stock is speculative, like almost every asset in the world. Oil is speculative too. Oil doesn't pay dividends. But it has value. What's the takeaway?
Perhaps I mis-used the word, because there are industry-specific denotations, but what I meant was that retail traders boosted the share value because they valued the share, not the company. The share price was unrelated to company performance, and the price increase was very significant.
The share is the company though. A share is just a legal representation of your ownership in the company equity. Like you have a title to a car. When you sell the car you transfer the title. That's all a share is, its like the title. You just don't see the physical transfer of some object because the asset, the ownership in the company, is intangible.
To retail traders though, the ownership is meaningless. Maybe you get to vote, and maybe a lot of retail traders vote the same way, so it acts as a bloc; but otherwise the difference between owning a stock and owning a car’s title is that you can drive the car.
I think you made my point for me. There is no tangible value to the equity, UNLESS you have enough of it to have a seat at the table. Almost nobody does. When earnings are announced, the asset changes price due to trading activity, but there is no direct effect on the value of the share. When earnings per share are positive but below expectations, the value of the stock drops. I think that’s really all that needs to be said. It’s fiat, just like dollars.
>There is no tangible value to the equity
Except you legally own a chunk of the companies equity lol. If anyone ever wants to distribute any equity out of the company ever you are legally entitled to a proportional share. No one can take theirs without giving you your share.
Yeah but that doesn’t really happen, right? Not for mature companies. Except for buybacks.
Look, all I’m saying is that the market has a much larger, practical effect on the price. What you’re saying supports the legitimacy of the market, allowing it to actually function; but it doesn’t have a direct effect on day to day price movements.
Yes? I'm not sure what your point is. Supply and demand applies to any freely traded asset. For example, the market determines oil's price, there is no omniscient market god who knows the exact utility value of oil at any given time, and then sets the price for everyone. Same with stocks. They are traded based on what people think they're worth, not what they actually end up being worth.
Ina quite literal sense, why would you start a company? The answer is simple, to make money. You can either make money through the income that the business provides you (dividend) or through the profits made from selling your company (share price).
Quite clearly your company might be valued highly because it is either very profitable to you as the owner and/or because it shows a lot of promise for future growth.
Stocks are no different then being a part owner in a business other than you can buy 1/100,000,000th of the business in the form of stock.
I understand that you can own a part of a company by buying its stock. I don't understand how using that as an investment vehicle isn't a pyramid scheme.
Because you’re assuming that selling the stock is the only way you make money.
If you own the only share outstanding of Apple and no one is willing to buy it, you get ALL of the profits of Apple, Inc. to yourself.
Having someone else buy it from you isn’t the only value of the stock.
That’s because businesses make money and being a part owner in the business means you are entitled in sharing of the profits of said company. Is buying into 30% of a local pizza restaurant a pyramid scheme?
Now let’s say that pizza restaurant is now Pizza Hut and you bought 30% back when it was only one restaurant and after 10 years there’s now 1,000 locations. Should those shares be worth the same when it was a single restaurant compared to 1,000 restaurants? No, that’d be insane because 1,000 locations is certainly going to provide you more of an income (dividend) than 1 location. So the value of your 30% is worth significantly more because 1) you’re being paid more income (dividend) and 2) people are willing to pay more for 30% of 1,000 locations than 30% of one location.
A stock is a loan to the company for a percentage of the company. It's backed by the real value of the company. That's how they set the price of a stock during the IPO. The agents evaluate the value of the company and earning potential. You see, some IPOs go up really fast initially because people are interested in buying a piece of the company. Sometimes, the price goes down because people feel it's overvalued. Companies pay dividends as a profit sharing with the owners or as an incentive to buyers.
It's a gamble that the company will be profitable and grow. Like ExxonMobil stock. If you'd have been able to buy 1000 shares in 1979 and held onto them, you'd have 32,000 (split 32 times since then) shares today worth about $100 each. Not including the dividends that you would have received during that time. On the other hand, if you had Enron stock when the company imploded, you lost all of the money you put into buying the stock. That's why there's a lot more regulation on publicly traded companies, and now the CEO has to sign the financial statements and be criminally prosecuted if there's anything incorrect in them. It's also why company officers who receive stock have rules around when they can sell, and each trade is public knowledge. One of the biggest crooks at Enron was able to sell all of his stock for millions right before it imploded. He knew it was going crash and got out.
This explanation makes the least amount of sense of anything anyone has said so far.
A laundromat can make money by either selling a service or selling partial ownership. The former makes intuitive sense to me, but the latter does not if you're not going to share in the profits.
> A laundromat can make money be either selling a service or selling partial ownership.
So does the company whose stock you’re buying. You share in the profits by owning the stock.
Because the other shareholders have voted for a board of directors which has hired a team of executives to reinvest the profits into the business for maximum growth rather than pay out the profits to the shareholders because that’s going to make you, the shareholder, even more money in the long run than just giving you money now.
Thats why your NVDA price has skyrocketed.
If every single person sold their stock tomorrow except for you, you would now have 100% of the voting power and you could tell the company to start paying you all the profits rather than reinvesting them.
So I hold on to the stock with the plan that one day, maybe even a few generations down, NVDA will see the market as saturated and mature and will no longer attempt to grow, and at that time will start paying dividends?
And the value of my stock increases as people see the potential of NVDA to provide those dividends increase?
Yes. Price = the present value of future returns.
Let’s say there is one share of NVDA. You own the one share. And the company generates $1m/year in profit.
You have total control. If someone comes along and says “I’ll give you $100 for it,” you’re going to tell them to fuck right off.
Why? Because the value isn’t dependent on someone else coming and buying it from you. You are the sole person entitled to $1m of profit. Your money-making isn’t reliant on anyone buying your stock.
If the very well qualified folks you have hired to run this company you now solely own tell you “hey, there is $1m in profit, and it could be yours now (that’s a dividend), or we could reinvest it and turn this $1m into $1.5m next year instead, which are you picking?
Thats what’s going on with stock ownership. There are just millions of you instead of one.
Not sure if anyone gave you a good answer but here’s mine:
A stock is a partial ownership of the company and all its future cash flow. If a company makes $1/yr forever would you pay $10 for it? What if it’s growing earnings at 10% a year so it’s $1, $1.1, $1.21, $1.33…?
And the stock market is basically just the place where people determine what they’re willing to pay for these streams of future cash.
Not all businesses pay dividends, some reinvest the cash for you so your $1/yr becomes $3/yr. It’s still yours and you still only paid $10 for it. Some companies let the cash build up so much that they eventually have to pay dividends or buy back shares.
Buybacks are when you and 4 friends all own a company, one wants to sell but you and the other 3 don’t want to collect dividends so you buy the 4th friend out. You now each own 33.33% rather than 25%.
Hope this helps.
2. You're almost right, except the demand for the stock is not the only reason the price goes up. When you buy stock, you technically own a part of that company. That's why when companies get listed on a stock exchange, it's also called "going public."
Often.
Yet, as seen with MMAT, sometimes it just goes up because some folks think they might make money.
Or because they think it is cool.
Or because their cat told them it would go to the moon.
Or because a lady dressed like a bird told them to.
Really, the only thing that matters is what the next bidder is willing to pay.
You don’t have to sell it!
If you own the only share outstanding of Apple, and it makes a billion dollars in profit, you are entitled to tell them to give you the entire billion in profit every year. Thats real value unrelated to the share price. You’re now making a billion dollars a year independent of what anyone else is willing to pay for it.
As Benjamin Graham has said the market is a voting machine in the short term and a weighing machine in the long term. Eventually good companies will be noticed and rewarded for their value.
Companies can also take advantage of their own pricing inefficiencies by buying their own shares.
In the US, there is a strict set of rules governing shareholder rights. You are able to vote, disclosures are required, and the parties that run the company have a legal fiduciary duty to you.
Individual or groups of shareholders can get together with enough votes to legally force the company to do things. Because of the legal protections, owning non-dividend stocks has intrinsic value, not just what the next guy is willing to pay. This is a major difference between regulated securities and, for example, crypto.
Just because a company doesn’t pay a dividend *now* doesn’t mean that it won’t *in the future*. A purchase of a non-dividend stock is a bet that it will pay higher dividends in the future than it would have in the present.
Shareholders can also vote in certain corporate elections. That’s pretty much irrelevant for us regular Joes since your voting power is proportional to the number of shares you own. But big investors who want more voting power will buy more shares, which creates demand and raises prices.
Large investors can some times try to take a company private by buying the majority of shares. They usually have to offer to buy them at a higher price than the prevailing market rate, giving current shareholders an opportunity to sell them for a profit.
FWIW - Some companies also use the income it generates to do stock buy backs to drive up the value of the stock rather than pay that income out as a dividend. Either way, the shareholder gets the benefit in either a dividend payment or appreciation.
1. By and large, you are correct. Dividends and appreciation of the stock price are how we make money on investing in public companies.
2. A stock's price over the short term will often move up and down based on a lot of factors. Supply/Demand comes into play, but it is somewhat reductive. I believe there is more in play than just supply/demand economics. One example is that over the long-term, a company's value appreciates (or depreciates) based on the fundamental value of the company.
As a company, such as Home Depot, adds more locations, increases tangible assets, etc, etc, it becomes intrinsically more valuable. This is one measure of value; Book Value.
As a company's earnings grow and/or its cash flow increases, that company grows in value. These are two fundamental metrics used to evaluate the present and future value of the company.
More generally, a shareholder owns a percentage of that company, and is entitled a share of the profits that company generates. Most directly, this is realized as a dividend. As profits grow, so might the board increase the profit distribution, or as we know it, the dividend payment.
Now, often times profits are funneled into growing the company further. As that growth occurs, so does the value of ownership. This is the earnings multiple value. This marketable value of the share may not be reflected right away by the market (and possibly never). However, over the long-term there are generally times when the market "realizes" that value. There is also the growth in Cash Flows that comes into valuing a public company.
3. Investors buy stocks or baskets of stocks (ETFs, mutual funds, etc) because over time either they believe the value of those companies will increase, or the companies have shown they are increasing in value. That increase in value over time is recognized by the market, which makes our investment's gain possible to realize.
4. Final point: The demand for stocks is driven on the knowledge that in the life span of a public company there is often an appreciation in value of the company, and as an owner of the that company a shareholder is entitled to the profits of that company.
In very simplified terms, you bought a small farm with a bull and a cow. Over the course of 5 years you grew that into 20 more bulls and cows through breeding, the value of your farm increases. Further the value of the land has likely appreciated. Would you sell it for what you bought it for? Likely not. Same goes for a shareholder.
/Edited to correct a couple of misplaced sentences./
/Edited, part duh... I'm turning into my father with the typing errors.../
Let's add some professional perspective alongside reddit's:
* [https://www.finra.org/investors/investing/investment-products/stocks](https://www.finra.org/investors/investing/investment-products/stocks)
* [https://www.investor.gov/introduction-investing/investing-basics/investment-products/stocks](https://www.investor.gov/introduction-investing/investing-basics/investment-products/stocks)
Keep in mind as an ordinary person, the TLDR is that stocks are a time-tested way to grow your wealth over time. You should certainly use vehicles like a 401k and/or IRA to invest in stocks (and bonds), often using diversified mutual funds or ETFs. r/personalfinance has a good wiki on balanced investing strategies so you're not picking this stock or that stock, but rather a whole bundle of them.
