Question on the nature of the value of shares

[Julia]

Very fair comment, dhukka.

But it's not correct to assume from what I said about a situation where a well run, stable company is nonetheless not bringing decent returns for its shareholders, that conversely it's necessarily a good investment to buy some market darling whose SP has been inflated despite that company's fundamentals not being sound.

I don't know if most trend followers will check fundamentals before climbing on to an uptrend. I do. People who were done over by holding the stocks you mention could have - even if they hadn't been watching fundamental factors - could have got out with a relatively small loss if they'd exited at the start of the downtrend.

But many of these people said, 'hell, if it was a bargain at $X, then surely it's way more of a bargain when it has lost 50% of its value", and happily bought more.

But they are two separate arguments.

My point was simply that not all 'good' companies provide their shareholders with reasonable returns.

 

[dhukka]

Very fair comment, dhukka.

But it's not correct to assume from what I said about a situation where a well run, stable company is nonetheless not bringing decent returns for its shareholders, that conversely it's necessarily a good investment to buy some market darling whose SP has been inflated despite that company's fundamentals not being sound.

I don't know if most trend followers will check fundamentals before climbing on to an uptrend. I do. People who were done over by holding the stocks you mention could have - even if they hadn't been watching fundamental factors - could have got out with a relatively small loss if they'd exited at the start of the downtrend.

But many of these people said, 'hell, if it was a bargain at $X, then surely it's way more of a bargain when it has lost 50% of its value", and happily bought more.

But they are two separate arguments.

My point was simply that not all 'good' companies provide their shareholders with reasonable returns.

If that was your point it wasn't clear to me, I thought you were saying that a company's shares are simply worth what someone is prepared to pay for them. I don't know why I thought that was your point, oh wait a minute, maybe it had something to do with this:

but essentially buying shares in a company is the same as buying e.g. a house. It is only worth what someone is prepared to pay for it.

But anyway, why would anyone buy QBE because it has been touted as a good company? CSL is one of the most innovative, successful and well run companies to come out of Australia, I doubt many would dispute that. However 2 years ago, the stock was 15% higher than it is today, does that mean it's a badly run company? hat's why you do valuation analysis. You work out a value and compare it to the price to determine if it is worth buying or not.

 

[wayneL]

It's good to hear from you dhukka.

 

[tothemax6]

OK QBE, CSL, the tech bubble, Lehman's brothers etc are part of my question.
It seems here that there is a huge decoupling of the values of the companies and their price. So this is a good point to question.
In the case of a sack of flour, the value is coupled directly to the exercising of the use of that flour. That is to say, people can speculate all they want, but in the end the price will hover around a price based on fundamental supply and demand of the flour. However, from what I'm reading, shares seem massively speculative. That is, since there is no use value for the share at any given time (only a possible return of the backing equity at some point), the price heads into random territory.
So to use an analogy, it seems that whilst a commodity vs its value is "a ball on a flexible stick", with the ball (price) being moved (side to side) fairly rigidly by the supply/demand (hand at the stick); a share appears to be a "ball on a long bungee cord", or perhaps in some cases, "a ball in a lotto machine, the movement of the stick being irrelevant".
Does this sound fair?
Also, to try and explain myself better, another example is that somes share act like "a fictitious entity advertised on the internet as "XYZ+", and people can bid for shares in it. The price is then randomly determined by people bidding against each other, even though the entity (since it does not exist) has no exercising value".
Btw I guess I'm still confused
Cheers

 

[Trembling Hand]

Commodities are more volatile than share prices. That is they undergo larger % moves of given periods than shares. (excluding to odd penny dreadful who's market is close to no existent)

As you used a bag of flour,

A monthly chart of wheat,

Basically though its the same mechanics of an on going market. Both shares and commods and other financial instruments - continual auction - very similar result. Miss price happen daily in all of them over all time periods

 

[robusta]

Today is the perfect day to look at the value of shares. Because of Irish debt and Chinese inflation is the combined value of listed Australian companies worth 1.6% less today than yesterday?
Is Monadelphous worth 2.6% less, CSl 0.52% less and CBA 0.2% more? I don't think so. So it is fairly obvious that price will often vary from the value of the company. This is probably due to fear, greed and for all I know the phases of the moon. I don't bother trying to work it out (because I cannot) I just try to take advantage of it.

