(Very) basic understanding of the stock market

[Plasmo]

I'm almost embarassed to ask, but just to set this straight, because I've never studied finance or even come across the idea in my travels...

The underlying motivation for the purchase of stocks is because they are anticipated to in future pay Dividends out, yes?

For example, if I offered you for $5000 a 10% stake in a company that was guaranteed to grow earnings by 20% per year, held assets valued at $10 million, but with one catch - it would never, ever, pay dividends, that "stake" would be fundamentally worthless, right? Or is there some psychological phenomenon that I'm ignoring here that would create a "market value" for "ownership" which has no value outside of speculation.

 

[stoxclimber]

Yes and no. Equity is a residual claim (i.e. you get paid after all the other owners i.e. debt holders and other security holders) on the firm's assets, these assets are generating cash flow from the operating activities of the company. So what you say is incorrect in the sense that a share is worth whatever that residual claim on the cash flows/assets is worth.

However, what you say is right to the extent that if you owned a share and were never going to sell it, and management (which itself owns shares so is usually trying to maximise shareholder value) decided not to pay dividends ever and just sit on their mountains of cash), and for some reason no-one could buy this company, then yes, you would not receive any money from your investment ever, making it worthless.

 

[reece55]

I'm almost embarassed to ask, but just to set this straight, because I've never studied finance or even come across the idea in my travels...

The underlying motivation for the purchase of stocks is because they are anticipated to in future pay Dividends out, yes?

For example, if I offered you for $5000 a 10% stake in a company that was guaranteed to grow earnings by 20% per year, held assets valued at $10 million, but with one catch - it would never, ever, pay dividends, that "stake" would be fundamentally worthless, right? Or is there some psychological phenomenon that I'm ignoring here that would create a "market value" for "ownership" which has no value outside of speculation.

The key question is whether the holder could dispose of the securities and if this was the case, what a willing arms length party would be interested to pay for the entity....

Interestingly, I had to do a valuation on an entity like this only a few weeks ago that had a clause in its constitution preventing it from distributing profits (was not for profit and this clause was required to maintain its non for profit status). As the disposal was limited to only a few parties, we used a modified liquidation value and DCF using sustainable EBITDA + capex using a very very high discount rate (above 20%).

Cheers

 

[Julia]

Perhaps I'm not understanding your question correctly, but you mention the only benefit of owning the stock in your hypothetical company to be its dividends.

Surely most people buy a stock in anticipation of the share price rising, providing them with capital growth, rather than the payment of dividends?

If looking for an income stream, then yes, of course the dividends and franking credits are desirable, but I wouldn't be happy with just that if the SP was going backwards.

 

[Trembling Hand]

Surely most people buy a stock in anticipation of the share price rising, providing them with capital growth, rather than the payment of dividends?

If looking for an income stream, then yes, of course the dividends and franking credits are desirable, but I wouldn't be happy with just that if the SP was going backwards.

eXactly

 

[Wysiwyg]

The underlying motivation for the purchase of stocks is because they are anticipated to in future pay Dividends out, yes?

No way, they`re 10 baggers or bust.:

 

[stoxclimber]

Perhaps I'm not understanding your question correctly, but you mention the only benefit of owning the stock in your hypothetical company to be its dividends.

Surely most people buy a stock in anticipation of the share price rising, providing them with capital growth, rather than the payment of dividends?

What he's saying is still correct in a sense, because under the assumptions above (i.e. you basically have no other way to get cash apart from dividends), anyone who buys your share from you is buying on the promise of future dividends. So if there are no future dividends no-one is going to pay anything for your shares. Under those assumptions of course.

 

[Trader Paul]

I'm almost embarassed to ask, but just to set this straight, because I've never studied finance or even come across the idea in my travels...

The underlying motivation for the purchase of stocks is because they are anticipated to in future pay Dividends out, yes?

For example, if I offered you for $5000 a 10% stake in a company that was guaranteed to grow earnings by 20% per year, held assets valued at $10 million, but with one catch - it would never, ever, pay dividends, that "stake" would be fundamentally worthless, right? Or is there some psychological phenomenon that I'm ignoring here that would create a "market value" for "ownership" which has no value outside of speculation.

Hi Plasmo,

Expanding on your example .....

..... if you relied solely on dividends, then the stock would be worthless,
but while a stock may not pay dividends, its price may rally beyond your
buy-in price (for various reasons).