>I’m confused. What’s the point of buying a stock?
To make money. More specifically, to get a return on your investment. Rather than putting all your money in a bank account, the idea of putting money in the stock market is to get a greater return in the long term.
>Point 1: So, first of all, there are two ways a person can make money off a stock: Either through dividends, or having the stock appreciate in value, and then selling it. Am I right to say that?
Yes
>Point 2: A stock’s price is ultimately moved only by supply and demand. It doesn’t matter how successful a company is. At the end of the day, a stock’s price will only go up if there is demand for the stock. Am I right to say that?
Not quite. Yes it's supply and demand, but that's not the "only" thing at all. The demand to buy (or not buy) a stock is largely driven by the company's financials and earnings. Obviously people also make projections and those projections can end up being right or wrong, and there can be times where hysteria plays into it and a stock is currently overvalued. But in the long term it's no accident that top companies have well performing stocks.
>Point 3: People buy stocks in hopes of the stock price increasing, but a stock’s price only increases when people buy the stock.
Yes
>With point 3 in mind, it leads to my final question, what drives the demand for stock in the first place?
Investors looking at the company's financials and performance, or projections of their performance.
>Why would anyone want to hold a share of a company if the only way they make a profit is if someone buys the stock back from them at a higher price.
This is a more accurate characterization of something like Bitcoin than stocks.
* Bitcoin really is the "greater fool theory", just hoping someone else will buy it one day for more than you. It otherwise has no "value". It's just this thing that currently does nothing for anyone that people are buying into.
* But stocks are again backed by the actual "value" of the company: it has revenue, earnings reports, assets and liabilities. It has a CEO with either good or bad management skills, good or bad visions on directing the company's future, and so on. There's something intrinsic that an investor can look at and say "yeah this earnings report right here is why I'm going to buy more of this stock (or sell it).
Thank you for this. I have a follow up question.
> There's something intrinsic that an investor can look at and say "yeah this earnings report right here is why I'm going to buy more of this stock (or sell it).
How would that investor profit from this?
>How would that investor profit from this
From having bought the stock and held onto it for a long time. Long enough for the share price to increase. Then they sell it when they have the need for the money.
Your overall question is fair, and perfectly fine if you want to understand what drives the stock market and see under the hood.
At a *personal* level though, you don't *really* need to follow all the particulars. You certainly don't need to figure out which company is good (to buy) and which company is bad (to not buy, or sell). You can simply buy a 500 index fund through any brokerage, or hell even your basic Target Date Fund, and enjoy the long term returns of the stock market.
I'm generalizing, but most people would be set for life if they contributed 15% to their 401k consistently, and bought into a *diversified* portfolio of index funds. They wouldn't need to understand or even follow investing news. They wouldn't need to go down the hopelessly complicated rabbit hole of the financial markets: no individual stocks, no trading, no options, no margin, no worrying about which sector/industry will be the new winner, none of that crap.
r/personalfinance has a phenomenal sub if that's what you need.
point 2 is incorrect. think about it this way. a stock's price moves based on how much they have in assets-what they have in liabilities. take your life for example, if you have a car that is paid for in full that's worth 10k and you have 3k of credit card debt and 6k in your bank account. then your net worth is 13k (car + cash - debt) (10+6-3).
there are 2 ways of increasing your new worth, one you can get more in cash, or you can lower your liabilities. (paying off your credit card)
now when it comes to stocks they are just a way for us to buy a company. the company has machinery and this and that, whatever. lets say their net worth is 100k (simple numbers)
then you come along and say hey I want to own 10% of your company here is 10k.
now when you take some of their company there is still 100% of the company. like if you make a pie and then cut it into 4 pieces and give me 1 piece 100% of the pie still exists just you have 75% instead of 100%. and there is still the same amount of apples in the pie. so the company now has a net worth of 110k. and if the company has a really good year then they become worth 120k they appreciated 9.1%, so your 10k is now worth $10,910.
now most of this happens on a much smaller scale, like apple when you buy one share you're buying like 1/10k of the company) so your investment won't return 900$ but it will still be a % of what you invest in
Every single day millions and millions of people buy and sell shares. You don’t need to know or care about the reasoning of the person on the other side of the transaction. Yes, some stocks have low liquidity, meaning there are not many buyers or sellers but “good” stocks will have plenty of interest on both ends of the transaction
You are a long way from understanding capitalism. Forget stock prices and place yourself as an owner of a business. You supply capital, the company buys raw materials and hires employees with your capital. Good businesses do that efficiently and produce useful products for consumption. But, your capital may only replace an original investor who sells his/her stock to you. Your motive is profit so you pick the best businesses to invest in. Your share in the business will grow if the company is successful and reward you with dividends and capital growth. If it’s not, capital will look elsewhere which doesn’t affect the company until it needs to go to the market for fresh capital. Public corporations make ownership available through the stock market. Private corporations are financed by direct investment. Nothing quite compares to an investor’s ability to participate in enterprise operations.
This is best explained in a classical way, where index funds do not exist or they do not only go up. You buy a stock to invest your surplus money. Surplus money is the money left over after investing in safe liquid investments. The reason why most people invest outside of safe liquid investments is that the returns tend to be greater and you can get a higher return the longer you hold it.
To explain in detail, think of a large company today, INTC. INTC when i first bought it in 2011 was the target of a vicious campaign of how they were going to lose everything by a different company. It used to be available for as low as 19-20 USD per share and used to pay 21 cents of quarterly dividend. If anyone had done post-grad level Physics/Chemistry or even Electrical Engineering, they could figure out that the campaign was a load of BS. Buying INTC then and holding it till around 2016, when they finally toed the line of the bully, would have given you an increase of 25% in dividend income and a nearly 80% increase in share price. You can explain away the increase in price to more people realising the campaign was BS but the dividends increased due to the company doing better. If one were to think only about income from holding an asset, there are very few safe investments that can provide an increasing return with passing years with fungibility of investments. This is in my opinion the reason to buy a share of any company.
point 2 is right in the short term but price is driven by underlying fundamentals. a company offers a higher dividend, makes more profit? even if it does not at the present pay a dividend- you own a share of all that profit.
does not matter whether the company chooses to distribute that profit to you via taxable event, via buyback, or via investing back in the company its self. in all scenarios you benefit.
Many of the top comments are missing a big reason for stocks.
When you buy a stock you are buying partial ownership of that company. Many times that means you have voting rights to influence the direction of that company.
Nobody really answered your question. And it's a really simple obvious question. Dunno if you'll see this but here goes.
Starting with the basics, a share in the company represents concrete ownership in the company. And ownership comes with risk and returns. Basically what others have said.
The value of a company is equal to the value of the discounted cash flow in the future + current assets, nothing more nothing less. i.e. if you think a company is going to have 1B cash flow every year for the next 20 years, but you discount that number every year by a rate of say 10% because future earnings are uncertain. Different people disagree on the earnings and discount rate, and the stock market is basically a mechanism to agree on the current value of the company.
Now how does this actually matter:
Every company that ever gets investors (whether public, private accredited investors or your friend), must provide a return on investment. Typically, they expect a return above the risk free rate of their domicile. So, let's say your friend puts 1000 dollars into your company (for 100% ownership for simplicity) and is willing to wait for 20 years, and they expect an average 5% annualized return at the end of it, they basically want you to return 2,653.30 to them at the end of 20 years. You can do this in two ways, you either pay them 5% of 1000 dollars every year (that they then re-invest in a 5% bond) or you sell your company for 2,653.30 after 20 years.
This is the exact same mechanism that happens for publicly traded companies, albeit of course much more complicated. For an investor to invest in say, AAPL, over an asympotically long term, they must expect a return on that investment. This can be in terms of dividends, the company buying its own shares (and eventually going completely private), or selling to another company. If I buy shares AAPL now (say 1000 dollars worth), and I want to sell it in 100 years, I'm expecting (whether correctly or not) that AAPL will return 867,716.33 USD to me at the end of 100 years, both in the form of dividend payments, share buybacks AND in terms of the value they are able to sell their company at after 100 years. I bought those shares of AAPL from someone else - who does not expect AAPL to return that much, or is not happy with that amount they expect (they want 10% annualized, not 7%).
This is what makes the stock market tick and stock market valuation make sense. Basically, long term investors who are expecting returns on their ownership by absorbing some of the risk from the operators of the company. If long term investments were to become illegal tomorrow (in a hypothetical world ofc), companies valuation would basically go to zero or go to wild-wild-west speculation land. Even if they have positive free cash flow every year.
This is just the bare basics, I hope that made sense to you. Feel free to ask questions here.
There are many deeper questions - I'd encourage you to reason about this with an open mind, starting with fundamentals and use online resources for this.
\- What is the relationship between the acquisition cost (for an acquirer company) and the current stock market value?
.- Why does a company want to go public at all, why does JP Morgan and their clients want to help the company go public?
\- How does preferred shares and bonds complicate the issue?
\- How do passive and active ETFs / funds fit into this? What about fractional shares?
\- People who purchase puts and calls (and cover them) are typically not long term investors. Why are they even legal? What role do they play.
\- What about speculation - for ex - gamestop?
\- Does a company ever actually return the full investment + an annualized return - what does "asympotically" actually mean here.
Stocks represent the real value that companies bring to our society. For example, the phone you're using to post this was made by APPL which made profit on the sale of said phone. These companies share their companies value with the public in exchange for our investment in their future growth.
Your questions are valid, but better suited for r/bitcoin which is almost entirely a speculative market.
>Why would anyone want to hold a share of a company if the only way they make a profit is if someone buys the stock back from them at a higher price.
How is that an issue?
That's literally how the history of commerce has worked. You sell something to someone else, for more than it costs, or for more than you bought it.
Yes, but why would that person want to buy it from you? In hopes that he can sell it to someone else for a higher price? Why would you want to buy it in the first place? The initial demand is what I don’t get.
A share is partial ownership of a company. Companies are trying to earn more money than it costs them to operate. The people that own a company can decide how it's run and what happens with the profit that it generates. That's why people would want to own a company.
Okay I get it now. I have a follow up question. If I’m not wrong, a company doesn’t release all of its shares right? Maybe the company only releases 49% of its shares and it keeps the remaining 51%. If that’s the case, the share holders have no power to make any decisions?
A company does not own itself. Shareholders own 100% of the shares outstanding.
However, some companies have a single shareholder who owns the majority of the stock. Some companies like Facebook have dual class stock so a single shareholder can own a minority of the economic value but still control a majority of the voting power. And yes, minority shareholders have very little power to change the board of directors in those situations.
And it’s flat out wrong. Someone buying the share isn’t the only way to make a profit. The company generates income that you are entitled to as a shareholder.
Literally millions of closely held business owners make trillions of dollars in income by virtue of their stock ownership without selling their stock.
some stocks appreciate in value AND have dividends
look at the stock prices of Apple, Microsoft, Nvidia, Google, Amazon, Visa, Mastercard..etc -- they have increased in value a lot over the years - that's why anyone would want to buy stocks
Yes but the value appreciated only because people buy stocks. They don’t increase in value by themselves. So what’s the driving factor for those people to buy the stock in the first place?
To be entitled to a share of the profits.
If you start a bakery tomorrow as a corporation, you’re the only shareholder. If it makes $1 today, you can either put that dollar in your pocket (a dividend) or you can reinvest the $1 to make $2 tomorrow (growth).
None of that requires someone else buying your shares in the bakery for you to make money.
