Does anyone else think the stock market works in a very strange way?

Question

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?

Answer 1

While I agree that the stock market sometimes acts a little crazy, I disagree with the statement that "there's absolutely no inherent value whatsoever in a stock that does not pay out dividends." That's a common misperception, but I think it's simply not true. By that logic, a treasure chest containing $1,000,000, a piece of land, and a diamond ring have no value because they're not paying out dividends.

When I buy a stock, I'm buying a small piece of the company. If the company has 100,000,000 shares and I buy 100 shares, then I own 1/1,000,000th of the company. That means I own part of their land, their buildings, their equipment, their cash-on-hand, any patents they hold, etc. Even if they shut down tomorrow and sell off all that stuff, it's definitely worth something.

If it's a good company, they will make money every year. Let's say they make $50,000,000. My share of that is $50. The company could pay me the $50 as a dividend or they could use it to expand their business by building a new factory, hiring more workers, etc.

If they pay me the dividend, the company stays the same size and will probably only make a little more than $50,000,000 next year (due to inflation or maybe better efficiency that reduces expenses).

If they build a new factory, buy new delivery trucks, etc. the value of the stuff that they own goes up, which means the value of my share of the company goes up. In addition, their earnings will probably grow faster and they might make $70,000,000 next year. As the company grows, its value gets higher and higher, which is why people will pay more for the stock later.

If I have a job that pays me enough to live on now, I don't need those dividends and am perfectly happy to watch the value of my investment grow so I'll have more to use when I retire. At that point, I might need extra income, so I might prefer dividend-paying stocks, but during the "wealth accumulation" phase of my life, owning a piece of a company that becomes bigger and more valuable every year is just fine.

Answer 2

A company that pays dividends decides that they can't find a better way to grow the company so they give the money straight to investors. A company that reinvests that money found ways to grow the company. Plus the investor doesn't pay taxes on that growth.

Some companies are stuck paying divendends when they shouldn't be, otherwise investors will sell, and this hurts the company.

The value of a company not paying dividends is the growth. One is not going to find all investors or even a tiny percent buying because the employees bought a pet or something ridiculous because it doesn't contribute to growth. Stocks may go down because of something in the news that would effect growth, but keep in mind investors as individuals have many different styles or strategies.

Answer 3

The markets sometimes behave strangely, but they're not as arbitrary as that. When you buy stock, you own a percentage of the company. A company has value, even if it's not paying dividends.

If everyone agreed to value stocks based on the number of employees who own glow-in-the-dark sandals, the price of Microsoft stock might plummet to nearly $0 per share. Then you could buy the entire company for $5000. Yes, Stevie is now 100% owner of Microsoft and could easily run it for personal profit or sell off the pieces and pocket hundreds of billions. The market obviously won't let you buy it that cheap.

The market value of a company is based on actual current value and projected future earnings, which makes sense. (Projections change and people project differently, which is why prices constantly change.)

edit: OK, bad example since, as rimihage points out, Microsoft pays dividends.

Answer 4

The reason is they could pay out dividend if they want to, but they decide to keep it to invest it in new projects.

Take Microsoft as an example in the nineties; instead of paying dividends based on the cash flow Windows generated they choose to reinvest in new product areas like X-Box, MSN etc so they could generate even more cash flow.

Answer 5

You obviously have no idea hoe the stock market works or what determines a stock price.
Most of the other answers to this are stupid and they do not know what they are talking about either.