The distinction between dividend paying and non-paying stocks is very confusing, because you can think of a dividend payout as a forced sale of stocks. If I have 100 shares at $100 (so $10,000) and they pay out $1/share in dividends, then I have 100 shares at $99 ($9,900) and $100 in cash.This is no different from just selling one share, in which case I'd have 99 shares at $100 ($9,900) + $100 in cash. The number of shares is completely meaningless, which is why a company can just do a stock split: if their share price is really high (e.g. $500 per share), they can just split it so that you have twice as many stocks and their value is now $250 per share.
They're
monetarilythe same, but completely different fundamentally: and that's precisely what I'm talking about. A company paying out a dividend with whatever profits it accrued in a quarter is fundamentally different than selling the share to another trader. That's the crux of the issue, and why the value of that stock is illusory in the latter case (with regards to non-dividend stocks).
Whether I have a claim to this $1 in their cash account or whether they give me $1 in cash is exactly the same. It's true that in one case, I can't directly get the $1 out of their account -- but I can sell my stock to someone else and that $1 claim will be factored into the price the other person is willing to pay.
They're not the same outside of the money equivalence. a dividend paid out to someone owning a share is
fundamentallydifferent than
sellingthe share to someone with the dividend claim factored in. One is receiving the benefits of ownership of company realizing profit (which is the point); another is putting the share on a market to be bought. And again I'm stressing the original point:
if I buy a non-dividend paying stock that I never sell, what is the value of that stock?
Isn't that a bit like saying there's no value in a $100 bill unless you spend it on something? Having assets is valuable, and a company has a lot of assets.
No, see you're missing the real point.
Money is used to exchange goods and services, an abstraction of value that is quantifiable. If I want to sell this chair I'm sitting in, I'll sell it for some amount of money. If I want to buy a new car, I'll spend a certain amount of money. It quantifies and mediates exchange of tangible objects and activity.
A non-dividend paying stock gives you small fractional ownership, but you can't do or enact any change with it whatsoever. It
does nothingexcept be bought and sold, and bought and sold again and again. It provides you no realized share of company profits as dividends paid out. The
only thingyou can do it with is play proverbial hot potato. As I said, it's only a vehicle to accrue money through its buying and selling, along it's history of buyers and sellers.
If you look at this chain of buyers and sellers, what happens is these people make or lose money off of buying or selling the shares. This continual, everyday process generates money for someone that can be used in real life, such as buying a new chair or car. But the process I used to gain the money was completely illusory and only existed on a market used to exchange a fabricated good, by playing hot potato with some stock.
Nothing happened in the real worldthat provided me this money to buy a chair or car,
and yetI am able to do so.
There's no "gaming" involved. You're going to have a natural turnover of stocks as people (or firms) take on different risk profiles. For example, young investors will want to buy stocks to save for retirement, whereas older investors want to sell stock to finance their retirement.
Well, we can use euphemisms or other words to describe the process of someone wanting to get a great price vs wanting to sell at the maximum price. Whatever verbage you'd like to use, you're certainly welcome.
Company profits most certainly affect the stock price, which is often accompanied by a range of measures including the price/earnings ratio. But it's generally expected profits that matter, since when you invest in a company today, you care about its profitability tomorrow, not that of yesterday. Individual investors may not think too much about it and when they buy stocks, often pick the companies they like and do business with [...]
Sure, it may affect the stock price, but it doesn't matter. As a non-dividend paying stock that I own and don't want to sell, why do I care about company profit if I never get a dividend?
Maybe this is simply a misunderstanding about the company's infinite lifetime? We tend to think of firms as going on forever... so I don't really care about Amazon's profits 100 years from now, but I can tell you that 60 years from now, there's someone who will care about the profits in 2114 (namely the person who starts saving for retirement). There's basically no reason to "close the books" and sell off the firm with all its assets for you to cash out, because there are other people who want to take over ownership of the firm.
But
whydo they care? What can they do with AMZN shares? Most tech companies
neverpay dividends, so what value is their stock to me as an investor unless I sell it, passing along the hot potato? The
onlyargument one can make is that
possiblyat some future date the firm will pay out dividends, and the present value of the stock price is thus reflected in that expectation. But to me, that sounds like a bogus claim used to explain why a non-dividend stock has any value at all.
Think of someone who founded his own business and passes it on to his kid. The company doesn't get sold, but the inheritance clearly has value beyond whatever salary the kid can now pay to himself. If he doesn't want to be in the business anymore, he can sell it to someone else. The only difference is that selling a local gardening business is going to be really difficult, whereas selling stocks of a large company takes a fraction of a second.
Simple fractional ownership means nothing if I cannot do anything with that ownership; it's an illusion used to facilitate the hot potato-passing. Selling an entire business to another person, sure. If I sell Dumar's chair business to Soriak, some tangible product or activity gets bought or sold. But If I buy 20 shares of AAPL, what is that? What is that in a
concretesense? It will never pay a dividend, and the only thing I can do with these 20 shares is sell them now or wait to sell them.
That's it. This illusory notion of value gets perpetuated and perpetuated, onward and outwards to ridiculous levels, by no other way except passing millions of hot potatoes back and forth.
edit: a Ponzi scheme is something in which you buy something that is inherently without value in hopes that someone else will pay you more for it.
Is that not exactly what I've been describing?
By the way: I highly recommend going to a shareholder meeting, if you can. Find a company that's headquartered in your city (or nearby) and buy a single share, then go to the meeting. Most firms also stream them online (and you don't have to be a shareholder to watch), but I think this is kind of worth seeing in person. Plus, free food & beer/wine.
I've sat in on ORCL earnings calls. Talk about a waste of time!
There's a guy in Switzerland who has become semi-famous for owning a couple shares in all the major Swiss firms and going to their meetings. He's probably in his 70s and requests a few minutes of time (which he is entitled to as a shareholder) and goes on to comment about the food and the gift bag. It's usually along the lines of "much better than last year, but at company Y they had a larger selection of wines! Maybe you can fix this for next year."
Isn't that the point here? He's just wasting his time, outside of the free food and wine. There's no value in buying fractional ownership unless you're planning to sell that fractional ownership to someone else at a higher price. Hot potatoes, everywhere!