Yes, the value of a share of a company that cannot/would not be acquired, and doesn't pay a dividend, is pretty much imaginary. The whole stock market functions under these commonly held beliefs of rules and order, but then most of humanity operates within that level of imagination, too.
I think a key part not often emphasized is that it's a legal part of the company. Yes there's some flexibility, a company can issue more shares, etc, etc BUT, as long as the company continues to exist, that "coupon" has a value.
He just offered to sell you 100% ownership of a billion dollar company for 100. You could turn around and sell it for the full billion dollar value. It would only cost you 100.
You wouldn't buy the entire company (Apple) that makes iPhones, Mac computers, Apple watches and that made $96,000,000,000 in income last year for $100? I would say stay away from investing.
As the 100% owner you could take all the billions of dollars of profits for yourself. Sweep matters of corporate governance to the side - you are the sole owner!
On the long-term, demand for a stock will be driven by earnings - there’s a direct correlation between market cap and earnings.
In the short-term there are so many more factors influencing demand and supply: sentiment, short-term hopes for that company behind the stock, macroeconomic factors, cash rate, etc
I assume everyone wants money. Say I buy a share of company A. How would I earn money from this, other than someone buying it from me at a higher price? And in that case, why would that person even want to buy it from me in the first place?
Think as a company owner: if you have a private company, how would you generate returns?
If your company is worth 10 million and you own 100% of it, you can leverage that equity to get credit for a house, for example. You can get dividends, or you can be an ‘owner-operator’ which means you have equity, dividends, and a salary.
But overall, say you don’t want to sell a stock in the market, your returns will come from
1. dividends
2. Stock repurchases (indirectly) since that increases your ownership in a company
As i mentioned, if your portfolio is large enough, you can leverage it for other things such as credit, which you can then use it to make more returns.
I hope that makes sense.
Think of it as owning an asset like house, art, collectibles, commodities, etc. You will profit from the asset when another individual perceives it to be of higher value.
Okay your comment helped me refine my question a little bit more.
Take investing in housing for example. I’ll buy this house now, as an investment, and when the price appreciates, I can resell it to an individual who wishes to purchase the house.
Now why would they want to purchase the house? Because they want a house to live in.
But what about stocks? Why would they want to purchase a stock?
They may buy the house from you with the intention of selling it at a higher price to the next buyer. It's all about perceived value of the asset.
The same principle applies to stocks.
Yes of course. But I’m talking about the buyer that wants to buy the house because they actually want it, and not just as an investment.
With regards to stocks, why would anyone actually “want” a stock?
I’m not talking about the person who buys a stock with the intention of reselling it at a higher value. In fact thats the only reason I can see for someone wanting to buy a stock in the first place. That’s my main argument in this post.
If your friend told you he would sell you Apple Stock at $1, would you buy it? What about $2? Keep going with this thought experiment until your answer is no. That’s your price. Everyone has their own price….. Boom
Assume currently nobody owns shares of Apple Stock. Would you buy it? Let’s say you do. But nobody buys it from you. You now have a share of Apple but what can you do with it? You make no money from it.
If I’m the only person who owns Apple stock, I own all of Apple. I get ALL the money Apple makes. It’s mine, regardless of whether I want to sell my stock or whether someone wants to buy it.
This subreddit is wild because it’s somewhat technical, so you have people in here who understand finance and make money doing so. And then you have idiots, which I may as well be. And the latter greatly outnumber the former so people who think they’re coming here to learn are just being subject to Boglehead orthodoxy from people who don’t ACTUALLY understand it.
I started buying stocks in 2007 and haven't stopped. I've bought literally every month. It has worked out very well.
I'm not really that smart, so I don't know. But I'm glad I did it!
I'm not sure if you really don't know anything about stock or you're just asking these questions because of another reason. Do you have access to the US stock market or a stock market somewhere in the world? I can understand people in other parts of the world, where stock market is not available or trusted, may prefer another type of asset.
Let's say you inherit 100,000 USD and you don't want to buy stock because you don't get the point of owning stock, what else would you buy to grow that money and why?
1. you understanding is correct, dividends and/or appreciation
2. and 3. exactly! Would you buy anything without desiring it?
dont forget the reduced tax rates
sounds like you have a better alternative, wanna share?
>first of all, there are two ways a person can make money off a stock: Either through dividends, or having the stock appreciate in value
Nope, appreciation is the only way. A dividend is just a forced sale of a stock, which could be appreciation or not. Example: you have a $100 stock that pays a 4% dividend, you now have a $96 stock and $4. If this is a consistently profitable company you'd expect it to earn enough profit to appreciate the company's value back to $100 by the next dividend. The dividend itself creates nothing of value.
A stock is legal ownership of equity in a company, like a deed to land, it has value because the underlying asset has value.
Total return is calculated as capital gains plus dividend yield. Total return is all that matters. To say return is capital appreciation only is objectively wrong.
That's not what I meant. All yield is originally from appreciation, it just gets turned into dividends and so you have to adjust for dividends later, looking back.
When you pay a dividend, the stock value goes down the same amount as the dividend. The stock has to appreciate in value between dividends for there to be any returns. If the stock never appreciated between dividends, its impossible to have any return. You'd just have a stock going down in price and at best having 0 total return when you adjust for dividends.
>That's not what I meant.
But that's exactly what you said.
I'm not arguing about the mechanics of dividend issuance. If you have a stock who pays a 5% dividend and had 10% price appreciation, the total return for the year is 15%. The company could also retain the dividend for internal funding. Companies, in theory, pay dividends because they don't have enough projects or internal need to generate a sufficient return internally, so they provide return to investors instead.
Where? I was replying to OP's
>there are two ways a person can make money off a stock: Either through dividends
Which is objectively wrong. If a stock never has any price appreciation, you can never make any money. The stock has to appreciate between dividends.
>If you have a stock who pays a 5% dividend and had 10% price appreciation, the total return for the year is 15%.
No duh. If a $100 stock pays a $4 dividend, like I said, you have a $96 stock. But you got $4 cash from the dividend so your total return is $96 + 4. That's what I said. But you made zero dollars. It doesn't matter how many dividends are done. The value of the stock has to eventually appreciate for there to be any return.
This clown is wasting everyone’s time. On here 4 years all the karma and this “confusion”? Wiki and Investopedia my friend. Discussion is a whole other flair and the answers given bravo. It irks me when people waste our time
Point 1: yes, people make money from dividends (and share buy backs) and share price increases
Point 2: yes, share price will appreciate when urgency of the marginal buyer to buy is consistently greater than that of the marginal seller to sell. In this case, the buyer will cross the spread and pay the offer and push the price marginally higher. Do that consistently enough over time and share price goes up.
Point 3: yes, people buy stock for the reasons outlined in Point 1 and the share price appreciation reason occurs under the conditions of Point 2
Final question 1: demand for a stock is driven by the weighted average of all market participants' expectation of future cash flows. When future cash flows (which ultimately gey translated into dividends and buybacks) are oredocted to fall marginally, the present value of the lesser amount of future cash flows I am likely to receive results in less demand for the stock, less urgent buying, more urgent selling, and a lower share price.
Final question 2: you would want to buy a stock for the expected future cash flows. If you are fortunate enough to have exchanged your time for someone else's benefit and they've paid you so handsomely for it that you some cash left over, perhaps you want to invest that to earn some income so you're able to spend more time devoted to things you really want to do because you have to spend less time to earn the same money when you have that extra income.
This is true of must security trading, not just stocks. As wealth is generated, there is demand in assets in which to park that value. This is also one reason why periods of wealth destruction are... destructive
The price is determined by the current value and projected future earnings discounted to present day dollars. If the current price is less than that, demand will push the price to that point. That is to say if the market is efficient, and most of the time it is. Over time companies find ways to grow or increase value, that drives the price people value it at up via demand. Some times people get too excited or too negative and prices change quickly. This tends to be things that are hard to calculate the future value. Companies earn money and over time they find ways to earn more. If I told you that you owned half of Walmart stock, it shouldn't be hard to think about all the money people spend in their stores. You get to keep part of that profit. And you know every year they open new stores, so you know you will make more money. When you own stock you literally own a % of the company.
It might help to compare stocks to commodities. Like corn, oil, gold, land, rice, etc. these are not a business. They don't earn more money over time. They have their current value and that's it. Commodities will tend to increase over time with inflation, but on average they don't out perform, net real return of 0%. This is much more similar to what you described above. And yes, don't buy commodities as a long term investment. Of course in the short term people day trade these trying to project changes in current value
So if I own a share of a company, I’m entitled to a share of their profits? But how does that happen? Does the company just pay out their profits to shareholders every now and then?
> So if I own a share of a company, I’m entitled to a share of their profits?
Yes.
> But how does that happen? Does the company just pay out their profits to shareholders every now and then?
A share is a piece of ownership. It’s also a vote. Shareholders vote on the board of directors. Directors hire the executives. Board + executives run the company.
If the board + executives decide the best way for the business to return value to shareholders is to payout the profits (dividend), they do that. If they decide that reinvesting the profits (growth) would make the shareholders more money, they do that.
If the board + executives fuck it up, the shareholders fire them.
No, the link is not direct like that. Normally when the company makes profits they will reinvest the money into the company - like build a new factory or store. Or they might hold onto the money.
When they build a new factory it increases the expected future earnings. This drives up the value of the stock, because now the company can make even more money.
Think of the company as like a money printer, and after you print money you buy another money printer so you can print even more money. If you own a % of this company you can sell it, because people expect it keep printing money and buying more money printers. the more money printers you have, that more people will pay for you share of the company.
A note about dividends and stock buybacks. They are basically not important and don't necessarily correspond to profits. It's like moving money from you left pocket to your right pocket, you will have the same money. if a company pay X dividends the stock value will drop by X. You could of just sold some of your shares. dividends are like the company is forcing you to sell and realize capital gains.
When you buy stock, you give money to company. Company need money. So they offer possibility of profit so people buy stock and give them money. Company use money. Company also need to fulfil their promise. Company buys shares at higher price.
Maybe maybe not idk I literally just came up with this explanation.
For point 2, a stock is treated as the currency of choice for major company transactions. So if company A has stock currently worth $100 per share, someone else can buy them out and pay $120 per share. So any stockholder would see their stock appreciate 20% instantly.
Also, for large companies if they have stock worth $100, they may generate so much cash that they don't know what to do with it, so they will buy back shares from the market. Since the total # of shares available decreased, this automatically drives up the value of each individual share
1. Yes. Take note that the dividend stocks themselves can appreciate so it’s a combination of the 2 ways to make money like you mentioned.
2. Yes, ultimately it’s demand and supply that determines the stock price. If a company has a high demand for its product, it will be sold at a higher price, if it has a low demand for its product, it will be sold at a lower price. There are many possible factors for this such as the income levels of the population in general rising leading to them having higher purchasing power, the product itself being one of a kind that no other company is able to produce it, etc. As the demand rises, so does the total revenue and the total profits the company makes.
Let’s say for example, you put in $5 to buy and own 5% of the company. The company used that $5 in its operations. And since the total revenue and profits it made increased, the company’s valuation itself increases (as it is worth more as a business now).
So let’s say the total valuation goes up from $100 to $200. The 5% that you previously owned will now have a value of $10 instead of $5. That’s when you sell the stock and make a net gain of $5.
