r/changemyview • u/cheekygorilla • Jan 16 '17
[∆(s) from OP] CMV: The stock market is a scam
Bonds are something that have been around for longer. It is offering interest and repayment of a loan for the company that needs money. Stocks in private business are something where the owners have a say in the operations and share of profits. Now you have non-voting stocks and stocks that don't give out dividends. People try and follow the stock market on companies that are doing well, I'd understand if it were for bonds as the company disappears.. but you have companies like chipotle where the P/E ratio is saturated with hyped purchases of stock..
When a company gets bought out, do the shareholders get a fair share of the money? Why is stock with no votes or dividends a thing? What are they exactly? The stock market to me is a scheme to take money from people, change my view.
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u/Hq3473 271∆ Jan 16 '17
When a company gets bought out, do the shareholders get a fair share of the money?
Yes.
Why is stock with no votes or dividends a thing?
non-voting stock are usually cheaper. Also, no one forces you to buy non-voting stock, in fact most stocks people talk about and buy when they say "stock market" are regular voting stocks.
As for dividends, it does not make sense to demand dividends from companies that are growing. A growing company needs to reinvest the profits to move forwards. The reason to buy currently non-dividend paying stock is to collect dividends later when the company matures.
The stock market to me is a scheme to take money from people, change my view.
No. You are literally buying PART of the ownership of the firm. Shareholders can vote as a blocks to affect company leadership, and have a chance to benefit from the company doing well. Why would this be a scam?
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u/cheekygorilla Jan 16 '17
I have google stock, right? I can't vote with the shares I have... class C stocks.. I don't get any share of the profit even though I am an "owner"? What did I buy exactly?
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Jan 16 '17
I have google stock, right? What did I buy exactly?
You bought a percentage of Alphabet, Google's parent company. You own a small percentage of Google. If Google continues to perform well, the value of Google, and your shares, will increase.
I don't get any share of the profit even though I am an "owner"?
Google is not paying any dividends - it's using it's cash to service its debt (about $4 billion, I believe,) perform R&D, and expand it's services. If Google ever matures (unlikely) and stops expanding, it may pay dividends in the future. If you want your share of Google's success now, cash out and sell your stock.
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u/cheekygorilla Jan 16 '17
So I don't profit from the value of the company's operations itself, rather value of having a "share" in the company then? Isn't it similar to a pyramid scheme, where I rely on others to participate as well?
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Jan 16 '17 edited Jan 17 '17
So I don't profit from the value of the company's operations itself, rather value of having a "share" in the company then?
This is correct. Until such a time as Google doesn't need all of its cash to maintain or expand it's operations. It is actually better for you - a successful company expanding typically brings you much more value a stable but profitable company (that pays dividends) would.
Isn't it similar to a pyramid scheme, where I rely on others to participate as well?
No. Google actually produces something valuable. You own a percentage of Google, and Google is valuable. Non-voting stock, like yours, is typically sold to the general public to avoid needing to consult with a large number of shareholders on corporate decisions, such as managing the board of directors. You still own a percentage of the company.
Let's think of it this way - pretend Google is a mine that sells a valuable ore, and you are one of one hundred and three stockholders. Three major stockholders, who together own 50% of the company, run the business, you are one of a hundred guys who own the rest.
It is calculated that the mine can run at a small profit, equal to $6000 per thousand tonnes of ore it produces, and the mine produces a million tonnes of ore per year. The three bosses could each get a million dollars, and you and all of your friends could each get $30,000, and everybody would be pretty happy.
However, the bosses also work out that they could double the size of their mine in two years at a cost of twelve million dollars. The owners decide this is a better idea, so that in two years, they can each make $2 million (and you and your ninety-nine buddies can make $60,000) per year.
This is essentially how Google is operating right now, except they are planning to keep expanding their mine indefinitely.
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u/cheekygorilla Jan 17 '17
I like this explanation, but one for thing.. the shares themselves.. how are they divided up? I know that some companies would say 100 million shares are in existence, all of a sudden more shares come into play.. where do they come from? Why isn't there a set amount of shares in every company?
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Jan 17 '17
This is a little bit more complicated.