There is a confusion here between price and value, the two aren't the same thing.

It is simple if the price you pay is below the value you get then things generally turn out well.

Have you considered that all the complicated considerations of what a company is worth may mean zilch if your capital doesn't grow?
Or at the very least if you don't receive dividends and franking credits which offset any fall in the SP?

It bothers me a little how complicated a lot of people make out fundamental investing to be (including a lot of fundamental investors)

Here is the technique I use to find investments, before I look at the price.

1) The business must make a profit.
Fairly simple, no profit makes it impossible for me to find a value and keeps me from speculating.

2) The business must have little or no debt.

3) The business must have a high ROE
Return On Equity is the most important consideration in valueing a business.
Would you invest $100 if it only returned $2.00 p/a or would you rather invest $100 to return $20 p/a? I normally search for a minimum 20% ROE

Steps 1, 2 and 3 save me a heap of effort running a red line through most of the listed companies.

4) Does the business have a competitive advantage?
You know what this means, we are talking about Woolworths. any of the big 4 banks, JB Hi Fi, Navitas....

5) Work out a value for the business.
For this example we will look at a company paying out all profits as dividends. (because I will often pay a bit more for a company that can compound returns by retaining profits and earn a high ROE on those returns)

My required rate of return for investing is at least 10% to compensate me for the risk's taken.

Now the fun bit, let's "value" some companies.
Company A
Equity / share $1.00, EPS $0.20 ROE = 20%, now I would "value" this company @ $2.00, so if I pay $2.00 all things being equal I should get my 10% return if I pay more than $2.00 my returns will be less, if I pay less my returns will be more.

Company B
Equity / share $1.00, EPS $0.35 ROE = 35%, this one I would value at $3.50

6) Now switch the stock market back on, compare the value to the price. If you have a margin of safety (price is a decent discount to value) You have found a bargain.

Might be another way to approach your investing. You can spend days evaluating the intrinsic worth of a company, but if the market doesn't agree, you're simply not going to make money.

Disagree with this, I love it when the market doesn't agree it means I have found a bargain. If I spend a hour or two looking at the few extraordinary businesses this applies to I know the market cannot ignore their performance forever.

 

[prawn_86]

On the topic of value does anyone know where one can obtain a good spreadsheet setting our ROE, div yield etc? I have built my own but its not very pretty

 

[dhukka]

OK QBE, CSL, the tech bubble, Lehman's brothers etc are part of my question.
It seems here that there is a huge decoupling of the values of the companies and their price.

Absolutely, prices can decouple significantly from their underlying value and remain so for lengthy periods of time. That's what creates the opportunity for a value investor. The price will reflect fundamentals over the long term but may trade for significant periods at prices that don't reflect the underlying value.

Stocks are simply a claim on a long-term stream of cash flows that investors expect to be delivered over time. What are the source of those cash flows? Usually they come in the form of dividends, but can also be capital returns. Investors also attach a terminal value for the stock, or in other words, the price they expect to receive for selling the stock.

skc's example may be 'theoretically' true but it is of absolutely no practical use in understanding how to value a stock.

In the case of a sack of flour, the value is coupled directly to the exercising of the use of that flour. That is to say, people can speculate all they want, but in the end the price will hover around a price based on fundamental supply and demand of the flour.

But there is no "in the end" as TH says, it is a continual process and the fact that commodities are often more volatile than stocks demonstrates that stocks are not more speculative.

However, from what I'm reading, shares seem massively speculative. That is, since there is no use value for the share at any given time (only a possible return of the backing equity at some point), the price heads into random territory.
So to use an analogy, it seems that whilst a commodity vs its value is "a ball on a flexible stick", with the ball (price) being moved (side to side) fairly rigidly by the supply/demand (hand at the stick); a share appears to be a "ball on a long bungee cord", or perhaps in some cases, "a ball in a lotto machine, the movement of the stick being irrelevant".
Does this sound fair?