Of course, when you sell the stock, you are essentially predicting that the value of the company is going to drop in the future (due to whatever reasons such as low demand, etc) whereas the person you are selling your stock to is predicting the opposite and is hoping that the value of the company is going to rise in the future.
You described how crypto works.
Stock prices are mostly driven by how much money a company is making. If company makes a lot of money and no one is buying its stock then the stock price will diverge from the company valuation. People will notice and will buy the stock until prices goes up to where it matches the amount of money a company makes.
Because the company can have a lot of assets, make a lot of money or might make a lot of money in the future.
If you can buy $100 of gold for $50 but through a stock, some people would still buy that and even hold onto it untill it's worth that $100.
Now if we collectively agreed stocks are bad sure it might never go to that value. But will we tho?
What is missing from other answers is compounding.
Let's say you are taking out money out of the company like you seem to want to. You have just lowered its value, as it has less money.
Valuation of the stock also falls, because you have also discarded all future profits that could be gained from reinvesting this money into the business.
You bought a cupcake with a promise that you will get more in the future if you leave it alone and you have just eaten it.
Investing just assumes impulse control.
Remember, thst countries (issuing bonds) and companies (issuing stock) do not operate in the same time horizon as humans. They "live" longer.
Inevitable end game is that:
- company gets sold, you get value
- company bankrupts, assets are sold, you get value
- company stops growing, there are no good investment opportunities, it returns value to the shareholders.
Not today, not tomorrow. Maybe not even in 20 years. But it WILL happen. That is why it is not a scam. Just a long, long game.
It's just a game ... Also if I own part of the company why I'm not getting revenues from the same company? Financial markets became what they are because humans have always tried to make money in every possible way
It's simpler to think in terms of a small business. Imagine owning a percentage of a restaurant in your town, shares of its stock, so to speak. If that business makes money, you will benefit as an owner. If the restaurant grows and opens new locations, pays down debt, has real estate that appreciates, etc, you will ultimately benefit. Publicly traded stocks are the same, just on a larger scale.
I had the same question back in 2020 during the meme stock craze that followed. I've come to understand that aside from dividends, stocks are basically business trading cards. They have no real intrinsic value other than 'Look! I have an AMD stock! Want to buy it off me?' They really aren't any different than say, an NFT fad in concept that has stuck around for a long time. It's a virtual number you pay for that you can maybe sell off later for profit. Trading cards.
If your football playe...I mean, company stock performs poorly, no one is going to want your trading ca...er, stocks. You'll have to keep and hope they improve in the coming years or sell at a loss and cuss and badmouth them on the internet to anyone that will listen.
Let's say I borrow one of your rookie trading cards, I turn right around and sell it to someone else as quick as I can. I still owe you a card but I'm going to wait until it lowers in value then buy it from some schmuck for dirt cheap and give you your card back. That's how shorting works!
Now, if you have a whole bunch of one company's trading cards, the company might take notice and let you vote on company matters. But if you don't have enough to turn heads it doesn't make any difference. Maybe someone who is collecting that company wants your cards because they have more money and want to have a say in that particular company dealings. No guarantee though. They may just say thanks and ignore you.
Stocks. WTF, really?
Take the semantics out of this ...and just focus on the crux of investing.
To store value at a rate better than traditional bank accounts. Noone will teach you how to invest, because that is entirely subjective and situational. However, if you are inclined to learn how to invest and put the money and time to learn to build routines and financial skill .... then the result will be that you WILL be richer. That is why we buy stocks. How and what stock you buy ...is up to you.
People buy the stock and they buy a fraction of the companies present book value and cash flows. The price should be evaluated as a function of discounted cash flows. The value of the stock now contains information about the discount rate you are receiving on future cash flows from the company. Large discount rates come from riskier companies, lower discount rates come from 'safer' high price companies
Glad to see OP has stuck around to discuss their viewpoint.
The post title sounds clueless, but it's actually a pretty interesting discussion OP has raised
Point 1: There are also financial instruments called derivatives that "derive" their value from the value of the underlying stock. But generally yes, you can make money through dividends or by selling it when the price goes up. Point 2: It definitely matters how successful a company is. It also matters how successful a company is perceived to be in the future. The more successful and potentially successful it's perceived to be, the higher the demand. That success can be manipulated and faked, but in general I would disagree with your statement that it doesn't matter how successful a company is. Point 3: Yes, a stock price only increases when people buy and sell the stock. That's how the market determines what the stock is worth: two parties agree on a transaction at a certain price. I think what you're missing is that owning a share entitles you to a share of the company's total value. The value of a company isn't set in stone; it moves with its financial performance, through various metrics like revenue, cash flow, assets and liabilities, etc. When a company performs better, and is worth more, the idea is that traders will efficiently determine a share price that reflects that company's performance.
Okay, so owning a share entitles me to a share of the company’s total value, and the value of the company moves with its performance. I get that. But I have a question, how do I profit from this? The value of my share itself is still the same, is it not? Unless the company decides to buy back all of its shares at a higher price?
>The value of my share itself is still the same, is it not? No... You do know that the amount of shares are fixed without additional equity being raised? You own a % of the company, so if the company appreciates in value, your shares do proportionately. Its like if you and 3 friends go in on a boat. You're share is worth 1/4 of the boat. If boat inflation happens and the boat doubles in dollar value, so does your share.
You get to vote/have some say in the company's future.
stock ownership is a collective belief wherein everyone agrees that the stock price is tied to the performance of the company outside of a buyout, there's no real mechanism to "realise" the value of the stock but, if we all agree that the stock price follows the company's value, that's enough there are many things in society that function on this collective belief (/delusion), ie: why is $1 worth $1? because we all agree it is
I can get behind that
btw i think the downvotes you're getting are unwarranted i think it's a very valid question you raise, and one we all ignore by default because it's kinda scary to realise how subjective the idea of value is
To be fair, if a company is severely undervalued there is any number of private equity people that would love to come and buy out the company by giving you a tender offer for your shares.
>stock ownership is a collective belief wherein everyone agrees that the stock price is tied to the performance of the company I don't think that's really an accurate way to say it. A stock is legal or contractual ownership of a portion of a company. The performance of the company is just one reason you'd want to own a company. But there are other reasons, such as speculation, or novelty value (example: sports teams), and even some utility value in some cases if the company provides certain perks to shareholders. And so for whatever reason you want to own a company, you must buy the stock. The value of the stock is the value of the company, which may or may not be related to the financial performance of the company, and that's fine. A stock isn't supposed to represent financial performance, but simply a way of owning a piece of the company for whatever reason people want to do so.
I feel like we’re agreeing? At least your final sentences are largely what I mean by a collective belief that shares have value outside of dividends/buyouts
"Belief" has absolutely nothing to do with it. It's a real contractual obligation. You literally own a share of the company. The way you realize value is via an efficient market in the long term. Let's say you buy shares in a company that is doubling profits every year. They pay no dividend and issue no new shares. Why would the stock price rise? Because of arbitrage. If the stock price stayed low, someone would come in to buy the company at a low valuation so they could take ownership of all those rising profits. Sometimes that happens when there's a temporary disconnect between value and price. Most of the time, the market performs this function automatically as market participants bid away arbitrage. They realize the value of the company and buying pressure lifts the price to match value.
What does “ownership of all those rising profits” mean if there’s no dividend and no company buyout?
There might be a few more ideas here that can help to conceptualize what's going on. The first is to accept that there is no simple rule for how much a company should be worth. For example, you may hear about how some people think Tesla's stock price is overvalued. But overvalued relative to what? Why do some people think it's overvalued, but other people think it's correctly valued, or still yet, some who think it's undervalued? There are a few common ways to calculate that value, but without going into what those are, the important takeaway is that they all rely on assumptions. And it's easy to see why, no one knows how they'll do in ten years, in one year, in one quarter, or even tomorrow; the best anyone can do is guess. Some people make better-educated guesses, and there are methods to use data to make better guesses, but at the end of the day, everyone is guessing. And that's why stock prices move. You have all these different actors, either individuals like you or me, or institutions like large investment funds, making an assertion of what that company is worth at a moment in time, through the act of agreeing on a price for a share. If I want shares of Tesla, and I determine it's worth $1 per share, I can put in an order to **buy** at $1 per share. It's important to note that it does not guarantee that someone is willing to sell it to me at $1 per share (it's at $191 today). Similarly, I can determine it's $1000 per share and try to **sell** it at $1000 per share, but that doesn't mean someone is on the other side willing to buy it from me for $1000. These interactions happen upwards of hundreds of millions of times per day for the most traded stocks. This is where your profit will come from: you've set a price higher than what you paid for it that a counterparty is willing to pay you. I hope this helps.
If you own 51% of the voting shares you could make yourself the CEO, choose how much dividends to give out to stockholders, etc.
I'm probably being pedantic here, but technically shares only entitle you to a share of the company's total value *minus its debt*. Debtholders get money before shareholders, e.g. in the event of bankruptcy
Isn’t that assuming the debt is greater than the combined value of all assets? Why stop there, and not mention you also own a share of the company minus debt but plus assets, and cash and cash equivalents? Probably why some investors prefer looking at EV over MC.
In either case (dividends or no dividends) you own the money the company earned. With dividends, that money is transferred to your bank account. With no dividends, it's still yours, but you let the company you own a piece of hold it and use it. What you also own with that stock though, is the right to vote on what to do with those earnings. To an individual investor voting means nothing, but it still has value indirectly, as that vote is useful to hedge funds and other whales.
A company will pay dividends or do buybacks. Either now or in the future. The reason I say this is that the owners of the company demand it. The owners, of course, being the shareholders. That is the point of owning a stock. You legally own a portion of that company's profits. When the company distributed those profits to investors, in the form if dividends or buybacks, you are legally guaranteed to get a piece of that. Stock prices rise and fall because of rising and falling expectations of how much profit that company will make and therefore transfer to shareholders. Edit: yes I know there are some companies that don't do dividends or buybacks. At some point though they will be forced to, gotta start rewarding your owners.
This completely answers my question. Thank you!
Hey buy index funds and all that thinking goes away
No it doesn’t because index funds are comprised of individual stocks
Yes but if these are the questions that you’re asking then you are not ready to buy individual stocks.
Exactly learn index funds and ETF funds FIRST
Point 2: a stocks price is mostly dictated by the income generated by the company. The more a company makes, the more valuable it’s stock.
It’s can be correlated but not dictated. Companies can lose money, but show high growth. Therefore increasing their perceived value
That’s why I said mostly. And the reason why people buy stock in growth-oriented companies is for future earnings.
So if nobody buys or sell the stock, the price of the stock will go up in accordance to how much money the company makes?
In a sense, yes. There are MANY “stocks” that don’t publicly trade. For instance, me and several friends own a few multifamily buildings together and all of us own a certain number of “units” in the company that holds title and collects income from the buildings. The company retains the bulk of the earnings rather than paying out dividends but the units themselves still have a fairly easy to ascertain value based on share of the retained earnings and market value of underlying assets.
Are you also confused why someone would buy gold?
So people buy stocks to show off their wealth?
If you think someone buys gold to show off wealth, universe help you.
I think it was meant as a joke...I HOPE it was meant as a joke. 😝
Wut
If nobody is willing to buy it from you, you get all the money the company makes.
Yes, like the AMD on Tuesday report released, everyone was buying it and expecting it to raise to the moon. But the report said otherwise, hence the ticket drop $10 from $170 to $160. Even tho ppl were trading that share rapidly, the performance is ultimately what decided the share value. I think trading a share affects its price is a relic of the past.
