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?
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A share of stock provides you with a share of equity or ownership in a company. As a result the market capitalization ( number of shares times share price) tells you how much a company is worth. If a company can make more net profit then generally its value increases, as it would take more money for some other entity who wanted to buy it to be agreeable. With share ownership comes a vote towards board meetings, own enough shares and you can control important things. Additionally if a company is sold and you own shares you get paid out as part of that acquisition. For example I bought 100 shares of Red Hat in 2008 for 25$. Around 2018 IBM bought out Red Hat for 192$ a share. Red Hat board approved the sale because they felt that was a fair price for the company. As a result shareholders were forced to sell for 192 a share. I made a profit of (192-25) * 100 because I bought Red Hat. Why did I buy it? Because I thought the company was undervalued and that’s it’s profits and thus it’s market value would surely increase in the future.
That is just one way where you can get your investment return. There are other ways a company can engage in returning value to shareholders besides issuing dividends. One popular mechanism is using surplus cash to perform a share buyback where the company purchases and then cancels a large volume of shares. This arguably net zero act returns value tonshareholders by increasing the price of shares (its a little more complicated but this is the gist of it). Because they just effectively gave you a bigger ownership percentage. Dividends are another way in which value is returned to shareholders. But there are entire books by great economists about why dividends are a good or bad thing so I’m. It going to go down that road. Suffice to say Warren Buffet one of the brightest financial minds of our lifetime has a strong no dividend policy for his company Berkshire Hathaway. I’ll leave it as an exercise to you to go look at their share price and growth. (Hint it’s the most expensive stock in the world.)
Let’s get this back to dirt simple again. Certainly you see the value of real estate because homes and buildings cost money right? So let’s compare this to investing in real estate. If a piece of land is worth more then the land’s title is worth more right? But there is no dividend in real estate. You only make money when a sale takes place. In that instant the value is realized through a transaction and the investment pays off or doesn’t. Think of stock as like being a portion of the title to that land. Because that’s what it is. But instead of land you own part of a company. And unlike real estate there are ways for the business to return value to the investor sooner because it isn’t an all or nothing deal. The business generates revenue in order to exist. They can do a number of things with that revenue, they can reinvest it in the company they can sit on it they can invest it or they can return it to investors just to name a few things.
Stock only exists because the company wanted it to, stock is issued as a means for a company to grow and acquire capital. The company is selling shares of its ownership in exchange for capital, they then use that capital (from the IPO) to grow. And hence forth they continue to aim to grow to please it’s shareowners so that they want to maintain ownership of the shares and retain the board members.
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