No, there is no evidence that suggests stocks are more speculative, in fact if anything commodities tend to be more speculative.

Also, to try and explain myself better, another example is that somes share act like "a fictitious entity advertised on the internet as "XYZ+", and people can bid for shares in it. The price is then randomly determined by people bidding against each other, even though the entity (since it does not exist) has no exercising value".
Btw I guess I'm still confused

Maybe you are over thinking it. Robusta's examples ( although if you are going to lift examples straight from Brian McNiven and/or Roger Montgomery you should probably acknowledge it) are a useful starting point. It is important to note the difference between a company that pays out all dividends as profits and one that retains all earnings. Understanding this is the key to understanding how the value of a business can increase over time. I would recommend picking up a copy of one of Brian McNiven's books, his latest being Concise Guide to Value Investing: How to Buy Wonderful Companies at a Fair Price.

 

[Julia]

If that was your point it wasn't clear to me, I thought you were saying that a company's shares are simply worth what someone is prepared to pay for them. I don't know why I thought that was your point, oh wait a minute, maybe it had something to do with this:

Sorry you found it necessary to resort to sarcasm, Dhukka.
I stand by my comment above in terms of whether you are going to make money or not, something I'd have thought was the fundamental purpose of our involvement in the market.

Have I expressed myself so badly that you can't see my point regarding e.g. QBE, well managed company though it might be, is simply not going to grow your capital if it continues in its current downtrend?

If the market doesn't agree that it's a company worth owning, then the SP will languish as it has. Therefore my comment that the company's shares are simply worth - in terms of making money for you - what the market is prepared to pay for it.
Nothing to do with how you 'value' a company.

But anyway, why would anyone buy QBE because it has been touted as a good company? CSL is one of the most innovative, successful and well run companies to come out of Australia, I doubt many would dispute that. However 2 years ago, the stock was 15% higher than it is today, does that mean it's a badly run company? hat's why you do valuation analysis. You work out a value and compare it to the price to determine if it is worth buying or not.

Well, I suppose this is just where we have a total philosophical difference.
I simply don't understand why you'd want to buy a company whose shares are not going to make you any money in the foreseeable future, when there are plenty of companies out there which will.

I simply don't get why anyone would opt for the opportunity cost of holding on to a losing or passive share just because they believe in its intrinsic value, something which seems to be infiniately variable depending on who is doing the analysis.

But that's fine. None of us is obliged to adopt what makes someone else happy.
I just really did think most people bought shares with the aim of growing their capital and maybe receiving a reasonable yield in the process.

Absolutely, prices can decouple significantly from their underlying value and remain so for lengthy periods of time. That's what creates the opportunity for a value investor. The price will reflect fundamentals over the long term but may trade for significant periods at prices that don't reflect the underlying value.

Hence opportunity cost where your funds could in the interim be invested in a company whose SP is actually rising.

 

[dhukka]

Sorry you found it necessary to resort to sarcasm, Dhukka.
I stand by my comment above in terms of whether you are going to make money or not, something I'd have thought was the fundamental purpose of our involvement in the market.

I too thought that was the purpose, I don't know anyone, nor have I ever, who invests to lose money.

Have I expressed myself so badly that you can't see my point regarding e.g. QBE, well managed company though it might be, is simply not going to grow your capital if it continues in its current downtrend?

I understand your point now, it was not at all clear to me before. However I don't really don't understand how your point is relevant to the thread, which is afterall about the "nature of the value of shares"

If the market doesn't agree that it's a company worth owning, then the SP will languish as it has. Therefore my comment that the company's shares are simply worth - in terms of making money for you - what the market is prepared to pay for it.

So your point is that if XYZ is trading at $3 today then it is worth $3 to the person holding it today. I'm at a loss to understand why you feel the need to state this, this is just so blindingly obvious.

You seem to be arguing a form of EMH? That prices reflect all available information about the stock.

Well, I suppose this is just where we have a total philosophical difference.
I simply don't understand why you'd want to buy a company whose shares are not going to make you any money in the foreseeable future, when there are plenty of companies out there which will.