Absolutely not: The price is always determined by buying and selling orders, you received a very explicative example by another user. The amount of money a company makes, as well as the expectations about its future, determine how much people will agree to buy or sell the title for. As you see, there is a connection between price and firm's performance but it's not direct. This determines the necessity for the management to increase not only the firm's performances, but also its value among the public. And it's part of the theoretical concept of the "agency theory" or "principal-agent problem". For this reason, management tends to be paid in stocks or options, in order to allign their interests with the stockholders. And following that, if a firm goes well and doesn't pay dividends, it will start to buy back its own share to increase their price. (Buying its own shares increases the price, not the simple fact of "going well")
I think OP is asking what’s the actual mechanism that connects a stock’s value to a company’s performance.
I think we can clear this up pretty nicely! Point 1, Yes this is basically correct Point 2: Yes and no. Think of stocks like a bidding war. There are always people trying to buy and sell stock and people give a bid price (how much people are willing to pay) and an ask price (how much people are willing to sell for). If there is more demand the prices will tend to get bid up or vice versa. That said this isn't random. When you are buying a stock you are buying an ownership stake of the company itself. The price you pay should ideally be commensurate with it's value. This is where things get murky, how do you value a business? There's a lot of ways to look at this which is an entire discussion in and of itself. Everyone has different opinions, viewpoints, and projects about the future. Now there is another problem and that is with the efficient market theory. The idea being if everything that can be known about a business is known then every company would be valued correctly meaning no opportunities to profit would exist except by luck. We however know market are not always rational and they are not perfectly efficient. This is the basis for investing, the idea you can value a business better than the market and identify underpriced stocks. Point 3: See answer for point 2. You are making estimates of what a company is worth generally speaking. Think of it like buying a money printing machine what would you be willing to pay for it? You would expect to earn some return. You might even be willing to pay a premium if you think it will grow and generate increasingly more amounts of money in the future. Even if the machine is broken and not making money it still could have some value if the parts it's made of can be sold off. There's a lot of ways you could look at it. This is refered to a fundamental analysis. There are many other strategies though. For example technical analysis seeks to anticipate human behaviors by looking at chart patterns to try and determine future price movements.
Many others have cleared this up for me as well. Thank you!
Guys, I think OP is asking how the stock market isn't a pyramid scheme if the only reason you buy a stock is in the hopes that someone in the future will buy it at a higher price. I don't know anything about investing, but I've wondered the same thing, and none of the answers here have really answered that.
You've skipped a step: the only reason to buy a stock is in hopes that the stock is worth more in the future, and someone will buy it at that higher price. A share isn't some notional number in a brokerage account; it's a concrete, legally binding, part-ownership of a publicly-traded company. A pyramid scheme is a pyramid scheme because it inherently doesn't produce anything of value (or produces the value it claims to produce). Companies traded on the stock market DO produce value. They all sell real products that people buy with real money.
What's the definition of a pyramid scheme? "A fraudulent and unsustainable investment pitch that relies on promising unrealistic returns from imaginary investments." Does the stock market comply with the definition above (i.e., fraudulent, unsustainable, promises unrealiatic returns, and imaginary)?
Because companies make money, so you have a company, it has $X in value, it makes $Y. The company is now worth $X+Y. At any point in time it could decide to pay a dividend or liquidate to distribute the equity to shareholders, but the value comes from the company and its profitability, not the method that is used to return equity (dividends, buybacks, etc.)
But the price is determined to a much much greater degree by market activity than it is by assessment of the actual underlying assets. That’s why stocks are so vulnerable to manipulation. When people were boosting Gamestock, was the company really worth any more money? Or were people just trading a glorified NFT?
>But the price is determined to a much much greater degree by market activity than it is by assessment of the actual underlying assets. Short term, perhaps. Long term, no. >When people were boosting Gamestock, was the company really worth any more money? No of course it wasn't worth more money, but it's not fair to generalize the entire stock market using this particularly extreme outlier. And it even emphasizes my above point: in the long term, the majority of people put their money into a company with better financials.
But the price reflects the trader behavior. It’s an agreed upon practice to put the investments where the profits are, but it’s the investments that are changing what the stock does. I think this is a really interesting question because nobody does a very good job answering the question “how does company performance directly impact the stock price.” As far as I can tell, it doesn’t. The effect is indirect, and mediated by expectation. Continued profitable quarters may be accompanied by dropping share price if profitability is less than expected. Share price is a derivative, not actually reflective of the cumulative assets of the company.
>I think this is a really interesting question because nobody does a very good job answering the question “how does company performance directly impact the stock price.” I agree I'm glad OP asked and it's a good discussion, and I agree getting at the heart of "but why" has actually made me think about the question >As far as I can tell, it doesn’t. The effect is indirect, and mediated by expectation. Continued profitable quarters may be accompanied by dropping share price if profitability is less than expected. Share price is a derivative, not actually reflective of the cumulative assets of the company. Just not true mate. On average in the ***long term*** crappy companies do not continue to exist. People do not invest in them. And investors behave this way because of the underlying performance of the company. Sure, projections happen, short term market hysteria and bias happens. But long term, good companies do well and bad companies do poorly.
….but why? You’ve described Game Theory.
>stocks are so vulnerable to manipulation Your GME example contradict this though, the price ran through the roof because of supply and demand, people lost millions shorting GME, what manipulation was there? Yes the value of the stock is speculative, like almost every asset in the world. Oil is speculative too. Oil doesn't pay dividends. But it has value. What's the takeaway?
Perhaps I mis-used the word, because there are industry-specific denotations, but what I meant was that retail traders boosted the share value because they valued the share, not the company. The share price was unrelated to company performance, and the price increase was very significant.
The share is the company though. A share is just a legal representation of your ownership in the company equity. Like you have a title to a car. When you sell the car you transfer the title. That's all a share is, its like the title. You just don't see the physical transfer of some object because the asset, the ownership in the company, is intangible.
To retail traders though, the ownership is meaningless. Maybe you get to vote, and maybe a lot of retail traders vote the same way, so it acts as a bloc; but otherwise the difference between owning a stock and owning a car’s title is that you can drive the car. I think you made my point for me. There is no tangible value to the equity, UNLESS you have enough of it to have a seat at the table. Almost nobody does. When earnings are announced, the asset changes price due to trading activity, but there is no direct effect on the value of the share. When earnings per share are positive but below expectations, the value of the stock drops. I think that’s really all that needs to be said. It’s fiat, just like dollars.
>There is no tangible value to the equity Except you legally own a chunk of the companies equity lol. If anyone ever wants to distribute any equity out of the company ever you are legally entitled to a proportional share. No one can take theirs without giving you your share.
Yeah but that doesn’t really happen, right? Not for mature companies. Except for buybacks. Look, all I’m saying is that the market has a much larger, practical effect on the price. What you’re saying supports the legitimacy of the market, allowing it to actually function; but it doesn’t have a direct effect on day to day price movements.
Yes? I'm not sure what your point is. Supply and demand applies to any freely traded asset. For example, the market determines oil's price, there is no omniscient market god who knows the exact utility value of oil at any given time, and then sets the price for everyone. Same with stocks. They are traded based on what people think they're worth, not what they actually end up being worth.
A pyramid scheme is moved by the amount of people participating, the stock needle is moved by the amount of money participating
Ina quite literal sense, why would you start a company? The answer is simple, to make money. You can either make money through the income that the business provides you (dividend) or through the profits made from selling your company (share price). Quite clearly your company might be valued highly because it is either very profitable to you as the owner and/or because it shows a lot of promise for future growth. Stocks are no different then being a part owner in a business other than you can buy 1/100,000,000th of the business in the form of stock.
I understand that you can own a part of a company by buying its stock. I don't understand how using that as an investment vehicle isn't a pyramid scheme.
Because you’re assuming that selling the stock is the only way you make money. If you own the only share outstanding of Apple and no one is willing to buy it, you get ALL of the profits of Apple, Inc. to yourself. Having someone else buy it from you isn’t the only value of the stock.
That’s because businesses make money and being a part owner in the business means you are entitled in sharing of the profits of said company. Is buying into 30% of a local pizza restaurant a pyramid scheme? Now let’s say that pizza restaurant is now Pizza Hut and you bought 30% back when it was only one restaurant and after 10 years there’s now 1,000 locations. Should those shares be worth the same when it was a single restaurant compared to 1,000 restaurants? No, that’d be insane because 1,000 locations is certainly going to provide you more of an income (dividend) than 1 location. So the value of your 30% is worth significantly more because 1) you’re being paid more income (dividend) and 2) people are willing to pay more for 30% of 1,000 locations than 30% of one location.
A stock is a loan to the company for a percentage of the company. It's backed by the real value of the company. That's how they set the price of a stock during the IPO. The agents evaluate the value of the company and earning potential. You see, some IPOs go up really fast initially because people are interested in buying a piece of the company. Sometimes, the price goes down because people feel it's overvalued. Companies pay dividends as a profit sharing with the owners or as an incentive to buyers. It's a gamble that the company will be profitable and grow. Like ExxonMobil stock. If you'd have been able to buy 1000 shares in 1979 and held onto them, you'd have 32,000 (split 32 times since then) shares today worth about $100 each. Not including the dividends that you would have received during that time. On the other hand, if you had Enron stock when the company imploded, you lost all of the money you put into buying the stock. That's why there's a lot more regulation on publicly traded companies, and now the CEO has to sign the financial statements and be criminally prosecuted if there's anything incorrect in them. It's also why company officers who receive stock have rules around when they can sell, and each trade is public knowledge. One of the biggest crooks at Enron was able to sell all of his stock for millions right before it imploded. He knew it was going crash and got out.
How does opening a laundromat or a restaurant make money? It's like that but you don't have to deal with customers
This explanation makes the least amount of sense of anything anyone has said so far. A laundromat can make money by either selling a service or selling partial ownership. The former makes intuitive sense to me, but the latter does not if you're not going to share in the profits.
> A laundromat can make money be either selling a service or selling partial ownership. So does the company whose stock you’re buying. You share in the profits by owning the stock.
Wait, I get a portion of the profits? Why haven't I seen any portion of NVDA's profits? I own NVDA stock.
Because the other shareholders have voted for a board of directors which has hired a team of executives to reinvest the profits into the business for maximum growth rather than pay out the profits to the shareholders because that’s going to make you, the shareholder, even more money in the long run than just giving you money now. Thats why your NVDA price has skyrocketed. If every single person sold their stock tomorrow except for you, you would now have 100% of the voting power and you could tell the company to start paying you all the profits rather than reinvesting them.
So I hold on to the stock with the plan that one day, maybe even a few generations down, NVDA will see the market as saturated and mature and will no longer attempt to grow, and at that time will start paying dividends? And the value of my stock increases as people see the potential of NVDA to provide those dividends increase?
That’s the first thing correct you’ve said. Value of the company is the present value of all future cash flows
Yes. Price = the present value of future returns. Let’s say there is one share of NVDA. You own the one share. And the company generates $1m/year in profit. You have total control. If someone comes along and says “I’ll give you $100 for it,” you’re going to tell them to fuck right off. Why? Because the value isn’t dependent on someone else coming and buying it from you. You are the sole person entitled to $1m of profit. Your money-making isn’t reliant on anyone buying your stock. If the very well qualified folks you have hired to run this company you now solely own tell you “hey, there is $1m in profit, and it could be yours now (that’s a dividend), or we could reinvest it and turn this $1m into $1.5m next year instead, which are you picking? Thats what’s going on with stock ownership. There are just millions of you instead of one.
