I understand that a share of stock represents a share of ownership in a company. But if dividends are not paid, what is the actual value of that stock? Why does it have value? The company making more money does not flow to me because I own the stock. So is it basically just like owning a baseball card in that if the player (company) does well more people want to collect (own) their cards (stock) and this the price goes up?
In: 76
The simplest answer is it’s worth something because other people will purchase it from you.
It just feels so abstract because we’re used to getting something material when we make a purchase.
There’s lots of stuff about underlying value of the company etc etc, but on the simplest level it has value because someone else will pay for it.
The real answer people aren’t giving you. If a stock never pays dividends, it has no value.
It only has value if people think AT SOME POINT it will pay dividends and so the shares can be sold under that assumption.
Holding a common share entitles you to just about nothing in terms of asset rights. Companies have a list of priority for creditors, common shareholders are usually the bottom of that list. So unless you have a large enough ownership share, a stock which isn’t paying dividends and isn’t EXPECTED to pay dividends will be worthless.
Is the company profitable? Well, where does the profit go then? It’s either paid as dividends or it goes to growing the company. Either way stockholder gets their value. In dividends on in incrase of stock price.
Ah, the company isn’t profitable. But surely it will be sometime in the future, right? Right? Please tell me there will be profit down the road.
Imagine you could own the entire Apple corporation today. The whole thing. Every employee now reports to you, you get to control everything it makes, all of the new research, all of the IP belongs to you, everything. That would be pretty great, wouldn’t it? How much would you pay to be able to do that?
Well, the consensus around the world seems to be that it’s worth about three trillion dollars to be able to do that. Divide that by the number of shares, and that’s what a share is worth.
Let’s say you have a baseball card. That card does not pay you anything but you know that once you decide to sell, you’ll get some cash and that amount is determined how valuable the player on your card is.
Dividends are mostly issued for companies that want to encourage people to buy their stock, it’s also a great way to reward execs/big investors who usually own a lot of stock.
You essentially buy stocks for two reasons: growth or income.
1. The stock is undervalued and you expect the price to go up (buy low and sell high).
2. The company consistently declares dividends, therefore you earn income from holding the shares.
A third reason some investors buy stock is to gain control or influence, but that is reserved for a few select / large investors
Two reasons:
You might invest in a company that doesn’t pay dividends now because you expect it will be much more profitable in the future and then it will pay dividends. For example, you might invest in a biotech company working on a promising drug that hasn’t gone through clinical trials and isn’t approved yet, but the drug could be huge if it does work. Many of the largest technology companies lost money for many years before they finally became profitable.
Also, even without dividends, your stock ownership entitles you to a share of the value of the company if it is sold. If you own 1000 shares out of a million total shares, and the company is sold for $30 million, you would get $30,000.
The shares that you own are valuable because of the “full value of all of the assets” + potential future earnings that the company can make using those assets. so if the company is being bought out the agreed upon value is based on the full value of the assets, that’s the only reason your shares are worth anything. Basically the shares are backed/valuable due to the companies assets and potential earnings
what value does a 22k gold chain have if it doesn’t pay dividends? It has financial value.
It has value because it has growth potential – and a business’ aim is to maximise growth.
The company itself was profitable – dividend or not. The dividend is actually just the money going out the door, and so is useless to the company: even if the investor reinvested the money, it wouldn’t go into operations.
When the money is instead retained, this is either to be stored as cash for reinvesting into making the company grow, or adapt – or else is money kept aside as protection against, for example, a recession. Or else to pay off debt.
Giving out dividends doesn’t help the above. Which is okay if the company is in a stable market environment, with shareholders focusing more on passive cashflow. But in a dynamic and competitive environment, a company can’t really afford to be stagnant.
And the better the survivability and competitiveness a company has, the better its future prospects versus other companies.
Latest Answers