I don't either, actually I don't know anyone who would, the whole idea seems so obviously stupid I can't understand why you feel the need to state it.

I simply don't get why anyone would opt for the opportunity cost of holding on to a losing or passive share just because they believe in its intrinsic value, something which seems to be infiniately variable depending on who is doing the analysis.

Because from a value investors standpoint, if you have no idea of the value of the company, then there is no basis to assess whether the price on offer is reasonable. But nor does a value investor have to hold something that is going down, he/she should be constantly reassessing the stocks prospects based on further information, there is nothing stopping a value investor changing his/her views and cutting his/her losses.

I understand that technical traders have no need of valuation techniques to buy a stock or make money, why can't you understand that a fundamental investor doesn't need to concern himself with the trend of the price?

I just really did think most people bought shares with the aim of growing their capital and maybe receiving a reasonable yield in the process.

So did I, again who are these people buying shares with the aim of losing money? I've just never met anyone that stupid.

Hence opportunity cost where your funds could in the interim be invested in a company whose SP is actually rising.

Why is there necessarily an opportunity cost? Value investors are not prohibited from buying a stock with a rising price.

 

[Julia]

So your point is that if XYZ is trading at $3 today then it is worth $3 to the person holding it today. I'm at a loss to understand why you feel the need to state this, this is just so blindingly obvious.

I'd have thought so. But you asked me to say why I said the market value of a share was what someone was prepared to pay for it, so I did.

I don't either, actually I don't know anyone who would, the whole idea seems so obviously stupid I can't understand why you feel the need to state it.

I'll ignore the sarcasm again and just ask why, then, so many people hold stocks like QBE and CSL as core p/f stocks where the value of their capital investment is falling when that capital could be employed in rising stocks.

I'm not suggesting you do this, but if you look at many of the recommended core p/folios, both these stocks will have been included over the whole of the downtrending period.

Because from a value investors standpoint, if you have no idea of the value of the company, then there is no basis to assess whether the price on offer is reasonable.

Yes, of course I understand what you're saying here. But my different approach is that I don't actually care whether that price truly reflects the intrinsic value of the company if I can make some money out of it from the start of an uptrend.

You know as well as I do that thousands of people buy stocks they believe are undervalued (as well they might be), and hold on to them into infinity, believing that one day the market will recognise how undervalued they are and they will actually make money instead of losing it.

Again, I'm not suggesting you do this. I don't know.

Why not just let's accept that different people have different approaches, perhaps often due to their personal circumstances? If I need to generate a living from my capital, I'm not going to do it by buying the CSL's of the market and living in hope of growing that capital one day.
But I suppose if someone has a full time job or other source of income which meets all expenses, then that person can quite afford to take the view that they can buy what they believe is an undervalued company in the belief its 'true value' will be recognised at some stage.

I have no interest in quarelling with you, dhukka. I apologise if I had no right to offer a suggestion that considering trends can be a useful alternative approach and wish you all the best in whatever approach best serves your own philosophy and situation.

 

[dhukka]

I'd have thought so. But you asked me to say why I said the market value of a share was what someone was prepared to pay for it, so I did.

No actually, I asked about 'value' not market value, two completely different things. Market value is just the price, the intrinsic value of a business is something altogether different.

I'll ignore the sarcasm again and just ask why, then, so many people hold stocks like QBE and CSL as core p/f stocks where the value of their capital investment is falling when that capital could be employed in rising stocks.

I'm not suggesting you do this, but if you look at many of the recommended core p/folios, both these stocks will have been included over the whole of the downtrending period.

I didn't mean to be sarcastic I genuinely can't believe anyone would knowingly do this. I guess I don't buy into your premise that "so many people" are willfully doing it. I can understand that there may me be many people who have entrusted their investments to investment managers that invest in such stocks as QBE and CSL. But I suspect they have no clue why their managers are buying these stocks or even if they know what stocks are in their portfolio.

Remember a lot of these managers are just shadow indexes only they do worse than the index because of transaction costs. I'm not making excuses for them, I think it's a horrible idea just to hold stocks because they are in an index and a true value investor wouldn't do it.