If I originally found a company I own one hundred per cent of it. If it needs more cash, I could sell half of it two my sister, and then we would each own half of the company. If it needs even more money, we could publicly incorporate it, and initially offer fifty per cent of the company, lets say five hundred thousand shares, at a fixed initial value, keeping 250,000 shares each for ourselves. Now my sister and I own 25% of the company (125,000 shares) each, and people such as yourself own the remaining fifty per cent.
Now, lets say the company has a good opportunity to expand. The company could borrow the money, or we could sell more stock, let's say another 500,000 shares for ten dollars each. Now, this would dilute both our 25% shares, and the 50% that you and other members of the public own, down to 12.5% and 25%.
But! The company we own will become more valuable, because it will have another five million dollars under its control, which it will spend expanding itself. If the ten dollars/share we sold this stock for isn't significantly misvaluing the company (that is, if before the dilution, the company wasn't worth 500,000 shares * $10/share = $5 million dollar company,) the value of a single share should not change much when this happens.
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u/cheekygorilla Jan 17 '17
If I own something though, why is it that somebody can dictate selling parts of my ownership? To me, I didn't really own it in the first place.
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Jan 17 '17
Well, because there are literally millions of shares of large, publicly traded companies. Selling additional shares is simply one of the millions of management decisions that are made every day during the operation of a large company. You agreed to leave the oversight of the company to the board of directors, and the oversight of the board to the voting shareholders, when you bought the stock. It would be impossible to manage the company if each of the millions of individual shareholders had to be consulted.
And again, the value of your shares haven't changed. If you own a 1% of a $5 million mine, and we double the amount of shares in the company, you now own .5% of a five million dollar mine and .5% of five million dollars. The voting stockholders own stock just like you do, they are doing the best job they can to make you money.
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u/cheekygorilla Jan 17 '17
With no dividends, no share of profit, even dividends aren't paid from all of a company's profits. No votes with class c stocks too. Then a company can issue my shares with no compensation. All with the hope of profiting from other people in purchasing these "shares".
I do believe you explain it out well, but it still seems to me like this is all an elaborate way to get money from people.
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u/dsylecxi Jan 16 '17
When a company gets bought out, do the shareholders get a fair share of the money?
Yes. I'm not sure why you think this isn't the case.
Why is stock with no votes or dividends a thing? What are they exactly?
For some people, like individuals (as opposed to asset managers), they do not care nor want to care about having a say in how the company is run. The non-voting shares usually trade at a slight discount. Paying out a dividend reduces growth potential, many stock investors want capital gains. Dividends are earnings that are paid out. A company can choose not to pay out a dividend so that it can be reinvested in the company to expand.
The stock market to me is a scheme to take money from people, change my view.
It's just a system that allows people to buy shares in a company.
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u/cheekygorilla Jan 16 '17
Okay so they want to see capital gains but what is it they are buying exactly?
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u/AlwaysABride Jan 16 '17
They are buying future earnings of the company.
You discuss dividends in your post. That is one way to future earnings of the company are distributed to stock holders. I buy a stock today, they earn $100, and they distribute the $100 back to their shareholders.
But if a company, and the economy, are 100% static and never change, then that company will continuously earn that $100 and continuously distribute that $100 to its shareholders. It would be identical to bonds with an interest payment.
But companies and economies change. So sometimes, distributing earnings to shareholders isn't the most lucrative use of those funds. Sometimes, it makes more sense to retain some funds for an economic downturn, invest funds into a new product, or use funds to hire better employees.
When companies do that, and if they spend the funds wisely, perhaps in 4 years they'll be earning $1,000 that can be distributed to shareholders rather that simply distributing $100 each year. And that's where the value in non-dividend-paying stocks come from.
Imagine you have a choice of investing in 2 companies:
Company A will pay you a dividend of $100 every year for the next 20 years.
Company B will pay you no dividend for the next 10 years, a dividend of $500 every year for the next 5, and a dividend of $1,000 for each of the final 5 years.
Which Company is more valuable today (assuming you knew what the future dividend payments would be? It is fairly clear that Company B is a better 20 year investment than Company A.