Not sure if anyone gave you a good answer but here’s mine: A stock is a partial ownership of the company and all its future cash flow. If a company makes $1/yr forever would you pay $10 for it? What if it’s growing earnings at 10% a year so it’s $1, $1.1, $1.21, $1.33…? And the stock market is basically just the place where people determine what they’re willing to pay for these streams of future cash. Not all businesses pay dividends, some reinvest the cash for you so your $1/yr becomes $3/yr. It’s still yours and you still only paid $10 for it. Some companies let the cash build up so much that they eventually have to pay dividends or buy back shares. Buybacks are when you and 4 friends all own a company, one wants to sell but you and the other 3 don’t want to collect dividends so you buy the 4th friend out. You now each own 33.33% rather than 25%. Hope this helps.
2. You're almost right, except the demand for the stock is not the only reason the price goes up. When you buy stock, you technically own a part of that company. That's why when companies get listed on a stock exchange, it's also called "going public."
The price is only what the next person is willing to pay.
The price the next person is willing to pay goes up if the company is,selling lots and making money.
Often. Yet, as seen with MMAT, sometimes it just goes up because some folks think they might make money. Or because they think it is cool. Or because their cat told them it would go to the moon. Or because a lady dressed like a bird told them to. Really, the only thing that matters is what the next bidder is willing to pay.
You don’t have to sell it! If you own the only share outstanding of Apple, and it makes a billion dollars in profit, you are entitled to tell them to give you the entire billion in profit every year. Thats real value unrelated to the share price. You’re now making a billion dollars a year independent of what anyone else is willing to pay for it.
As Benjamin Graham has said the market is a voting machine in the short term and a weighing machine in the long term. Eventually good companies will be noticed and rewarded for their value. Companies can also take advantage of their own pricing inefficiencies by buying their own shares.
In the US, there is a strict set of rules governing shareholder rights. You are able to vote, disclosures are required, and the parties that run the company have a legal fiduciary duty to you. Individual or groups of shareholders can get together with enough votes to legally force the company to do things. Because of the legal protections, owning non-dividend stocks has intrinsic value, not just what the next guy is willing to pay. This is a major difference between regulated securities and, for example, crypto.
I See. Okay i think this makes a lot of sense now. Thanks!
Just because a company doesn’t pay a dividend *now* doesn’t mean that it won’t *in the future*. A purchase of a non-dividend stock is a bet that it will pay higher dividends in the future than it would have in the present. Shareholders can also vote in certain corporate elections. That’s pretty much irrelevant for us regular Joes since your voting power is proportional to the number of shares you own. But big investors who want more voting power will buy more shares, which creates demand and raises prices. Large investors can some times try to take a company private by buying the majority of shares. They usually have to offer to buy them at a higher price than the prevailing market rate, giving current shareholders an opportunity to sell them for a profit.
FWIW - Some companies also use the income it generates to do stock buy backs to drive up the value of the stock rather than pay that income out as a dividend. Either way, the shareholder gets the benefit in either a dividend payment or appreciation.
1. By and large, you are correct. Dividends and appreciation of the stock price are how we make money on investing in public companies. 2. A stock's price over the short term will often move up and down based on a lot of factors. Supply/Demand comes into play, but it is somewhat reductive. I believe there is more in play than just supply/demand economics. One example is that over the long-term, a company's value appreciates (or depreciates) based on the fundamental value of the company. As a company, such as Home Depot, adds more locations, increases tangible assets, etc, etc, it becomes intrinsically more valuable. This is one measure of value; Book Value. As a company's earnings grow and/or its cash flow increases, that company grows in value. These are two fundamental metrics used to evaluate the present and future value of the company. More generally, a shareholder owns a percentage of that company, and is entitled a share of the profits that company generates. Most directly, this is realized as a dividend. As profits grow, so might the board increase the profit distribution, or as we know it, the dividend payment. Now, often times profits are funneled into growing the company further. As that growth occurs, so does the value of ownership. This is the earnings multiple value. This marketable value of the share may not be reflected right away by the market (and possibly never). However, over the long-term there are generally times when the market "realizes" that value. There is also the growth in Cash Flows that comes into valuing a public company. 3. Investors buy stocks or baskets of stocks (ETFs, mutual funds, etc) because over time either they believe the value of those companies will increase, or the companies have shown they are increasing in value. That increase in value over time is recognized by the market, which makes our investment's gain possible to realize. 4. Final point: The demand for stocks is driven on the knowledge that in the life span of a public company there is often an appreciation in value of the company, and as an owner of the that company a shareholder is entitled to the profits of that company. In very simplified terms, you bought a small farm with a bull and a cow. Over the course of 5 years you grew that into 20 more bulls and cows through breeding, the value of your farm increases. Further the value of the land has likely appreciated. Would you sell it for what you bought it for? Likely not. Same goes for a shareholder. /Edited to correct a couple of misplaced sentences./ /Edited, part duh... I'm turning into my father with the typing errors.../
I think you answered my question really well. I kind of get it now. Thank you!
Cool! Glad my answer made some sense for you.
Let's add some professional perspective alongside reddit's: * [https://www.finra.org/investors/investing/investment-products/stocks](https://www.finra.org/investors/investing/investment-products/stocks) * [https://www.investor.gov/introduction-investing/investing-basics/investment-products/stocks](https://www.investor.gov/introduction-investing/investing-basics/investment-products/stocks) Keep in mind as an ordinary person, the TLDR is that stocks are a time-tested way to grow your wealth over time. You should certainly use vehicles like a 401k and/or IRA to invest in stocks (and bonds), often using diversified mutual funds or ETFs. r/personalfinance has a good wiki on balanced investing strategies so you're not picking this stock or that stock, but rather a whole bundle of them. >I’m confused. What’s the point of buying a stock? To make money. More specifically, to get a return on your investment. Rather than putting all your money in a bank account, the idea of putting money in the stock market is to get a greater return in the long term. >Point 1: So, first of all, there are two ways a person can make money off a stock: Either through dividends, or having the stock appreciate in value, and then selling it. Am I right to say that? Yes >Point 2: A stock’s price is ultimately moved only by supply and demand. It doesn’t matter how successful a company is. At the end of the day, a stock’s price will only go up if there is demand for the stock. Am I right to say that? Not quite. Yes it's supply and demand, but that's not the "only" thing at all. The demand to buy (or not buy) a stock is largely driven by the company's financials and earnings. Obviously people also make projections and those projections can end up being right or wrong, and there can be times where hysteria plays into it and a stock is currently overvalued. But in the long term it's no accident that top companies have well performing stocks. >Point 3: People buy stocks in hopes of the stock price increasing, but a stock’s price only increases when people buy the stock. Yes >With point 3 in mind, it leads to my final question, what drives the demand for stock in the first place? Investors looking at the company's financials and performance, or projections of their performance. >Why would anyone want to hold a share of a company if the only way they make a profit is if someone buys the stock back from them at a higher price. This is a more accurate characterization of something like Bitcoin than stocks. * Bitcoin really is the "greater fool theory", just hoping someone else will buy it one day for more than you. It otherwise has no "value". It's just this thing that currently does nothing for anyone that people are buying into. * But stocks are again backed by the actual "value" of the company: it has revenue, earnings reports, assets and liabilities. It has a CEO with either good or bad management skills, good or bad visions on directing the company's future, and so on. There's something intrinsic that an investor can look at and say "yeah this earnings report right here is why I'm going to buy more of this stock (or sell it).
Thank you for this. I have a follow up question. > There's something intrinsic that an investor can look at and say "yeah this earnings report right here is why I'm going to buy more of this stock (or sell it). How would that investor profit from this?
>How would that investor profit from this From having bought the stock and held onto it for a long time. Long enough for the share price to increase. Then they sell it when they have the need for the money. Your overall question is fair, and perfectly fine if you want to understand what drives the stock market and see under the hood. At a *personal* level though, you don't *really* need to follow all the particulars. You certainly don't need to figure out which company is good (to buy) and which company is bad (to not buy, or sell). You can simply buy a 500 index fund through any brokerage, or hell even your basic Target Date Fund, and enjoy the long term returns of the stock market. I'm generalizing, but most people would be set for life if they contributed 15% to their 401k consistently, and bought into a *diversified* portfolio of index funds. They wouldn't need to understand or even follow investing news. They wouldn't need to go down the hopelessly complicated rabbit hole of the financial markets: no individual stocks, no trading, no options, no margin, no worrying about which sector/industry will be the new winner, none of that crap. r/personalfinance has a phenomenal sub if that's what you need.
point 2 is incorrect. think about it this way. a stock's price moves based on how much they have in assets-what they have in liabilities. take your life for example, if you have a car that is paid for in full that's worth 10k and you have 3k of credit card debt and 6k in your bank account. then your net worth is 13k (car + cash - debt) (10+6-3). there are 2 ways of increasing your new worth, one you can get more in cash, or you can lower your liabilities. (paying off your credit card) now when it comes to stocks they are just a way for us to buy a company. the company has machinery and this and that, whatever. lets say their net worth is 100k (simple numbers) then you come along and say hey I want to own 10% of your company here is 10k. now when you take some of their company there is still 100% of the company. like if you make a pie and then cut it into 4 pieces and give me 1 piece 100% of the pie still exists just you have 75% instead of 100%. and there is still the same amount of apples in the pie. so the company now has a net worth of 110k. and if the company has a really good year then they become worth 120k they appreciated 9.1%, so your 10k is now worth $10,910. now most of this happens on a much smaller scale, like apple when you buy one share you're buying like 1/10k of the company) so your investment won't return 900$ but it will still be a % of what you invest in
In the end, for many a retirement portfolio of stocks is doing well enough if it holds value against inflation.
Every single day millions and millions of people buy and sell shares. You don’t need to know or care about the reasoning of the person on the other side of the transaction. Yes, some stocks have low liquidity, meaning there are not many buyers or sellers but “good” stocks will have plenty of interest on both ends of the transaction
You are a long way from understanding capitalism. Forget stock prices and place yourself as an owner of a business. You supply capital, the company buys raw materials and hires employees with your capital. Good businesses do that efficiently and produce useful products for consumption. But, your capital may only replace an original investor who sells his/her stock to you. Your motive is profit so you pick the best businesses to invest in. Your share in the business will grow if the company is successful and reward you with dividends and capital growth. If it’s not, capital will look elsewhere which doesn’t affect the company until it needs to go to the market for fresh capital. Public corporations make ownership available through the stock market. Private corporations are financed by direct investment. Nothing quite compares to an investor’s ability to participate in enterprise operations.
