I just don’t understand how it works…when I hold shares in a company and I spend money there, am I technically making a very very small amount of that money back?
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what is the simplest way to explain how stock prices increase then?
In: Economics
yes, by helping to keep their earnings positive you are contributing to the future stock price increasing…..but we’d be talking 0.00000001% so not an effective way to “pay yourself” with your spending habits
Not directly.
But increase in revenue and profit will likely make the stock increase in value. But it all depends on if people want to buy the stock.
But if you buy an iPhone just because you own apple shares, that’s stupid
Its like voting in an election. One vote doesn’t change anything but a lot of votes in the same direction does…
There’s not a direct connection between the company’s revenue and its stock price. The stock price reflects what people think the company is worth, which is in part based on its revenue. So by spending money the company has higher revenues and that could cause people to value the company more making its stock more expensive. So in an indirect way, yes. But it’s not a sure thing. Amazon historically had high stock prices despite losing money because investors believed in its potential. Companies without foreseeable growth might have high revenues but a relatively low stock price. ETA: Also if they pay a dividend, you’d technically be getting back part of their revenues.
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If the company is profitable and pays a dividend, could imagine you’re getting a tiny tiny tiny tiny bit of your purchase price back. All the money kind of swims around in different pools so it’s not quite that simple, but there is a tiny bit of truth to it.
One transaction isn’t going to make a material difference (unless you were like an airline buying a dozen aircraft from Boeing). But your $100 trip to Target or buying a new iPhone isn’t going to move the needle for Target or Apple’s stock. Combined with millions of other customers, it would. The profit Apple makes of your one iPhone, divided among the almost 16 billion of shares is infinitesimal. The profits Apple makes off all the iPhones, computers, etc. they sell does climb into the billions of dollars. Share price is typically a multiple of the annual earnings, so as the company’s earnings (profits) grow, so too does the share price.
Next time the company publishes its accounts the revenue will be slightly higher than would otherwise be the case. Assuming they made a profit on the sale the total reported profit will be higher, as will the amount of assets held by the business. As a result the equity (the total assets minus liabilities) will also be higher.
The company may choose to pay out the extra cash as a dividend, in which case you will get a small fraction of the profit from your purchase back into your bank account. They may choose to reinvest the extra cash into improving the business in some way, in which case you hopefully see a return in the form of extra future profit, or they may just hang onto the cash in which case your shares represent ownership of a small fraction of that extra cash.
Now investors who pay attention will look at those published accounts, and see that the company reported more revenue and has more cash on its books (than the hypothetical alternative where you didn’t make the purchase). As a result they may decide that the company is undervalued; that it is a good bet. As a result they may buy shares (or not sell shares they already hold), and so increase demand for the shares and in turn drive up the price.
Of course your individual purchase will be a tiny, negligible number in the accounts of any publicly traded company.
To answer your second question first: Stock prices are based on supply and demand of shares. The number of shares outstanding normally doesn’t change very much so supply stays pretty constant. If more people are buying than selling the stock price rises, if more people are selling than buying the stock price falls. That is it, it doesn’t matter if a billion people shopped at a company or 0 did.
With that being said, when someone purchases a stock they’re buying a right to the company’s profit. Higher profit will cause more people to want to buy the company stock causing the price to rise. Indirectly if enough people buy something at a company it would cause profit to rise and more people to buy the stock, but the share price rises because people are buying.
Stock Prices are loosely coupled to a company’s profits, so spending money at a company does help the stock price a little.
The primary driver in the modern stock market is not the company, it’s how much today’s buyer thinks he’ll be able to sell the stock for down the road. That’s largely based on how people feel about the company. Reality has an effect on that, but it’s mostly vibes.
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