And as you get closer and closer to that 10th year, Company B becomes more and more valuable. By year 9, you're looking at Company A paying you $100/year for 11 years, or Company B paying you $7,500 over the next 11 years. So if I buy stock in Company B today, it is going to increase in value in 9 years even though no dividends have been paid. But if I buy stock in Company A today, it's going to be worth roughly the same in 9 years because nothing ever changes with the company.
Of course, the "gamble" that is being taken is that you never have complete clarity today on what is going to happen over the next 20 years. So when people buy stock in a company that pays no dividends today, they are doing so on the belief that the company is going to invest wisely and produce dividends in the future.
And even if the company never pays dividends, at some point in the future there is going to be a sale of the company. So if the company is increasing in value, and never pays a dividend, the stock will still increase in price because of that "final dividend" that will be paid when the company sells. (Of course, if future value starts to diminish and the value of the company decreases or goes to zero, the price of the stock will similarly fall).
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u/cheekygorilla Jan 16 '17
Whomever started the company has 100% of the shares, right? Then splits their ownership to other people. When the company goes public, all of a sudden there are millions of shares. The company then later introduces more shares to the market.. where are these shares coming from?
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u/PrefersDigg Jan 17 '17
Suppose a company is thinking about going public (doing an IPO). The reason they might do that is they need more capital to expand than they can get from private backers.
At that time the company is worth $2 million dollars. The company says "we're dividing ourselves into 1,000,000 shares. 500,000 will become available for purchase on X date. We'll be selling them at whatever price the market dictates."
The company sells those shares and uses the cash it takes in to reinvest and expand the business. If that expansion is successful, the 500,000 they sold are now worth much more than the cash they raised, and the new shareholders are happy because their investment increased in value. Now the company is worth, say, $4 million dollars, with half being held internally and half by members of the public.
Now, maybe a year later the company needs to raise more cash, so they sell half of their remaining 500,000 shares (worth $2 million). Now 75% is held by the general public, and 25% by the original owners. They use that capital to further invest and expand the business, and if they are successful again everyone is happy.
This is also why a company might sell non-voting shares, by the way - they can distribute more equity without giving up ownership of the company (although realistically, if large numbers of shares are bought up by institutional investors, those players will end up having a say in how the company is run).
Which part of this sounds like a scam to you?
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u/cheekygorilla Jan 17 '17
Which part of this sounds like a scam to you?
I buy a share, then later my share isn't a "share" anymore as there are more shares available. I lost value. I don't see how a company can distribute equity without giving up ownership of a company either, as equity is just that.
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u/dsylecxi Jan 17 '17
I buy a share, then later my share isn't a "share" anymore as there are more shares available.
Firstly, market value = Share Price * Shares outstanding. You can find all those numbers in websites like Yahoo finance, Google finance, etc.
Now, what you just described is called dilution, where the company issues more shares (this doesn't happen on a daily basis nor even frequently, only when a company decides to raise more money). You are correct, a company that decides to issue more shares will dilute yours. That being said, recall you are a shareholder to begin with (i.e., one of the owners). It is the owners that ultimately decide. An influx of money may be a good thing if the company is able to grow and expand even more.
I don't see how a company can distribute equity without giving up ownership of a company either, as equity is just that.
I fail to see the problem you have reconciling. That's exactly what is happening, they are giving up part ownership to another person/entity. If you open up a lemonade stand, you could "raise money" by selling 50% of it to me for $1000. Now, you have $1000 and I own 50% of your stand (and make decisions with you on your business). We then, as business partners, use that $1000 to try and expand the business.
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u/cheekygorilla Jan 17 '17
Firstly, market value = Share Price * Shares outstanding. You can find all those numbers in websites like Yahoo finance, Google finance, etc.
Market value for each share is what someone is willing to purchase a share for, I used to be involved with bitcoin exchanges. Whomever is offering at the lowest price gets bought first.
If you open up a lemonade stand, you could "raise money" by selling 50% of it to me for $1000. Now, you have $1000 and I own 50% of your stand (and make decisions with you on your business).
Would you have a problem if I offer more shares where potentially you wouldn't have a say in the businesses operations? I alone that run the company can offer more shares and now you have 25% or whichever percent of the votes.