A value investor who buys CSL or QBE today is doing so because he thinks it's undervalued, he may or may not be right, I personally haven't looked at either for some time. I thought CSL was overvalued when looking at it in 2007 but that would have cost me money in 2007 but saved me some in 2008 and 2009. Personally I'm not interested in stocks of this size, the time to invest in CSL was in the early 1990's, I'm interested in finding the next CSL.

Yes, of course I understand what you're saying here. But my different approach is that I don't actually care whether that price truly reflects the intrinsic value of the company if I can make some money out of it from the start of an uptrend.

And I understand what you're saying, people can make money without worrying about intrinsic value, and more power to them. I thought the poster that started this thread wanted to understand what gives shares value, and what drives their price, I don't know how telling him that XYZ is worth $3 because that's what it is trading at right now, helps him.

You know as well as I do that thousands of people buy stocks they believe are undervalued (as well they might be), and hold on to them into infinity, believing that one day the market will recognise how undervalued they are and they will actually make money instead of losing it.

Again, I'm not suggesting you do this. I don't know.

There may well be thousands of people doing this, but you are mistaking a poor psychological approach to investing for a fault of fundamental or value investing. My mother is a perfect example, I've told her time and time again, if the reason you bought the stock has changed and there is no evidence for it being undervalued anymore, then it's time to get out, however she just says "oh I'll just hold it and see what happens, it might go up again", this is a woman who has no business investing in stocks as far as I'm concerned. She clearly doesn't understand what she's doing. She is also not following any disciplined approach based on fundamental or value investing. She is simply speculating.

Why not just let's accept that different people have different approaches, perhaps often due to their personal circumstances?

I do accept that, I have doubts that you do though. I don't think your really understand what a fundamental or value investing approach is all about. You seem to think it's about buying a stock that is out of favour or in a downtrend and hoping it will turn around. Your comments on opportunity cost seem to confirm this.

If I need to generate a living from my capital, I'm not going to do it by buying the CSL's of the market and living in hope of growing that capital one day.

Maybe not, but what has that got to do with the opening poster's questions about value?

But I suppose if someone has a full time job or other source of income which meets all expenses, then that person can quite afford to take the view that they can buy what they believe is an undervalued company in the belief its 'true value' will be recognised at some stage.

I think the veiled sarcasm here underlies your beliefs, I don't think you actually believe in the concept of intrinsic value. You think value and price are the same thing. If that is the case it is unfortunate because you can never understand a value investing approach.

I have no interest in quarelling with you, dhukka. I apologise if I had no right to offer a suggestion that considering trends can be a useful alternative approach and wish you all the best in whatever approach best serves your own philosophy and situation.

I didn't think we were quarrelling, I call it debate, considering trends may be useful, I agree, but it doesn't help with questions of value.

 

[robusta]

Robusta's examples ( although if you are going to lift examples straight from Brian McNiven and/or Roger Montgomery you should probably acknowledge it) are a useful starting point. It is important to note the difference between a company that pays out all dividends as profits and one that retains all earnings. Understanding this is the key to understanding how the value of a business can increase over time. I would recommend picking up a copy of one of Brian McNiven's books, his latest being Concise Guide to Value Investing: How to Buy Wonderful Companies at a Fair Price.

Just for the record the examples were my own, but the theory came from Roger Montgomery's Valeable. To learn about the value of shares reading anything by Benjamin Graham, Brian McNiven and Roger Montgomery would be a good start.

 

[Julia]

I think the veiled sarcasm here underlies your beliefs, I don't think you actually believe in the concept of intrinsic value. You think value and price are the same thing. If that is the case it is unfortunate because you can never understand a value investing approach.

No, quite obviously I don't really believe in the whole 'value investing' approach.
Any more than you believe in trend following.

I have already suggested in my last post a conciliatory approach of 'each to his own' but you seem determined to maintain an argument.

I frankly don't have either the energy or the interest to pursue what has become a pointless discussion. I've tried to be polite and draw the discussion to a reasonably amicable conclusion, wishing you all the best in your endeavours.
I now give up.