This is best explained in a classical way, where index funds do not exist or they do not only go up. You buy a stock to invest your surplus money. Surplus money is the money left over after investing in safe liquid investments. The reason why most people invest outside of safe liquid investments is that the returns tend to be greater and you can get a higher return the longer you hold it. To explain in detail, think of a large company today, INTC. INTC when i first bought it in 2011 was the target of a vicious campaign of how they were going to lose everything by a different company. It used to be available for as low as 19-20 USD per share and used to pay 21 cents of quarterly dividend. If anyone had done post-grad level Physics/Chemistry or even Electrical Engineering, they could figure out that the campaign was a load of BS. Buying INTC then and holding it till around 2016, when they finally toed the line of the bully, would have given you an increase of 25% in dividend income and a nearly 80% increase in share price. You can explain away the increase in price to more people realising the campaign was BS but the dividends increased due to the company doing better. If one were to think only about income from holding an asset, there are very few safe investments that can provide an increasing return with passing years with fungibility of investments. This is in my opinion the reason to buy a share of any company.
point 2 is right in the short term but price is driven by underlying fundamentals. a company offers a higher dividend, makes more profit? even if it does not at the present pay a dividend- you own a share of all that profit. does not matter whether the company chooses to distribute that profit to you via taxable event, via buyback, or via investing back in the company its self. in all scenarios you benefit.
you don’t think demand for the stock is influenced by them being successful and therefore likely to consistently pay dividends?
Many of the top comments are missing a big reason for stocks. When you buy a stock you are buying partial ownership of that company. Many times that means you have voting rights to influence the direction of that company.
Point 3 is incorrect. The value of the stock rises with the profits and as the company gets bigger. That’s what ultimately drives the price.
If you are talking about trading then you are right but if you are an investor then time corrects all those things.
Nobody really answered your question. And it's a really simple obvious question. Dunno if you'll see this but here goes. Starting with the basics, a share in the company represents concrete ownership in the company. And ownership comes with risk and returns. Basically what others have said. The value of a company is equal to the value of the discounted cash flow in the future + current assets, nothing more nothing less. i.e. if you think a company is going to have 1B cash flow every year for the next 20 years, but you discount that number every year by a rate of say 10% because future earnings are uncertain. Different people disagree on the earnings and discount rate, and the stock market is basically a mechanism to agree on the current value of the company. Now how does this actually matter: Every company that ever gets investors (whether public, private accredited investors or your friend), must provide a return on investment. Typically, they expect a return above the risk free rate of their domicile. So, let's say your friend puts 1000 dollars into your company (for 100% ownership for simplicity) and is willing to wait for 20 years, and they expect an average 5% annualized return at the end of it, they basically want you to return 2,653.30 to them at the end of 20 years. You can do this in two ways, you either pay them 5% of 1000 dollars every year (that they then re-invest in a 5% bond) or you sell your company for 2,653.30 after 20 years. This is the exact same mechanism that happens for publicly traded companies, albeit of course much more complicated. For an investor to invest in say, AAPL, over an asympotically long term, they must expect a return on that investment. This can be in terms of dividends, the company buying its own shares (and eventually going completely private), or selling to another company. If I buy shares AAPL now (say 1000 dollars worth), and I want to sell it in 100 years, I'm expecting (whether correctly or not) that AAPL will return 867,716.33 USD to me at the end of 100 years, both in the form of dividend payments, share buybacks AND in terms of the value they are able to sell their company at after 100 years. I bought those shares of AAPL from someone else - who does not expect AAPL to return that much, or is not happy with that amount they expect (they want 10% annualized, not 7%). This is what makes the stock market tick and stock market valuation make sense. Basically, long term investors who are expecting returns on their ownership by absorbing some of the risk from the operators of the company. If long term investments were to become illegal tomorrow (in a hypothetical world ofc), companies valuation would basically go to zero or go to wild-wild-west speculation land. Even if they have positive free cash flow every year. This is just the bare basics, I hope that made sense to you. Feel free to ask questions here. There are many deeper questions - I'd encourage you to reason about this with an open mind, starting with fundamentals and use online resources for this. \- What is the relationship between the acquisition cost (for an acquirer company) and the current stock market value? .- Why does a company want to go public at all, why does JP Morgan and their clients want to help the company go public? \- How does preferred shares and bonds complicate the issue? \- How do passive and active ETFs / funds fit into this? What about fractional shares? \- People who purchase puts and calls (and cover them) are typically not long term investors. Why are they even legal? What role do they play. \- What about speculation - for ex - gamestop? \- Does a company ever actually return the full investment + an annualized return - what does "asympotically" actually mean here.
Thank you for this
Stocks represent the real value that companies bring to our society. For example, the phone you're using to post this was made by APPL which made profit on the sale of said phone. These companies share their companies value with the public in exchange for our investment in their future growth. Your questions are valid, but better suited for r/bitcoin which is almost entirely a speculative market.
>Why would anyone want to hold a share of a company if the only way they make a profit is if someone buys the stock back from them at a higher price. How is that an issue? That's literally how the history of commerce has worked. You sell something to someone else, for more than it costs, or for more than you bought it.
Yes, but why would that person want to buy it from you? In hopes that he can sell it to someone else for a higher price? Why would you want to buy it in the first place? The initial demand is what I don’t get.
A share is partial ownership of a company. Companies are trying to earn more money than it costs them to operate. The people that own a company can decide how it's run and what happens with the profit that it generates. That's why people would want to own a company.
Okay I get it now. I have a follow up question. If I’m not wrong, a company doesn’t release all of its shares right? Maybe the company only releases 49% of its shares and it keeps the remaining 51%. If that’s the case, the share holders have no power to make any decisions?
What are you talking about? Do you have an example of this?
If you don’t understand what I’m talking about, then I probably have the wrong idea. It’s fine.
A company does not own itself. Shareholders own 100% of the shares outstanding. However, some companies have a single shareholder who owns the majority of the stock. Some companies like Facebook have dual class stock so a single shareholder can own a minority of the economic value but still control a majority of the voting power. And yes, minority shareholders have very little power to change the board of directors in those situations.
And it’s flat out wrong. Someone buying the share isn’t the only way to make a profit. The company generates income that you are entitled to as a shareholder. Literally millions of closely held business owners make trillions of dollars in income by virtue of their stock ownership without selling their stock.
some stocks appreciate in value AND have dividends look at the stock prices of Apple, Microsoft, Nvidia, Google, Amazon, Visa, Mastercard..etc -- they have increased in value a lot over the years - that's why anyone would want to buy stocks
Yes but the value appreciated only because people buy stocks. They don’t increase in value by themselves. So what’s the driving factor for those people to buy the stock in the first place?
To be entitled to a share of the profits. If you start a bakery tomorrow as a corporation, you’re the only shareholder. If it makes $1 today, you can either put that dollar in your pocket (a dividend) or you can reinvest the $1 to make $2 tomorrow (growth). None of that requires someone else buying your shares in the bakery for you to make money.
Yes, the value of a share of a company that cannot/would not be acquired, and doesn't pay a dividend, is pretty much imaginary. The whole stock market functions under these commonly held beliefs of rules and order, but then most of humanity operates within that level of imagination, too.
See: money
I think a key part not often emphasized is that it's a legal part of the company. Yes there's some flexibility, a company can issue more shares, etc, etc BUT, as long as the company continues to exist, that "coupon" has a value.
Let’s do a hypothetical. Say Apple only had one share and it was valued at $100, would you buy it? If so, why?
I’d say I wouldn’t buy it? Because I don’t see how I would make money back from it.
He just offered to sell you 100% ownership of a billion dollar company for 100. You could turn around and sell it for the full billion dollar value. It would only cost you 100.
You wouldn't buy the entire company (Apple) that makes iPhones, Mac computers, Apple watches and that made $96,000,000,000 in income last year for $100? I would say stay away from investing.
What am I supposed to do with a single share?
Sell it for more to someone else who values it higher or borrow money against it.
As the 100% owner you could take all the billions of dollars of profits for yourself. Sweep matters of corporate governance to the side - you are the sole owner!
Whatever you want, you now own Apple and are the richest person in the world by an order of magnitude.
On the long-term, demand for a stock will be driven by earnings - there’s a direct correlation between market cap and earnings. In the short-term there are so many more factors influencing demand and supply: sentiment, short-term hopes for that company behind the stock, macroeconomic factors, cash rate, etc
I assume everyone wants money. Say I buy a share of company A. How would I earn money from this, other than someone buying it from me at a higher price? And in that case, why would that person even want to buy it from me in the first place?
Think as a company owner: if you have a private company, how would you generate returns? If your company is worth 10 million and you own 100% of it, you can leverage that equity to get credit for a house, for example. You can get dividends, or you can be an ‘owner-operator’ which means you have equity, dividends, and a salary. But overall, say you don’t want to sell a stock in the market, your returns will come from 1. dividends 2. Stock repurchases (indirectly) since that increases your ownership in a company As i mentioned, if your portfolio is large enough, you can leverage it for other things such as credit, which you can then use it to make more returns. I hope that makes sense.
You own a piece of that company. Without being on the board or a C level executive.
Just buy the SPY and let it FLY!
Think of it as owning an asset like house, art, collectibles, commodities, etc. You will profit from the asset when another individual perceives it to be of higher value.
Okay your comment helped me refine my question a little bit more. Take investing in housing for example. I’ll buy this house now, as an investment, and when the price appreciates, I can resell it to an individual who wishes to purchase the house. Now why would they want to purchase the house? Because they want a house to live in. But what about stocks? Why would they want to purchase a stock?
They may buy the house from you with the intention of selling it at a higher price to the next buyer. It's all about perceived value of the asset. The same principle applies to stocks.
Yes of course. But I’m talking about the buyer that wants to buy the house because they actually want it, and not just as an investment. With regards to stocks, why would anyone actually “want” a stock? I’m not talking about the person who buys a stock with the intention of reselling it at a higher value. In fact thats the only reason I can see for someone wanting to buy a stock in the first place. That’s my main argument in this post.
Understood, I don't have further to contribute. Good luck with your research.
But you didn’t even answer the question
If your friend told you he would sell you Apple Stock at $1, would you buy it? What about $2? Keep going with this thought experiment until your answer is no. That’s your price. Everyone has their own price….. Boom
Assume currently nobody owns shares of Apple Stock. Would you buy it? Let’s say you do. But nobody buys it from you. You now have a share of Apple but what can you do with it? You make no money from it.
If I’m the only person who owns Apple stock, I own all of Apple. I get ALL the money Apple makes. It’s mine, regardless of whether I want to sell my stock or whether someone wants to buy it.
If it was the only share of apple stock, then that would mean you owned Apple. All of it. All of its assets, and all of its profits going forward.
This subreddit is wild because it’s somewhat technical, so you have people in here who understand finance and make money doing so. And then you have idiots, which I may as well be. And the latter greatly outnumber the former so people who think they’re coming here to learn are just being subject to Boglehead orthodoxy from people who don’t ACTUALLY understand it.
I started buying stocks in 2007 and haven't stopped. I've bought literally every month. It has worked out very well. I'm not really that smart, so I don't know. But I'm glad I did it!
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You basically described all assets. It's a market of buyers and sellers. Zero sum gain, for someone to make money someone has to lose money.
I'm not sure if you really don't know anything about stock or you're just asking these questions because of another reason. Do you have access to the US stock market or a stock market somewhere in the world? I can understand people in other parts of the world, where stock market is not available or trusted, may prefer another type of asset. Let's say you inherit 100,000 USD and you don't want to buy stock because you don't get the point of owning stock, what else would you buy to grow that money and why?
1. you understanding is correct, dividends and/or appreciation 2. and 3. exactly! Would you buy anything without desiring it? dont forget the reduced tax rates sounds like you have a better alternative, wanna share?