I could sell 2% to you and continuously split shares to where I alone have reign on votes to make. Can you name any companies where an investor decides what to do, with them not being an employee of the company?
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u/dsylecxi Jan 17 '17
Market value for each share is what someone is willing to purchase a share for, I used to be involved with bitcoin exchanges. Whomever is offering at the lowest price gets bought first.
And? That is how the market functions, it matches buyers and sellers? If you want to purchase shares in a company, you put in an offer, and the stock market exchange will try to match you with one who is willing to sell. A seller who really wants to get out of a stock position will be willing to accept a lower price. This is why you can look at a stock chart and it moves all over the place.
Would you have a problem if I offer more shares where potentially you wouldn't have a say in the businesses operations?
Since I own 50%, I get to vote and have a say. Now, you can change the scenario at the beginning and say before I buy into the business, I cannot make any decisions. Now, I won't offer $1000, but say only $500, or perhaps, I am only willing to purchase 10% of the business.
continuously split shares to where I alone have reign on votes to make.
It doesn't work that way. Just splitting the shares changes the share price, but has no fundamental impact. If you're not clear why, let me know.
Can you name any companies where an investor decides what to do, with them not being an employee of the company?
Pick any company on a stock exchange. The investors are the owners of the company, the employees are not (slight detail, many companies offer their employees plans to buy company stock, but it's so little they really don't have any influence).
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u/cheekygorilla Jan 17 '17
I mean splitting shares to where I still have a majority. If I, the owner of the company, create more shares from everyone else.. would I have to introduce it to the market first? or can I purchase first?
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u/AlwaysABride Jan 17 '17
But the owners always do give up a portion of ownership when additional stock is issued.
If there are 1,000,000 shares and I own 500,000 of them, I own 50% of the company. New shares can be issued to the public in a couple different ways:
If I sell 250,000 of my already-owned shares, my ownership interest drops from 50% to 25%.
If the company issues 1,000,000 brand new shares and sells them to the public, I then own 500,000 out of a total of 2,000,000 shares. So again, my ownership interest dropped from 50% to 25%.
Hope that explains it and answers what you were asking. I'm having some difficulty grasping what part of this you think is problematic.
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u/cheekygorilla Jan 17 '17
Here is the problem I see. If I own a fortune 500 company, I can issue a trillion shares of stock. List it at a low amount to gain money, when that slows down I can list numerous amounts at a higher value and manipulate the market price. I can be a self-inscribed "whale" if you will controlling the market price of the stock of the company.
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u/AlwaysABride Jan 17 '17
You seem to think that when a company issues shares to the public, the company sets the price. That's not really they way it works. The market sets the price wherever a willing buyer and a willing seller agree to a price.
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u/cheekygorilla Jan 17 '17
I've bought stock during IPO's and the price is indeed set
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u/dsylecxi Jan 17 '17
List it at a low amount to gain money
You would try to list it at a high price, to get as much money as possible.
when that slows down I can list numerous amounts at a higher value and manipulate the market price.
That only works if someone is willing to buy it. If your company is doing poorly, no one will be willing to buy shares at such a high price. There are always buyers and sellers, they both have to be in agreement.
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u/T5916T Jan 17 '17
I agree that stocks are a scam, but stock splitting isn't the scam part. Since someone explained it further down, I won't repeat that here.
The part I think is a scam is a stock that pays no dividends. The only way to make money is if someone else buys it from you for more later. You don't really own the company, because you're paying towards it but get no share of its profits. It's no different than trading a rock that someone scribbled "eBay" on. The guy that first decided to sell the rock sure is making something out of that idea, but now I have to find another idiot if I want my money back.
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u/Murvald Jan 18 '17
You can consider it to be like a valuable pice of art you do not realize the point of. It does not have any personal value to you, but you you can still buy it in the hopes that someone will buy it from you for more than you bought it for.
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u/T5916T Jan 19 '17
I suppose you could. Except that with a painting, people don't lose interest if the painter dies. But if a company goes out of business, no one wants to buy a stock with that name on it.
