(Very) basic understanding of the stock market

[Trader Paul]

..... 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?

Hi Plasmo,

"speculate on the fact that it is expected to deliver guaranteed cash"

..... in ordinary classes of shares, there's definitely NO GUARANTEE of
any cash, going forward ... !~!

happy days

paul



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[Plasmo]

If you don't know the answer, don't bother trying to look smart by posting something up. This is a theoretical question, not something you would have picked up reading graphs on your PC.

Obviously a share is worth what someone will pay for it. So is a rock or a bag of air. What I'm asking is; what differentiates a share from a purely speculative object? Why is there an active market in share trading instead of rock trading? Obviously "An X is worth whatever someone will pay for it" isn't going to cut it as an explanation.

So yes, I was embarrassed to ask, because I thought it would be the sort of basic knowledge everyone picks up in first year finance, frankly I'm more embarrassed now by the answers of people who think they know something about the market.

 

[professor_frink]

If you don't know the answer, don't bother trying to look smart by posting something up. This is a theoretical question, not something you would have picked up reading graphs on your PC.

Obviously a share is worth what someone will pay for it. So is a rock or a bag of air. What I'm asking is; what differentiates a share from a purely speculative object? Why is there an active market in share trading instead of rock trading? Obviously "An X is worth whatever someone will pay for it" isn't going to cut it as an explanation.

So yes, I was embarrassed to ask, because I thought it would be the sort of basic knowledge everyone picks up in first year finance, frankly I'm more embarrassed now by the answers of people who think they know something about the market.

If the question is so easy to answer, go ask a first year finance student for the answer and stop trying to flame people on an internet forum.

 

[Spaghetti]

If you don't know the answer, don't bother trying to look smart by posting something up. This is a theoretical question, not something you would have picked up reading graphs on your PC.

Obviously a share is worth what someone will pay for it. So is a rock or a bag of air. What I'm asking is; what differentiates a share from a purely speculative object? Why is there an active market in share trading instead of rock trading? Obviously "An X is worth whatever someone will pay for it" isn't going to cut it as an explanation.

So yes, I was embarrassed to ask, because I thought it would be the sort of basic knowledge everyone picks up in first year finance, frankly I'm more embarrassed now by the answers of people who think they know something about the market.

Well there is a very active market in rock trading. FMG for eg has made many people wealthy because they had rocks people perceived to have potential value in the future. May not be the case at all but they speculate that with the increased demand for this rock that one day FMG may actually make a lot of money. There is no guarantee of course but people speculate on the probability. Gold already has value but if in rock form people at the moment are not heavily speculating on it as the cost to get the bits of gold out of the rock may cost more than the amount of gold extracted. If the demand for gold continues and the price of gold goes up then people will want these rocks even if they simply sit in the ground doing nothing. The probability that one day it will be dug up increases.

 

[barney]

If you don't know the answer, don't bother trying to look smart by posting something up. This is a theoretical question, not something you would have picked up reading graphs on your PC.

Obviously a share is worth what someone will pay for it. So is a rock or a bag of air. What I'm asking is; what differentiates a share from a purely speculative object? Why is there an active market in share trading instead of rock trading? Obviously "An X is worth whatever someone will pay for it" isn't going to cut it as an explanation.

So yes, I was embarrassed to ask, because I thought it would be the sort of basic knowledge everyone picks up in first year finance, frankly I'm more embarrassed now by the answers of people who think they know something about the market.

I take a fairly simplistic view of how and why humans operate, so I'll put a quick spin on this ...........

Humans are greedy .......

Humans need to, and love to make money, because thats what makes economies work ......

A Company is nothing more than a "group" trying to make money ....

For a Company to be listed and sell shares, it needs or wants to get "bigger" ....

It can't get bigger without an influx of money ...

Shareholders provide the money to build the company (They are making a valued judgement that the Company has potential to make even more money ... Call that speculation or forward looking ...... doesn't really matter what you call, its still about money and greed ....

Without shareholders the company would most likely fail in getting listed in the first place ..

Once it is listed, the simple fact that there are a large number of shareholders is what creates a market where greed can be displayed via trading ... In the companies infancy, It is the potential of its worth which dictates its SP, not the dividend it pays ............ After it proves its ability to make money, it may pay a dividend which may then attract a different type of speculator/investor ....

The Rock scenario only has one shareholder, you, so until it displays some worth to lots of people, and you can grow that worth into a company large enough to "list", your market is very limited

A limited market will most times attract less speculators

Less speculators, most times, will generate less greed, so the percieved value of say your rock will be less than it possibly could be

You need to generate some hype and advertising to generate some interest in your rock .... get some greedy investors on board, then hope your rock has more than just granite in it ......

Not sure if that answered your question, but I am interested in this rock of yours Barney.

 

[Rainmaker2000]

This is a pretty amusing thread.......the core question is an interesting one, about the stock that will never pay a dividend, but it all seems to have been muddied.....

Dividends are nice but not essential for value.......many of the most valuable things in our world are valuable despite a lack of potential income....a painting, a stamp, wine, even lumps of gold...