 

[dhukka]

No, quite obviously I don't really believe in the whole 'value investing' approach.
Any more than you believe in trend following.

I have already suggested in my last post a conciliatory approach of 'each to his own' but you seem determined to maintain an argument.

I frankly don't have either the energy or the interest to pursue what has become a pointless discussion. I've tried to be polite and draw the discussion to a reasonably amicable conclusion, wishing you all the best in your endeavours.
I now give up.

But I do believe in trend following, I believe people can and do make consistent money from it. I also have taken the time to understand it.

I've tried to address your misconceptions about fundamental investing but you aren't interested in discussing it, it is clear you have made up your mind without an attempt to even find out what it is you don't believe in. Here is a simple question, do you think the price of a stock is equal to it's underlying value?

 

[tothemax6]

Maybe you are over thinking it. Robusta's examples ( although if you are going to lift examples straight from Brian McNiven and/or Roger Montgomery you should probably acknowledge it) are a useful starting point. It is important to note the difference between a company that pays out all dividends as profits and one that retains all earnings. Understanding this is the key to understanding how the value of a business can increase over time.

I think over things more than others, I agree, but that's my thing I guess. I totally understand all the talk about how the value of a company is determined. My problem is purely with the link between the equity of a company and its share price.
To try and illustrate my point better, what is the difference between a piece of paper saying "You own this official piece of paper printed by XYZ Co", and a share, if the company never actually pays out from the equity? If it doesn't then there is no link between the equity and the shares - it is all fictional. The other end of the spectrum would be a share which gives you full exercising rights over the underlying equity - i.e., you can withdraw that equity in exchange for the share at any time.

Stocks are simply a claim on a long-term stream of cash flows that investors expect to be delivered over time. What are the source of those cash flows? Usually they come in the form of dividends, but can also be capital returns. Investors also attach a terminal value for the stock, or in other words, the price they expect to receive for selling the stock.

You aren't understanding what I am saying - yes the stream of cash flow gives the share a value (just like a term-deposit). But if there is no cash flow (nil-dividend stock), the capital return is detached from any value other than itself. You could just as soon create "fakecomsec" dot com, with imaginary shares, and then people do the trading thing as usual.

Today is the perfect day to look at the value of shares. Because of Irish debt and Chinese inflation is the combined value of listed Australian companies worth 1.6% less today than yesterday?

Well yes. In a news event, information that was not previously known (and thus had a lesser effect on the share price) becomes know - increasing its effect on the share price. Chinese inflation could result in less purchasing power of the Yuan (although it is their fault, tying it to the inflating dollar and all), which could result in them purchasing less Aussie commodities. Investors, who had not known this before, now know it, and the new risk-knowledge reduces the value of the shares commensurately.
That is, if the equities underlying the shares is actually connected to the shares.
Cheers

 

[dhukka]

My problem is purely with the link between the equity of a company and its share price.
To try and illustrate my point better, what is the difference between a piece of paper saying "You own this official piece of paper printed by XYZ Co", and a share, if the company never actually pays out from the equity? If it doesn't then there is no link between the equity and the shares - it is all fictional.

No it's not fictional at all, you have completely misunderstood both 'shares' and 'equity'. You need to go back to basics. What is a share? What is Equity?

Take your example, if you have a piece of paper that says "You own this official piece of paper printed by XYZ Co" then what do you have? You have a piece of paper with some ink on it. What is that worth? I doubt it's worth anything, try selling it and find out what you can get for it.

Now imagine that you bought a share of XYZ company on the stock exchange, let's say XYZ is a food retailer like Woolies. Your share is not just a piece of paper. You are a part owner of XYZ, that means you partly own a share in all the assets and liabilities of that company, land supermarkets etc. What is it worth? Even if it doesn't pay a dividend? Well that's dependent on the kinds of returns the company generates. If you want to realise your investment right now, you can go straight to your broker and sell your share for a price, that's the function of the stock exchange. The price, may or may not reflect the underlying value of the company.

The other end of the spectrum would be a share which gives you full exercising rights over the underlying equity - i.e., you can withdraw that equity in exchange for the share at any time.

