Why are stocks percieved as valuable? I get that they're associated with a...

Sir_Gallonhead
Sir_Gallonhead

Why are stocks percieved as valuable? I get that they're associated with a company, but that dosen't mean they have value. Why do we panic sell when a company posts a bad quarter? Why does the price rally when the company posts a good quarter? Speculators arent betting on a company, they're betting on the actions of the other speculators. So what ties a companies performance to a stock's value

All urls found in this thread:
http://www.stockprep.com/stockdefinition.htm
takes2long
takes2long

@Sir_Gallonhead
we're not doing your homework for you

Bidwell
Bidwell

@Sir_Gallonhead
Basically shares are ownership of the business and it's future profits

iluvmen
iluvmen

@Sir_Gallonhead
Why are stocks percieved as valuable?
Well, that's kinda the whole idea of securitization, isn't it?

So what ties a companies performance to a stock's value
Nothing inherently. There is no obligatory link.

Deadlyinx
Deadlyinx

@Bidwell

Through dividends? They usually don't pay much

Though I understand a bit how you can "bet" on a prosperous future of a given business by buying its stocks (which according to you will only go up), gaining dividends and eventually selling them for a higher price if you suspect the prices will go down

As opposed to, say, day trading

Techpill
Techpill

Am I right to say that, after the IPO, the business will gain nothing from the rise of its share prices?

SniperWish
SniperWish

@Techpill
@Techpill
Yes. The cult of shareholder value is cancer that's slowly eating our economy from the inside.

LuckyDusty
LuckyDusty

@Sir_Gallonhead
http://www.stockprep.com/stockdefinition.htm

DeathDog
DeathDog

@SniperWish
cancer that's slowly eating our economy from the inside
I heard it was Bernie Sanders

BinaryMan
BinaryMan

@DeathDog
be IBM
Liquidate hugely successful business segments to boost quarterly earnings
Fire all the employees
15 years of doing this later
No profitable divisions left
Company on the brink of insolvency
This has happened way too many times at different corporations. Meme all you want, but it's causing our economy to decay.

Illusionz
Illusionz

@BinaryMan
This.
The telco company I work for just sold off some Chinese business it owned for more than a billion dollars, and instead of investing that money into their increasingly failing network they're instead giving it to the shareholders to keep them happy after the price went down after multiple widespread outages caused by cost cutting.

idontknow
idontknow

@Illusionz
let me explain why you pay your share holders. You pay your share holders to hold the value of your stock so when your CEO , Owners and other major insider shareholders decided to dump their shares their still valuable. Dividends usually keep share prices up because long term investors love em. so people keep eating dividend paying companies up.

PackManBrainlure
PackManBrainlure

@idontknow
You pay shareholders because they appoint board members who will fire you.

OP, imagine if you bought 5% of a local burger resturaunt. What gives that holding value? The same answer goes for stocks

Sharpcharm
Sharpcharm

@idontknow
I understand why they do it, but it's not going to help when the share price continues to fall because they are focusing on the shareholders and not the actual customers.

eGremlin
eGremlin

@BinaryMan
Sounds like a problem with no solution.

Unless you're the type that figures meaningless action/legislation is better than nothing.

Poker_Star
Poker_Star

@iluvmen
securitization
That word doesn't remotely mean what you think it does. Do some research before you make a fool of yourself in front of real people.

@Techpill
Am I right to say that, after the IPO, the business will gain nothing from the rise of its share prices?
Yes, but no. Higher share prices don't result in any pure economic benefit to the company, but it has many substantial incidental benefits. For instance, the company can use stock instead of cash to pay incentives and bonuses, allowing it to attract and retain skilled management. A strong stock price is also a good indicator of financial solvency, which makes it easier to obtain trade and bank credit, as well as other financing such a bond issuances.

@idontknow
Dividends usually keep share prices up because long term investors love em.
This is patently false. Dividends are horribly tax inefficient, and dividend stocks are a terrible addition to at least 50% of people's portfolios -- including most people on this board.

Stocks are not one-size-fits-all.