These are not similar to a company however.....just because productive assets are wrapped up in the legal character of the Corporation does not make them valueless if they don't 'pay out earnings'......you will notice that companies have a rainbow of ingenious ways of delivering value to shareholders other than dividends.......you may also note the multitude of legal circumstances that the Corporate 'veil' can be pierced...

This all renders dividends as pretty nice but pretty optional

 

[Trembling Hand]

This is a pretty amusing thread.......the core question is an interesting one, about the stock that will never pay a dividend, but it all seems to have been muddied.....

Yes interesting but I suspect the original poster started the thread just so he can tell others how sharprolleyes he is rather than any genuine discussion.

 

[barney]

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.

A couple of your posts have a pretty aggressive tone Plasmo ….. Not sure why, but I’ll keep buying in at the risk of being crucified …….

Re your above quote:-

I think you would want to sell a million shares in your rock not buy them, cause you already own the rock ??

If the rock makes a "fair profit" each year, how can you consider it worthless??

If you already own the rock (it is in your backyard after all), why are you the rocks "employee"?

The only way you can be the rocks employee is to turn your rock into a company and share your rock with like minded "speculators" .... Of course if you "sell" the idea of your rock as being "worthless" as you state, I doubt you will get many takers !

Might be a few holes in the scenario.

Actually I’m not sure of the point behind your question. ….... If you perceive that trading shares is in essence no different to speculating in general, what does that matter? Does it create moral issues, or simply create hesitancy due to a lack of confidence in the market as a system? ……….. (Serious question). Barney.

 

[kloid]

This is an interesting topic.

Just say for example that I bought shares in Berkshire Hathaway in 1990. Let's assume that I bought 20 shares at $8000 for $160K. Now, 18 years later my shares have a market value of over $2m. I haven't received any dividend in that whole time but my "wealth" has increased substantially. The only way I can realise my wealth is to sell the shares right? What I can't get my head round is why someone would buy those shares off of me if they will NEVER (theoretically) receive any cash for them. They could be sold and sold on forever but unless Berkshire starts liquidising its assets and returning cash to shareholders how would I ever realise my wealth?

I hope this makes sense to someone.

Cheers
Kloid

 

[Rainmaker2000]

That's why it is indeed a good issue to think about Kloid..........

The market often gives too much credit for companies just because they pay dividends......while punishing companies which could, but choose not too......just consider the company whose share price shoots up because they declare a large 'special dividend'.......the fact is, why should this mean the company is more valuable.....after all, earning the money is the hard part, giving it out is easy...

The stock is still valuable even if there are no dividends......buybacks, shareholder discounts, capital resturctures can all be employed instead of dividends.........the key is of course actually having valuable assets and good earnings...that's what matters

 

[kloid]

That's why it is indeed a good issue to think about Kloid..........

The market often gives too much credit for companies just because they pay dividends......while punishing companies which could, but choose not too......just consider the company whose share price shoots up because they declare a large 'special dividend'.......the fact is, why should this mean the company is more valuable.....after all, earning the money is the hard part, giving it out is easy...

The stock is still valuable even if there are no dividends......buybacks, shareholder discounts, capital resturctures can all be employed instead of dividends.........the key is of course actually having valuable assets and good earnings...that's what matters

OK, I understand that not paying dividend can be a good thing - if a company can invest all of its surplus funds and generate a return in excess of the cost of capital then I'd rather it didn't pay a dividend as I'd only waste it on something rubbish anyway. But if we took my earlier example to a silly extreme maybe I'll be able to make my point a bit more clearly:

Let's say I hold my shares until I die in 2050 at which point they're worth about $200m having grown at 10% per annum. They then pass to my son, who also holds them until his death in 2090 at which point those shares are worth around $5bn. The process could continue on for generations. My great-great grandchild could in 2150 have shares worth $1.5 trillion but unless they sell them they will not have anything to show for it. Those shares would represent massive amounts of physical assets, goodwill, employee skills, land, buildings, and so on - I guess what I'm trying to ask is - is the mere ownership of those assets the motivation to buy (and hold) shares even if the owner never sees a $ in their own pocket because everything goes back into the business....someone mentioned owning paintings above - I get that because I can look at a painting, enjoy it, use it to liven up my living room but I can't really do that with shares, or can I?

 

[Arkad]

Value is a nebulous concept.

Lets just say I own shares in a failed textile mill worth about $50 Billion.

I don't plan to sell them. I'd like to pass them on to my kids. Or maybe give them to Bill Gates one day.

What value would they have to me personally?

Well as a start. I would have almost unlimited credit at any bank at any time to buy whatever I choose. No questions asked. Why? Because I would be a zero risk customer.

Given that I have accumulated such an enormous sum, other members of the business community would want my help and advice. I would be offered seats on countless company boards. Governments would want to appoint me to various advisory panels. These would all be paid positions. Why? Because my personal time would have a very large financial value attached to it. I might even be able to charge $650,000 just to have lunch with me.

Why?

Because the creation of vast wealth suggests some expertise in the area of financial management and capital allocation. These are highly marketable skills. They may not be well deserved in some instances, particularly if my shares were themselves inherited.

So even without any desire to sell my shares, which of course, never pay dividends, there would still be value, in a capitalist society, attached to owning them.

Obviously this is an extremely fictitious example and any resemblance to any person living or dead is merely coincidence.

Have fun!