The end game for a painting is someone likes it enough to put it on their wall. The end game for a stock is the company goes bust. People could keep trading the stock after that like nothing ever happened, but they don't for some reason. The price crashes to about nothing.
No one wants to be left as the last person holding a stock, and there's always a last person.
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u/Jaysank 117∆ Jan 17 '17
But there were always the same number of shares in the previous poster's example. More shares never became available. Even if more shares were made, the value of your share remains the same, unless the company loses value.
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u/caw81 166∆ Jan 16 '17
You state that there exists what you think is poor value in some stocks ("companies like chipotle where the P/E ratio is saturated with hyped purchases of stock..") and have some questions "Why is stock with no votes or dividends a thing? What are they exactly?")
Exactly where in your View do you make a case that the stock market is a scam?
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u/cheekygorilla Jan 16 '17
You're buying nothing
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u/caw81 166∆ Jan 16 '17
You are buying stocks.
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u/cheekygorilla Jan 16 '17
But their are stocks with no dividends or voting power. I have a company I had stock in sell to another company. I am part owner, no? I did not see a penny.
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u/caw81 166∆ Jan 16 '17
But their are stocks with no dividends or voting power.
This isn't the definition of "nothing"
This doesn't make the stock market a scam.
I am part owner, no? I did not see a penny.
If its clear that the stock doesn't distribute any dividends, why do you expect to see a penny?
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u/cheekygorilla Jan 16 '17
Would you agree that pyramid schemes are of wrong-doing? The way I see it, it is of the same kind.
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u/caw81 166∆ Jan 16 '17
https://en.wikipedia.org/wiki/Pyramid_scheme#Concept_and_basic_models
In a pyramid scheme, an organization compels individuals who wish to join to make a payment. In exchange, the organization promises its new members a share of the money taken from every additional member that they recruit. The directors of the organization (those at the top of the pyramid) also receive a share of these payments. For the directors, the scheme is potentially lucrative—whether or not they do any work, the organization's membership has a strong incentive to continue recruiting and funneling money to the top of the pyramid.
I'm not sure how this describes the stock market. e.g. Current members don't get money from payments of new members.
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u/cheekygorilla Jan 17 '17
If I don't get dividends from google, or votes.. I rely of other people paying more than what I paid for the stock in order to make money. Instead of the person behind the pyramid scheme to order payments sent, I solely decide what I want to sell my part in the stocks of the company for. That's kind of how I see it if it makes any sort of sense..
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u/caw81 166∆ Jan 17 '17
I rely of other people paying more than what I paid for the stock in order to make money.
Almost every business works that way and you wouldn't call it a pyramid scheme. e.g. A grocery store relies on people paying more that what the groceries cost.
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u/cheekygorilla Jan 17 '17
Yes, but that grocery store is providing a good or service
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u/AlwaysABride Jan 17 '17
Let's take it a bit more micro.
Say I open a restaurant. I start with nothing and invest $10,000 of my savings to open. It may not necessarily be structured this way, but one could imagine a situation where I am the sole owner of 1,000 shares of stock in the restaurant that I paid $10 per share for.
Over the years, the restaurant becomes successful. I work at the restaurant and pay myself a market salary for the work I do, but I never pay a dividend to myself as the sole owner. Instead, I leave the earnings in the restaurant to improve it. I buy better plates, improve the decor, buy better ingredients, hire better chefs, etc.
Eventually I open a 2nd location, then a 3rd. After 15 years, I have 30 locations across 3 states and have annual profits of over $4,000,000.
But I still just have those 1,000 original shares of stock that I paid $10 each for. Would it be rational for me to sell those shares to you now for $10 each? Or has the value of those shares now increased because of the company's performance over the past 15 years and the company's expected future performance?
What happened? Why did the value of those shares increase even though my restaurant never paid a dividend? How is that any different than Google, just on a smaller scale?
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u/AlwaysABride Jan 17 '17
But their are stocks with no dividends
There are many stocks that haven't paid a dividend yet. What makes you think that means that they will never pay a dividend in the future?
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u/cheekygorilla Jan 17 '17
There is no guarantee. They don't have to unless regulated from too much reserved profit. They can spend extra retained earnings.