@BinaryMan
it's causing our economy to decay
Who fucking cares if IBM goes broke? Someone else will step in to buy those assets, form a better, leaner, more efficient business, and the economy gets stronger.

BinaryMan
BinaryMan

@Deadlyinx
There are two ways of getting a return - capital gains (share price goes up) and dividends (profits distributed to shareholders).

In theory the share price is based on company profits. A smaller company can grow quicker so share price goes up. A larger company can't grow much so pays out more in dividends - share price goes up.

The business doesn't directly gain from share price increase, but makes future financing easier.

Usually directors are incentivised for share price to go up (by metrics like return on equity). So they may buy back their own shares or takeover smaller businesses to hit their targets and get bonuses.

Owning shares is historically the best way of investing over the long term. In theory you can beat inflation over time, but they are riskier than other assets.

hairygrape
hairygrape

@Poker_Star
dividend stocks are a terrible addition to at least 50% of people's portfolios -- including most people on this board.

you're wrong

many many dividend stocks also experience long term growth of share price. Shit like Ford and Verizon are excellent buys for anyone long term

t. value investor

Snarelure
Snarelure

@Techpill
Secondary offerings, stock incentive plans to pay employees and sometimes creditors use stock prices to determine how much they can loan

Often times, executives and directors have shares, so if a share goes up, they get more money. Giving them incentive to move the price up

AwesomeTucker
AwesomeTucker

What if 10% of a company is represented as stocks, and these drop from 100 bucks a piece to 1 buck, forever. Am I right in thinking that the only way this matters for the company is that they won't get as much cash if they do an IPO again? Why else would they care?

Stupidasole
Stupidasole

@Poker_Star
dividend stocks are a terrible addition to at least 50% of people's portfolios

What do you think of pic related?

Dreamworx
Dreamworx

@AwesomeTucker
What if 10% of a company is represented as stocks
...what do you mean by this?

this matters for the company
This matters for the company's owners who will get very angry at the company's management.

Raving_Cute
Raving_Cute

@Dreamworx
...what do you mean by this?
Stockholders own 10% of the company. Or is this not possible?
This matters for the company's owners who will get very angry at the company's management.
But why?

likme
likme

@Raving_Cute
Stockholders own 10% of the company. Or is this not possible?
No, stockholders own 100% of the company. Where would be the remaining 90% otherwhise?

But why?
Because the owners' net worth is divided by 100, and that's bad for them? Shares are an asset, just like real estate or cash.

Deadlyinx
Deadlyinx

@Deadlyinx
There are instances where there is a transfer of money between the company and the shareholders. This is what gives the stocks value.
For example, dividends. And share buybacks. And payouts from any class-action lawsuits.

Also, gaining a controlling interest in company stock will get you seats on the board of directors, and enable you to affect the company's decision-making. If you're just a small time investor and don't have the business sense or sophistication to do something like that, your stock still has value because someone who DOES want the stock for that purpose is going to have to get it from you.

These forms of valuation of stocks are what is called "fundamentals", i.e. what the stock SHOULD be worth. In practice, the way the laws of the land are structured enable excess liquidity in the market (thank you wall street lobbyists). Meaning there's a ton of speculation going on that leads to frenzies of buying and selling, thus the market swings rapidly up and down on a minute by minute basis.

Thus although the short term value of the stock is purely a gamble, the long term value conforms to the fundamentals (or at least, it's supposed to). Long term investors can use their knowledge of business to turn a profit without having to gamble on the random swings of fortune of the marketplace. If they're part of a larger investment group, they can even buy up controlling interest in the company and influence the board of directors to make certain the company goes in the right direction and their investment is secure (this is how guys like Carl Icahn made their billions).

It's very unfortunate, they've structured the laws to turn the stock market into a casino. They've got supercomputers cranking day and night to predict the minute by minute swings in the market and siphon out as much money as they can, it's actually a rather small group of people doing this. They're taking advantage of the average person who thinks they can get rich on a gamble.

BinaryMan
BinaryMan

@Stupidasole
Show it on a tax-adjusted basis. What matters isn't lines on a chart -- what matters is what goes in your pocket (and stays there).

Disable AdBlock to view this page

Disable AdBlock to view this page