What is the inherent value of a stock?

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Correct me if I’m wrong!

I understand that a stock is an investment into a company, so you own a small part of the company and can get a part of the profits (dividends) and sometimes make decisions for the company.

The price of a stock is determined purely by supply and demand, the displayed price is actually the price at which the latest stock was sold. So it depends entirely on how much people are willing to buy/sell the stock for.

This is where I get confused. What gives a stock its value? Isn’t it purely an instrument to buy and sell (for profit) then? What distinguishes a X stock from a Y stock for example? Why do people want to sell the stock (for less) when the company is doing badly, if the price is not determined by said company? For example if X was doing insanely bad, but people still wanted to buy the stock thus making the price rise even more, why would that be ‘wrong’?

Thanks in advance!

In: Economics

4 Answers

Anonymous 0 Comments

The inherent value of a stock comes from the belief that you can collect dividends at some point in the future. You may ask, “What about stocks that do not give dividends?” They still represent *potential* dividend earnings in the future. The reason the company is not distributing profit as dividends is that they are reinvesting that money which, presumably, hopefully, is growing the company so that when they *do* choose to pay out dividends, they will have significantly more money so the dividends will be higher.

Yes, a lot of the value comes from people buying it to sell it later for a higher price, but ultimately someone needs to be the person at the end of this buy-sell-buy-sell chain – a reason to *own* the stock, not just flip it. That reason is dividends.

The other reason is that stocks usually (but not always) give you the right to vote on company operations. It’s unlikely that your average investor is ever going to own enough stock for their vote to matter. However, small investors may be looking forward to a time when someone with enough cash will buy a controlling share the way that Musk did to buy Twitter.

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