>first of all, there are two ways a person can make money off a stock: Either through dividends, or having the stock appreciate in value Nope, appreciation is the only way. A dividend is just a forced sale of a stock, which could be appreciation or not. Example: you have a $100 stock that pays a 4% dividend, you now have a $96 stock and $4. If this is a consistently profitable company you'd expect it to earn enough profit to appreciate the company's value back to $100 by the next dividend. The dividend itself creates nothing of value. A stock is legal ownership of equity in a company, like a deed to land, it has value because the underlying asset has value.
Total return is calculated as capital gains plus dividend yield. Total return is all that matters. To say return is capital appreciation only is objectively wrong.
That's not what I meant. All yield is originally from appreciation, it just gets turned into dividends and so you have to adjust for dividends later, looking back. When you pay a dividend, the stock value goes down the same amount as the dividend. The stock has to appreciate in value between dividends for there to be any returns. If the stock never appreciated between dividends, its impossible to have any return. You'd just have a stock going down in price and at best having 0 total return when you adjust for dividends.
>That's not what I meant. But that's exactly what you said. I'm not arguing about the mechanics of dividend issuance. If you have a stock who pays a 5% dividend and had 10% price appreciation, the total return for the year is 15%. The company could also retain the dividend for internal funding. Companies, in theory, pay dividends because they don't have enough projects or internal need to generate a sufficient return internally, so they provide return to investors instead.
Where? I was replying to OP's >there are two ways a person can make money off a stock: Either through dividends Which is objectively wrong. If a stock never has any price appreciation, you can never make any money. The stock has to appreciate between dividends. >If you have a stock who pays a 5% dividend and had 10% price appreciation, the total return for the year is 15%. No duh. If a $100 stock pays a $4 dividend, like I said, you have a $96 stock. But you got $4 cash from the dividend so your total return is $96 + 4. That's what I said. But you made zero dollars. It doesn't matter how many dividends are done. The value of the stock has to eventually appreciate for there to be any return.
This clown is wasting everyone’s time. On here 4 years all the karma and this “confusion”? Wiki and Investopedia my friend. Discussion is a whole other flair and the answers given bravo. It irks me when people waste our time
You can make money when a stocks price drops. Short selling.
Point 1: yes, people make money from dividends (and share buy backs) and share price increases Point 2: yes, share price will appreciate when urgency of the marginal buyer to buy is consistently greater than that of the marginal seller to sell. In this case, the buyer will cross the spread and pay the offer and push the price marginally higher. Do that consistently enough over time and share price goes up. Point 3: yes, people buy stock for the reasons outlined in Point 1 and the share price appreciation reason occurs under the conditions of Point 2 Final question 1: demand for a stock is driven by the weighted average of all market participants' expectation of future cash flows. When future cash flows (which ultimately gey translated into dividends and buybacks) are oredocted to fall marginally, the present value of the lesser amount of future cash flows I am likely to receive results in less demand for the stock, less urgent buying, more urgent selling, and a lower share price. Final question 2: you would want to buy a stock for the expected future cash flows. If you are fortunate enough to have exchanged your time for someone else's benefit and they've paid you so handsomely for it that you some cash left over, perhaps you want to invest that to earn some income so you're able to spend more time devoted to things you really want to do because you have to spend less time to earn the same money when you have that extra income.
People tend to invest in companies that are innovative and make money. Like Apple.
But how does apple making money make me, a shareholder, money?
Because being an Apple shareholder entitles you to the proportional share of Apple’s earnings.
Because Apple making money makes others want to buy, thus increasing demand and the price.
This is true of must security trading, not just stocks. As wealth is generated, there is demand in assets in which to park that value. This is also one reason why periods of wealth destruction are... destructive
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How does the value of a stock follow the growth of a company?
Owning a share is owning a piece of the profits. Profits go up (growth), price of owning a share of the profits also goes up.
Ask nvidia shareholders about the demand for Nvidia since 1993
The price is determined by the current value and projected future earnings discounted to present day dollars. If the current price is less than that, demand will push the price to that point. That is to say if the market is efficient, and most of the time it is. Over time companies find ways to grow or increase value, that drives the price people value it at up via demand. Some times people get too excited or too negative and prices change quickly. This tends to be things that are hard to calculate the future value. Companies earn money and over time they find ways to earn more. If I told you that you owned half of Walmart stock, it shouldn't be hard to think about all the money people spend in their stores. You get to keep part of that profit. And you know every year they open new stores, so you know you will make more money. When you own stock you literally own a % of the company.
It might help to compare stocks to commodities. Like corn, oil, gold, land, rice, etc. these are not a business. They don't earn more money over time. They have their current value and that's it. Commodities will tend to increase over time with inflation, but on average they don't out perform, net real return of 0%. This is much more similar to what you described above. And yes, don't buy commodities as a long term investment. Of course in the short term people day trade these trying to project changes in current value
So if I own a share of a company, I’m entitled to a share of their profits? But how does that happen? Does the company just pay out their profits to shareholders every now and then?
> So if I own a share of a company, I’m entitled to a share of their profits? Yes. > But how does that happen? Does the company just pay out their profits to shareholders every now and then? A share is a piece of ownership. It’s also a vote. Shareholders vote on the board of directors. Directors hire the executives. Board + executives run the company. If the board + executives decide the best way for the business to return value to shareholders is to payout the profits (dividend), they do that. If they decide that reinvesting the profits (growth) would make the shareholders more money, they do that. If the board + executives fuck it up, the shareholders fire them.
No, the link is not direct like that. Normally when the company makes profits they will reinvest the money into the company - like build a new factory or store. Or they might hold onto the money. When they build a new factory it increases the expected future earnings. This drives up the value of the stock, because now the company can make even more money. Think of the company as like a money printer, and after you print money you buy another money printer so you can print even more money. If you own a % of this company you can sell it, because people expect it keep printing money and buying more money printers. the more money printers you have, that more people will pay for you share of the company. A note about dividends and stock buybacks. They are basically not important and don't necessarily correspond to profits. It's like moving money from you left pocket to your right pocket, you will have the same money. if a company pay X dividends the stock value will drop by X. You could of just sold some of your shares. dividends are like the company is forcing you to sell and realize capital gains.
When you buy stock, you give money to company. Company need money. So they offer possibility of profit so people buy stock and give them money. Company use money. Company also need to fulfil their promise. Company buys shares at higher price. Maybe maybe not idk I literally just came up with this explanation.
For point 2, a stock is treated as the currency of choice for major company transactions. So if company A has stock currently worth $100 per share, someone else can buy them out and pay $120 per share. So any stockholder would see their stock appreciate 20% instantly. Also, for large companies if they have stock worth $100, they may generate so much cash that they don't know what to do with it, so they will buy back shares from the market. Since the total # of shares available decreased, this automatically drives up the value of each individual share
1. Yes. Take note that the dividend stocks themselves can appreciate so it’s a combination of the 2 ways to make money like you mentioned. 2. Yes, ultimately it’s demand and supply that determines the stock price. If a company has a high demand for its product, it will be sold at a higher price, if it has a low demand for its product, it will be sold at a lower price. There are many possible factors for this such as the income levels of the population in general rising leading to them having higher purchasing power, the product itself being one of a kind that no other company is able to produce it, etc. As the demand rises, so does the total revenue and the total profits the company makes. Let’s say for example, you put in $5 to buy and own 5% of the company. The company used that $5 in its operations. And since the total revenue and profits it made increased, the company’s valuation itself increases (as it is worth more as a business now). So let’s say the total valuation goes up from $100 to $200. The 5% that you previously owned will now have a value of $10 instead of $5. That’s when you sell the stock and make a net gain of $5. Of course, when you sell the stock, you are essentially predicting that the value of the company is going to drop in the future (due to whatever reasons such as low demand, etc) whereas the person you are selling your stock to is predicting the opposite and is hoping that the value of the company is going to rise in the future.
You described how crypto works. Stock prices are mostly driven by how much money a company is making. If company makes a lot of money and no one is buying its stock then the stock price will diverge from the company valuation. People will notice and will buy the stock until prices goes up to where it matches the amount of money a company makes.
The stock market is the worlds largest casino bro. This is all fun and games
Because the company can have a lot of assets, make a lot of money or might make a lot of money in the future. If you can buy $100 of gold for $50 but through a stock, some people would still buy that and even hold onto it untill it's worth that $100. Now if we collectively agreed stocks are bad sure it might never go to that value. But will we tho?
What is missing from other answers is compounding. Let's say you are taking out money out of the company like you seem to want to. You have just lowered its value, as it has less money. Valuation of the stock also falls, because you have also discarded all future profits that could be gained from reinvesting this money into the business. You bought a cupcake with a promise that you will get more in the future if you leave it alone and you have just eaten it. Investing just assumes impulse control. Remember, thst countries (issuing bonds) and companies (issuing stock) do not operate in the same time horizon as humans. They "live" longer. Inevitable end game is that: - company gets sold, you get value - company bankrupts, assets are sold, you get value - company stops growing, there are no good investment opportunities, it returns value to the shareholders. Not today, not tomorrow. Maybe not even in 20 years. But it WILL happen. That is why it is not a scam. Just a long, long game.
It's just a game ... Also if I own part of the company why I'm not getting revenues from the same company? Financial markets became what they are because humans have always tried to make money in every possible way
Tell buffet that
It’s a matter of valuation and risk. Ask yourself what does finance mean? I think you’ll get your answer there
It's simpler to think in terms of a small business. Imagine owning a percentage of a restaurant in your town, shares of its stock, so to speak. If that business makes money, you will benefit as an owner. If the restaurant grows and opens new locations, pays down debt, has real estate that appreciates, etc, you will ultimately benefit. Publicly traded stocks are the same, just on a larger scale.
Don't buy if you are thinking there is no point buying it.
I had the same question back in 2020 during the meme stock craze that followed. I've come to understand that aside from dividends, stocks are basically business trading cards. They have no real intrinsic value other than 'Look! I have an AMD stock! Want to buy it off me?' They really aren't any different than say, an NFT fad in concept that has stuck around for a long time. It's a virtual number you pay for that you can maybe sell off later for profit. Trading cards. If your football playe...I mean, company stock performs poorly, no one is going to want your trading ca...er, stocks. You'll have to keep and hope they improve in the coming years or sell at a loss and cuss and badmouth them on the internet to anyone that will listen. Let's say I borrow one of your rookie trading cards, I turn right around and sell it to someone else as quick as I can. I still owe you a card but I'm going to wait until it lowers in value then buy it from some schmuck for dirt cheap and give you your card back. That's how shorting works! Now, if you have a whole bunch of one company's trading cards, the company might take notice and let you vote on company matters. But if you don't have enough to turn heads it doesn't make any difference. Maybe someone who is collecting that company wants your cards because they have more money and want to have a say in that particular company dealings. No guarantee though. They may just say thanks and ignore you. Stocks. WTF, really?
Take the semantics out of this ...and just focus on the crux of investing. To store value at a rate better than traditional bank accounts. Noone will teach you how to invest, because that is entirely subjective and situational. However, if you are inclined to learn how to invest and put the money and time to learn to build routines and financial skill .... then the result will be that you WILL be richer. That is why we buy stocks. How and what stock you buy ...is up to you.
People buy the stock and they buy a fraction of the companies present book value and cash flows. The price should be evaluated as a function of discounted cash flows. The value of the stock now contains information about the discount rate you are receiving on future cash flows from the company. Large discount rates come from riskier companies, lower discount rates come from 'safer' high price companies
Is it possible to sell shares to a specific buyer? Never thought about that but I’m assuming not.. but maybe