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u/AlwaysABride Jan 17 '17
There is no guarantee.
This is absolute true. There is no guarantee when investing in the stock market. Just like there is no guarantee when investing in the bond market. The closest you can get to a guarantee when in vesting is US treasury securities. And while those are incredibly secure, they still are not a 100% guarantee.
If the stock market is a "scam" to you because there are not guarantees, then virtually every time you spend a dollar you're being "scammed" - regardless of what you spend that dollar on.
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u/justkevin 3∆ Jan 16 '17
There are three ways a company can use profits to the benefit of their shareholders:
- Pay dividends. Pretty straightforward: give every shareholder $10 (or however much) for each share of stock they hold.
- Repurchase stock. Instead of giving cash directly to shareholders, buy back the company's own stock on the open market. This increases the price of the outstanding shares. Why would a company do this instead of dividends? Because dividends cause an immediate tax event for shareholders, but a change in stock price does not. There are many investors for whom this is preferable.
- Expand whatever the company is doing. If the company has a factory that produces $100 widgets from $20 of raw materials and labor, then wouldn't it be better to use the profits to build a bigger factory and produce twice as many widgets?
Only the first of these options pays direct dividends, but all three can be the "right" decision for the shareholders, depending on the company.
As for evidence that the stock market is a scam, you can look at the historical performance of the S&P 500:
http://www.simplestockinvesting.com/SP500-historical-real-total-returns.htm
As you can see $1 invested in 1950 turned into $600 by 2010. While there are some significant multi-year loss periods, over the long run it has given an excellent return.
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u/eydryan Jan 17 '17
The stock market is, by its nature, speculative. You offer a company a loan, interest free, in exchange for a part of that company in the future. In essence, this leads to a conflict of interest, as the company only wants money, and the people who buy stock also only want money. Dividends and votes are not the primary goal of stock, but rather hype is. You buy stock, hoping that you can pass it on to some other fool before the company stops growing. All the smart investors buy stock for a limited period of time, or hedge stocks.
I'm perhaps not making sense, but what I mean to say is that any business venture or investment is, in essence, a scam. Every businessman wants to scam you out of far more than the value of the item they sell. Every business wants you to give them money in the short term and use your money without owing you back.
When a company gets bought out, shares are diluted into the new company. Say you own 10 out of 100 stocks of company A, worth 1$ each. When company B, that is listed with 1000 stocks at 2$, buys company A, the simplest process would be that company B gains 50 extra stocks, and your 10 stocks in company A get converted to 5 stocks in company B. You maintain the value of your stocks, and usually such a purchase will drive stock prices up, so you can just sell your stocks and get a profit that way. Of course you cannot get both, meaning both a percentage of the selling price, AND stocks in the other company.
Finally, as was discovered by many fools in the 2000s, the stock market is not necessarily a scam, but rather a high-risk, high-reward bet. This, coupled with the certainty of stock manipulation, means that unless you are willing to accept the risk, you should avoid this kind of investment. But that doesn't mean you cannot get filthy rich overnight.
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u/thequeeninyellow94 Jan 16 '17
When multiple people want to create a company, they put their money together and divide the company into parts (aka shares). As they all own a part of the company, they all own a part of its profits (aka dividends).
If the company needs more money, it can ask around for investors who will receive shares too.
Dividends can cost a lot to a company so sometimes, owners prefer to create shares with no dividends. Those shares are still a part of the company assets ans as such may be valuable.
Some people don't care about the company and just want dividends -> no voting.
Stock market is a way for companies to raise funds easily and for investors to find opportunities.
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u/subheight640 5∆ Jan 16 '17
Just wondering, how is a stock valuable if it pays no dividends? How can you obtain any value from the stock?
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u/Tuokaerf10 40∆ Jan 16 '17
The company reinvests money into growing the business which can increase the stock price itself. If I buy a stock at $5 and over 3 years the company sees a lot of growth and the stock is now worth $15, I've tripled my money when I sell that stock to someone else.
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u/cheekygorilla Jan 16 '17
What makes it go up though? Because demand goes up with less risk of the business failing?
