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Matt Humberto | Does anyone else think the stock market works in a very strange way? |
I understand why someone might buy a stock from a company that pays out dividends. That makes sense.
But there's absolutely no inherent value whatsoever in a stock that does not pay out dividends. You make money with that stock only by selling it a higher price.
It's sold at a higher price only because there are more investors willing to buy it than sell it. But investors are eager to buy it only because the company has/or is expected to report good earnings and growth.
But if all the participants of the stock market were to agree to it, tomorrow we could decide to value companies based on how many of it's employees are expected to buy pets, or how many cars its CEO plans to buy, or how many of its factories will be colored red, ANY RIDICULOUS VARIABLE WHATOSOEVER, and the stock market would work exactly the same.
It just so happens that investors worldwide have decided to label companies with high earnings as the "valuable" ones. Isn't this amazing?
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Thanks for your replies, but most of you have missed the point. P/E ratios, projected earnings, mergers, etc., cannot change the value of your stock. Only buyers can. Buyers must offer to buy your stock at a higher price than what you originally paid for it, and that is the only way you can make money with a stock that does not pay dividends.
And what do those buyers look for? A company with strong financial ratios, etc....those same factors that we already have shown do not inherently change the value of the stock.
Stock has value only because investors have decided to give it value, and expect other investors to agree it has value as well. |
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kheserthorpe
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It is not amazing, it is plainly obvious what people's intentions are.
Stocks values are based on future dividend flows. Period. If all future payouts were known, the value of the stock would fluctuate only with real interest rates, which would be used to discount those future cash flows.
Companies that are expanding rapidly do not pay dividends - and are encouraged not to - because shareholders believe the company can earn a higher return then they could if the money were returned.
But the assumption is that when the company's growth prospects slow, it will begin paying dividends. Significant ones.
Do analysts and investors get carried away with companies growth prospects? yes. THat's why 'value' companies (typically high dividends, low prospects) outperform 'growth' companies over time. People overestimate how bright the future is. But they are somewhat accurate, growth companies as a group will deliver large future dividends. Just not quite as large as their supporters hope. |
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John L
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Dividend paying stocks simply divest their profits to the shareholders rather than reinvest. For example if Company A is valued at $50/share and Company B is valued at $50/share, and both companies earn $10/share profit, then both companies are theoretically worth $60/share. If company A gives out that $10/share in dividend then the stocks price will remain the same while with company B the stock price will rise to $60/share. Either way you make the same profit, but the difference is in what the company want to do with the profits. This is all a gross oversimplification but you get the idea. |
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Hans
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yes, that why we should options to hedge the stock , and we can make profit whether the stock price is up , down , or do not move. |
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Chris
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It appears that you are ignoring P/E ratio as a valuation (among others). Price usually falls or rises to earnings in line with competitors or the sector. It would be irrational to allow companies prices to drop to P/E's of one because we cannot determine what might happen in the future. There is no rational valuation to the color red however there is one that includes Earnings Growth. Stocks are bought at value when the current price is lower than the expected price based on forward earnings. You can't assign arbitrary values to things that have value (not direct but assumed). |
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DeltaForce
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The flaw in your logic is that the valuations placed on companies are not arbitrary. They are based on real assets: The perceived earning power of the company. Your statement that there is "absolutely no inherent value whatsoever in a stock that does bnot pay out dividends" is simply wrong. The value is just expressed in a different way than you expect.
Whether or not the company disburses the earnings as dividends is a separate question. Owning a piece of a company that is generating earnings is a good thing. The board, through the management, will figure out what to do with those earnings later.
Investors will always be there to participate in companies with real earnings power. To say that is the same thing as valuing a company based on some arbitrary measure is just plain wrong. |
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acmeraven
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Yes it is. I also find it amusing when lightening strikes and the thundering herd stampedes in one direction or another for no apparent reason. Look at Sun Micro as an example; no debt, 8 billion dollars in cash, expanding market, yaddah. A week or so ago the talking heads said that Sun didn't meet their sales projections or something; ie, they only had 498 million dollars in sales instead of 500 million so the world wasl going to end. Bam! The herd stampedes in one direction. A few days later it becomes apparent the world isn't going to end and reality sets in and it goes back up. I sometimes wonder if the big boys somewhere contrive to release the male bovine excretement information to make money from wild swings? |
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Robert L
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I agree with you! That's why I own only stocks that pay dividends.
If you like to read, try "The Future for Investors" by Jeremy Siegel. You'll find he agrees, too. Siegel is a professor at the Wharton Business School and has a PhD. from MIT.
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pri k
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Surely not all |
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SMEAC
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Stock Market Investment is a gambling casino,and should be viewed as nothing more. I also think the stock market works in a very strange way, in that the idea is to but low and sell high,but every time the market hits record highs, it attracts record buyers.When gravity prevails,they weep,scandel. This link may help http://wallstreetradionetwork.com/ |
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