I had initially intended to mention dividends, just to say "let's not consider them for this" but it looks like I forgot to mention them at all.
Dividends was one of the first things that popped into my head as I was trying to think of what the value to an investor is. But most stocks don't pay dividends, and even for the ones that do that doesn't seem to be the primary reason why people buy them--it's still mostly because they expect the price to go up in the future.
But you add some really good points here that help explain things. I did not think about the issue of companies buying back stock to transfer value back to the investors. That's an interesting effect in and of itself.
An important point I was trying to make though is that even if the company never pays dividends (or buys back some of its stock) there is still some value being transferred to the stockholders every time the company makes a profit. That's because even if they use the profits to grow the company, that causes the stock price to go up. So I think what you say is right, that this is where the value comes from from the point of view of the investor... the investor knows that she will get a share of the company's profits one way or another. But it's interesting that that can happen in rather indirect ways.
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timeasmymeasure
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Date: 2010-04-04 12:21 am (UTC)Dividends was one of the first things that popped into my head as I was trying to think of what the value to an investor is. But most stocks don't pay dividends, and even for the ones that do that doesn't seem to be the primary reason why people buy them--it's still mostly because they expect the price to go up in the future.
But you add some really good points here that help explain things. I did not think about the issue of companies buying back stock to transfer value back to the investors. That's an interesting effect in and of itself.
An important point I was trying to make though is that even if the company never pays dividends (or buys back some of its stock) there is still some value being transferred to the stockholders every time the company makes a profit. That's because even if they use the profits to grow the company, that causes the stock price to go up. So I think what you say is right, that this is where the value comes from from the point of view of the investor... the investor knows that she will get a share of the company's profits one way or another. But it's interesting that that can happen in rather indirect ways.