Now, if you sold out during one of those price spikes, then you make
money on your investment (a capital gain), making that stock a money-making machine for you ... creating your "market value" ...

have a great weekend

paul



=====

 

[Plasmo]

While certainly it's possible you might find a buyer down the track for such a stock, isn't the value then entirely speculative (ie it will only go up so long as the next buyer expects they'll find a bigger sucker than themselves down the track?)

I mean, sure it could go up, but so could a rock or a bag of air, isn't the entire thing that differentiates stock ownership from the ownership of any worthless object that people could potentially speculate on the fact that it is expected to deliver guaranteed cash in hand at some point down the road?

 

[motorway]

If there were no buyers
the price would fall

at a price you could take control of that stock
and pay yourself dividends

such a stock would always have a value
maybe a high one
many stocks do not pay dividends

but it is anticipated that they could

why pay dividends if the business the stock conducts
has great growth prospects and needs capital ?

look at Warren Buffett's company

earnings are more important than dividends
Return on capital invested

dividends can be phony ( eg stocks can borrow to pay dividends )

motorway

 

[Plasmo]

I'm not talking about past dividends, I'm talking about anticipated future dividends. Berkeshire Hathaway's executives have suggested they will pay dividends in future, and I don't know what would happen to the share price over there if he had the business reclassified as some kind of non-profit entity which would never be capable of paying a dividend.

If there were no buyers
the price would fall

at a price you could take control of that stock
and pay yourself dividends

Well if the company which would never pay dividends actually paid dividends, then that would be entirely contrary to the point of the hypothetical example, wouldn't it?

 

[motorway]

No


because

we deal with dynamics

the result of buying and selling

which results in transfer of ownership..

If you what to fix that reality
then you want to stop time

and your example has no reality

If people thought such a stock had no value
Those people would want to sell their shares

I would offer .01 and buy all that was offered

because value is something created

How would you stop people selling to me ?

only if you could stop people selling
could you make the shares have no value ( listed or unlisted and ever )

motorway

 

[Plasmo]

I have a rock in my backyard, want to buy a million shares in it? It makes a fair profit each year, but by law it reinvests all its profits in me, its sole employee. Personally I think it's worthless, but you can prove me wrong by buying up all the available stock.

 

[Dezza]

Depends on if your rock is Phophate, Gold or Uranium...:

 

[motorway]

Show me the audited accounts
and give me recourse if the rock does not continue to perform
as you have stated ( profits )

and yes I could be interested

Only real profits of a continuing long term nature
will interest me ....


A lot of companies would not qualify
let alone rocks......

but with you as a guarantor ( and with a charge over suitable assets )

I will at least have a look

How many shareholders are involved
and would they want to sell such a rock ?


motorway

 

[Plasmo]

If people thought such a stock had no value
Those people would want to sell their shares

I would offer .01 and buy all that was offered

Translation

"If people thought such a stock had no value
Those people would want to sell their shares

I would make up a bunch of excuses why I won't pay up, but pretend I still seriously believe it has a high value"

 

[Wysiwyg]

I have a rock in my backyard, want to buy a million shares in it? It makes a fair profit each year, but by law it reinvests all its profits in me, its sole employee. Personally I think it's worthless, but you can prove me wrong by buying up all the available stock.

lol, can i answer this one ....

o.k. your rock is turning a profit and you want to sell it because a profiting rock to you is worthless.You don`t have to be proven wrong.You have already decided in your own mind that the profiting rock is worthless.Produce the financial paperwork and put it on the market.

 

[Plasmo]

Why would I waste my time doing that if I don't believe anyone would buy it?

 

[nomore4s]

Is there a purpose to this thread or are you just trying to bait people?

Various posters have put forward some answers to your original question and you just keep coming back with more ridiculous scenarios.

The fact is companies don't have to pay a d/e to be worth something on the stockmarket.

In reality it is about what someone is willing to sell a share for and what the other party is willing to pay for it.

 

[Julia]

Is there a purpose to this thread or are you just trying to bait people?

Various posters have put forward some answers to your original question and you just keep coming back with more ridiculous scenarios.

The fact is companies don't have to pay a d/e to be worth something on the stockmarket.

In reality it is about what someone is willing to sell a share for and what the other party is willing to pay for it.

Thank you for saving me the trouble of saying this, nomore4s.
Plasmo, you began by suggesting you were almost embarrassed to ask the question. We have attempted to answer what did appear to be a peculiar question in good faith.
If you have a genuine point, it would be good to make it clear.