I read that there are two ways for companies to compensate its shareholders:
1. Pay a dividend.
2. Buy back its stock (which reduces the overall number of stocks up for grabs and by that, increases the % ownership of every shareholder in the company).
Amazon does neither. It just reinvests its profits in the business.
So how come it stock price increases?
Is it just of anticipation that one day it’ll pay dividends or buyback its stock?
In: Economics
You don’t seem to accept others answers so let me try. Let’s use Amazon because you like that company.
We both know Amazon is growing and making money hand over fist. Also, as you point out, they can:
1) Pay a dividend to stock holders. Amazon is worth less (dividend cost cash), stock holders have more money. Stock price drops.
2) Buy back stock. Amazon is worth less (they paid for stocks) but each stock holder’s share is worth more (Stock price rises)
3) Re-invest the earnings. Amazon gets even bigger and makes even more money. Stock holders are happy. Amazon is worth more so stock price rises.
4) Amazon sits on the cash. IRS considers an _accumulated earnings tax_ and essentially _forces_ amazon to pay a dividend. IRS likes dividends because they collect tax. They don’t like companies sitting on cash cause they can’t tax that.
OK, you ask _WHY_ does the stock price go up or down? One answer is that Amazon has potential to make money in the future and shareholders are paying for that.
But you still say _WHY_ because how does that money _EVER_ get from Amazon to a stock holder. There are a lot of answers for this.
One answer is that _IF_ the stock price doesn’t go up, then corporate raiders might grab the company. If the building, desks, chairs and cash in a bank are worth more than the stock costs, it’s a no brainer to just buy the company and sell the stuff and transfer the cash in the bank into your own account.
Another answer is that if a company has a lot of cash sitting around, the IRS has ways to essentially force them to pay out that money as a dividend.
A third reason is that if the stock price does NOT go up, then the shareholders will elect a new board of directors who will do something different (change operations, acquisition, pay dividends, buy back stock). This is very important. There is _tremendous_ pressure on a board of directors and the corporate c-suites to make sure stock price goes up. These people are paid to find ways to make it go up. And they will or they will get fired.
if the company gets more valuable (by selling more products or services) the stock which is a percentage of the company gets more valuable
If you buy a stock you want the company as a whole to grow not just your percentage in the company so amazon stocks are getting more valuable because they are way bigger than 10 years ago and one reason they could grow this fast is because they don’t pay out dividend but reinvest it to buy more warehouses and stuff like that so they can make more profit.
Stock prices go up and down based on what people think other people think other people think (etc) is going to happen the the company.
It’s because you can resell the stock to other people on the stock market. The stock doesn’t even really represent the current immediate value of the company, but rather the potential value of the company in the future, if it were to ever get sold. And that value is set by whoever is currently buying and selling at the time.
And basically when stock prices go up for a company the actual company doesn’t directly make more money. They do get the potential to sell new stock or stock held in reserve at a higher price though.
More like anticipation that the companies balance sheet will improve, showing more value. More value = higher per share price. Dividends are DIRECT payment back to shareholders, stock buybacks indirect ways to increase the value of individual shares.
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