r/investing
What actually makes stocks valuable? Is it pure speculation or do they hold intrinsic value?
Beginner investor questions the link between stock prices and intrinsic value, citing GME as an example of speculation.
I’m a young adult looking to start investing in the stock market. I think I have a solid idea of what stocks are and how they are sold, but have had this nagging question since taking my financial literacy class in high school during the whole GME situation.
What about shares actually gives them value? Is it just the hope that you can sell it at a higher price? Where does the performance of the company tie into this?
My assumptions:
\- Owning a share of a stock entitles you to a VERY small percentage of the company. So small that you have essentially no influence over any decisions or strategies of the company.
\-Sometimes stocks will pay dividends to their shareholders based on their profits, but this is the exception rather than the rule.
\- You can sell a share for whatever price you want given that someone will buy it at that price. Stock exchanges like the NYSE help match sellers with buyers and list a stocks price based on what people are willing to buy/sell it for.
\- Sometimes even when companies aren’t profitable, the stock price will go up because people expect the company to be very profitable in the future.
So my question is there any way that stock prices and company performance are directly linked? It seems like nothing can stop investors from deciding that they actually like companies that lose money (like the GME situation).
Is it because there are financial institutions or ultra wealthy people that have enough money to buy enough stocks so that they actually DO have actual influence over how the company is run?
I’m curious: is a dividend (or a non-zero probability of future dividend) necessary for a rational investor to give value to a stock? Without earnings for owners, where does the value of a company come from?
The company could be acquired by a larger company for one. Also companies can do stock buybacks which are functionally similar to dividends.
I think you need either dividends/buybacks now or the assumption of one of those or an aquisition happening in the future, but the future could be very far off for "growth" stocks.
Dividends are not necessary. Berkshire Hathaway, Warren Buffett's company, is famously opposed to dividends. They stack profits into a vault like Scrooge McDuck then buy other companies and slowly conglomerize the world.
If you assume that most of the market is rational, then you will always have an exit via sale....rational investors will assign higher value to a company that is making more profits, holding more cash, etc.
The company is earning money, and has money, and you literally own a share of that via your stock. You don't CONTROL the money (beyond your voting rights), but it is YOURS. When stockholders lose faith in a company, they can vote to destroy the company in various ways, sell off all assets, and give each stockholder their share of the company wealth. (This is generally a very bad outcome, but illustrates the point that you literally own a share of a company that has machines and buildings and brand value etc)
Dividends are definitely not necessary. If you and your 3 buddies buy a restaurants, let's say, and after all costs are paid at the end of every year there's $400k profit left over, you can pay out each owner $100k or the business can keep the $400k in a checking account. You get the value of the $100k that's yours either way.
Now the business uses the $400k to start another restaurant. And it can continue to do that with profits for the next 10 years. And instead of getting cash every year, you own 25% of a larger and larger company.
Without earnings for owners, where does the value of a company come from?
Future earnings. Most business that don't pay dividends will presumably pay them one day when they don't have any better ways to invest the cash themselves.
I think about Google stock in this scenario where they have their own venture capital arm that's an early investor to Anthropic and SpaceX, etc., and their own incubator that created Waymo, Verily, etc. I'm much happier for them to do that with extra cash then to mail me a check. I could never invest that money better than they're doing.
Shocked such blatantly obvious sarcasm got hit by the downvoted brigade.
I obviously struck a nerve with the shortbus crew that found themselves up in a bull market and thought they were the second coming of Jesse Livermore.
I think it’s just you’re trying too hard to be funny. Jokes not landing, move on.
I guess, but isn’t that a bit circular? The price goes up because there’s demand, but what triggers the demand? The anticipation of future price increases?
It helps to imagine a much simplified scenario.
Suppose there's a business that owns $1,000 of equipment and spends $100/month while making $200/month for an annual profit of $1200.
Now imagine the owner wants to sell this business. What's a fair price? It should be pretty obvious why it's not just the $1,000 of equipment, but it should also be obvious that $50,000 is probably too high.
The fair price will be the value of the equipment (assets) plus some amount based on its projected earnings. Should you add 1 month of projected profit? 1 year? 5 years? Should you assume the business will grow and generate higher profits in the future or that profits will stay stable or decline?
These questions about projecting future earnings mean that different people will believe the business is worth different amounts and those differences will result in different prices being offered.
There is nothing that directly affects the stock price except buyers and sellers.
Company performance is only relevant to market participants perception of the stocks value or risk.
...but if they don't, it just means the part of the company you own is worth more, because they're either holding onto the cash or they're buying/developing something new with it
They do those things with the intention of growing and making more money in the future. The whole point of investing is to make money, so eventually the investor needs to be getting paid. Selling to someone else doesn't change the fact that someone else somewhere down the line is eventually expecting to receive a share of the company earnings.
Of course, but it is the most accepted way to estimate intrinsic value. The theory around it gives structure to the question "do stocks have intrinsic value" Contrast this with something like Bitcoin.
Clear and concise. Thank you.
That doesn’t answer the question at all. Did you read the post?