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
So there are two ways you can make money from owning a stock:
the first is dividends. When a publicly owned company makes a profit sometimes they will return that profit to shareholders in the form of a dividend, you get a proportional share of the profit based on how much stock you own.
The second way is an increase in value of the stock itself. The price of a stock is theoretically determined by collective decision-making, estimating the total value of the company including future earnings, divided by the amount of stocks. The price of a stock can therefore go up when the company is expected to make more money, or when the number of stocks decreases. Sometimes when a company has excess profits, instead of giving them back directly to investors as a dividend, the company will instead buy stocks and destroy them thereby decreasing the number of stocks in existence and increasing the value of the remaining stocks.
When you buy from a company, there are two effects. One, it demonstrates that the future earning of the company, and thus helps support its increased value evaluation, and two, they should make a profit from that sale. This profit will be either reinvested to help the company grow (thereby improving its future earnings potential) or return to the shareholders via dividend or stock buyback.
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