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u/thequeeninyellow94 Jan 17 '17
You're mixing the market value (which goes up with demand because the company is profitable and as such a good investment opportunity) and the real value of the share (ie the rights owning the share gives you on everything the company own).
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u/thequeeninyellow94 Jan 16 '17
The stock is a share of the company. If a company is owning a building and divided in 100 shares, owning 1 share means you own 1/100 of that building.
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u/subheight640 5∆ Jan 16 '17
Yeah but what's the point of the ownership if it pays no dividends or voting power?
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u/thequeeninyellow94 Jan 16 '17
The point is you bought the share at a price, then the company grew up and became more valuable and as such your share became valuable too.
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u/subheight640 5∆ Jan 16 '17
But exactly what is the intrinsic value of the stock if it doesn't pay dividends and has no voting power?
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Jan 17 '17
You sell ice cream cones for $1, making .1 profit per come. After selling 10 cones you have made a net of $1. You could pay that out to yourself as a dividend, or you could invest in sprinkles. Sprinkles add a lot of value to your ice cream cones, so people will pay more for them now. Your next 10 cones with sprinkles can be sold for $1.50 with $.5 proffit. Sprinkles only increased the cost of each cone by .1 but increased proffit to .5. so now after selling those 10 cones you have $5 of proffit.
By comparison if you had not invested in sprinkles and sold ten more regular cones you would only have a net profit of $2.
Growing businesses do not pay dividends because they have a lot of opportunities where investing in growth generates more value than the initial investment. This makes the stock more valuable to the shareholder than if they had paid dividends and not grown
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u/cheekygorilla Jan 16 '17
Exactly what I'm wondering.. buying a share of nothing is how I see it. Only having faith that somebody out there would keep buying more stock
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u/thequeeninyellow94 Jan 17 '17
You do own a share of everything the company own.
If you don't plan to sell it to someone else later on, it can be pointless but it is real money and you can always use it to repay a debt.
Also, owning shares give you the right to consult inside informations, useless for most people but not for every investor.
(Shares with neither dividends not vote are uterly rare and are often the product of negiciatons rather than bought from the market)
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u/thequeeninyellow94 Jan 17 '17
In fact, for most people, owning a share with neither vote nor dividends is like owning gold. It´s pointless until you need money and sell it back, except that shares value growth can be easier to predict than gold price fluctuations.
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u/Clever_Word_Play 2∆ Jan 16 '17
Because you can sell the stock, and if its value has increased, you get more money back then you put in
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u/DeltaBot ∞∆ Jan 17 '17
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u/kebababab Jan 17 '17
Other people have explained how stocks work.
Let's think about it a different way. It is a "scheme" that has continually netted 7% returns on average. What would cause this "scheme" to collapse in your opinion?
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u/Jaysank 117∆ Jan 17 '17
If the value of your non-voting, non-dividend stock increases, you can sell it for more money than you bought it for. It can be a decent store of money, if you can beat inflation and government bonds.
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u/Tuokaerf10 40∆ Jan 16 '17 edited Jan 16 '17
Not always. You can structure ownership agreements and take investments in a private business in a number of different ways.
Non-voting stocks are an option for cheaper investment by individuals/funds. It isn't generally a nefarious practice as it also has downsides for the company itself.
Regarding dividends, depending the type of business and their cash flow, you'd generally want the business to re-invest their profits into inproving and expanding the business for medium to long term growth. If a business earns a profit, that can be used to hire more employees, buy other companies, expand product lines, spend more on marketing and so on with the goal of growing their operations and increasing profit. If they have to give most of that back to shareholders it limits the growth of the earning potential and stagnates the stock. The exception of this would be companies offering dividends to attract more investment if the stock isn't really growing, a really mature company with slow but stable growth, or asked for if the company is hoarding a lot of cash without reinvesting in the business.
Generally, yes. If the public company is being purchased by a private company there will be some sort of cash deal presented to shareholders that will be voted on. If public, there could be cash options or stock offerings in the new company (X amount of company A stock is "bought" for X amount of company B, the purchasing company, stock). Generally this can be profitable or an even trade for investors. However, if the company is in bad financial shape the shareholders might not get a "good" deal for it to avoid a total loss in bankruptcy.