You are making a distinction that doesn't exist, shares are equity, that's why shares are commonly referred to as 'equities', if you own a share you own an equity stake in the company. You can withdraw your equity stake at any time by selling your shares on the stock exchange. (assuming there is a liquid market for your shares/equity)

You aren't understanding what I am saying - yes the stream of cash flow gives the share a value (just like a term-deposit). But if there is no cash flow (nil-dividend stock), the capital return is detached from any value other than itself. You could just as soon create "fakecomsec" dot com, with imaginary shares, and then people do the trading thing as usual.

It's not only dividends that give a company it's value, just because a company doesn't pay dividends doesn't mean it's value becomes 'detached'. The equity has a value that can be calculated by taking into account the company's return on equity.

How can you trade imaginary shares? It's impossible.

 

[Dreadweave]

I look at it very simply, there is no other way really.


A share has value because someone is willing to pay for it. the fact that you even buy the share in the first place is evidence of this, and that someone like you in the future may do the same thing and buy the shares from you.

shares have value in alot of cases simply because they can be traded.

in a perfect world shares would not be traded, people would only buy a share if the company paid a dividend. Human nature itself, greed, crowd phychology and understanding how this works adds the value to a share. Simply, because it can be traded, and that people will most likely buy it from you somewhere later on.

Because the share is actually a part of a company, there is some security or a feeling of safety that in some case one day if the company had to liquidate you might at lease get some of your money back. imho that is the only reason that people trade real shares and not fake shares.

 

[tothemax6]

It's not only dividends that give a company it's value, just because a company doesn't pay dividends doesn't mean it's value becomes 'detached'. The equity has a value that can be calculated by taking into account the company's return on equity.
How can you trade imaginary shares? It's impossible.

It is not impossible, you simply have an identical copy of comsec, but without the term 'actual own a share of the company' involved, and none of the listed companies have dividends. Then it is exactly the same, and people can trade their shares in the imaginary companies. After all, what is the difference in terms of the price action against the equity? You can have all the news about the companies, what they are doing etc, and people can use this information to decide the value of the shares - but like real share it is their trading decisions alone which actually set the price of the share.
Another example - we sell shares in "Sweden" - yes the actual country. We then say 'you own a part of all the assets and liabilities of Sweden'. And people then trade these shares, based on their opinions of what would value Sweden, since it is all fictitious any way and there is no way to retrieve the equity of Sweden promised by the share directly.
However, the one thing I can think of which might give a share real value (tying it to its equity) is the fact that the men with lots of the shares CAN exercise control over the company via voting, thus the minor holdings of shares by many are linked to the major holdings, and thus to those who can do as they wish with the equity.

A share has value because someone is willing to pay for it. the fact that you even buy the share in the first place is evidence of this, and that someone like you in the future may do the same thing and buy the shares from you.
shares have value in alot of cases simply because they can be traded.

Well the share I bought does in fact have a dividend, albeit tiny. But yes you see my point - it has value mostly because it is traded rather than the equity behind it, kind of like fiat money.
Cheers

 

[dhukka]

It is not impossible, you simply have an identical copy of comsec, but without the term 'actual own a share of the company' involved, and none of the listed companies have dividends. Then it is exactly the same, and people can trade their shares in the imaginary companies. After all, what is the difference in terms of the price action against the equity? You can have all the news about the companies, what they are doing etc, and people can use this information to decide the value of the shares - but like real share it is their trading decisions alone which actually set the price of the share.
Another example - we sell shares in "Sweden" - yes the actual country. We then say 'you own a part of all the assets and liabilities of Sweden'. And people then trade these shares, based on their opinions of what would value Sweden, since it is all fictitious any way and there is no way to retrieve the equity of Sweden promised by the share directly.
However, the one thing I can think of which might give a share real value (tying it to its equity) is the fact that the men with lots of the shares CAN exercise control over the company via voting, thus the minor holdings of shares by many are linked to the major holdings, and thus to those who can do as they wish with the equity.

tothemax, it would be a good idea for you to sell any shares you have and forget about the stockmarket. You are clearly very confused. If your comments were intended as a wind-up they would make much more sense.