From: Dan Fabulich (dfabulich@warpmail.net)
Date: Mon Sep 09 2002 - 17:10:17 MDT
So, I've been wondering something that I'm hoping one of the clever folks
here can answer for me. I believe I have some false assumptions about the
stock market, but I don't know what they are.
When I buy stock in a company, I get some controlling interest in the
company (normally, I get to vote on shareholder resolutions and whatnot),
right? I'm having a hard time understanding how and why that's valuable.
In my understanding of value, there are only two kinds of value: goods may
be purchased for their intrinsic value to the purchaser, and goods may be
purchased for their moneymaking value. (Here, I use "intrinsic value" to
simply mean non-economic value.)
Examples of goods purchased for their intrinsic value might be toys,
housing, and medicine. Examples of goods purchased for their economic
value might include tools, vocational education, and interest bearing
loans. (Of course, the distinction is rarely stark; sometimes you buy a
nice house so as to sell it when demand for the intrinsic value of your
house rises, education may be had for the pleasure of it, etc.)
[Here's where I'm especially unsure of my assumptions.]
Now, it doesn't seem to me like shares of a firm have any intrinsic/
non-economic value worth considering (?), but rather people only purchase
them with the intention of making money with them.
But, unlike tools that you can use to build things that make money, or
education that you can use to increase your productivity or expand your
money-making capabilities, or loans which make money in interest, [by
enabling other people to buy tools/education/capital, improving their
money-making capacity and passing some of the difference on to you,]
stocks don't appear to *do* anything that make them worth paying for.
Indeed, the primary way people intend to make money off of stocks is by
selling them. But this just begs the question as to why anyone would want
to buy them in the first place!
Of course, you CAN make money off of a stock by receiving a dividend.
But it's well understood that you don't buy stocks *so that you'll get a
dividend*; instead, you buy stocks so that you can reap the rewards when
their price goes up (ie, when other people are more interested in buying
your stock). The reward of owning stock is therefore realized only when
the stock is sold.
Even if dividends *were* the only way in which stocks could make money for
their bearers, then there's a huge number of stocks out there whose value
cannot be explained, because they do not offer dividends and do not intend
to offer dividends anytime soon, if ever. If dividends were the only way
a stock could benefit its bearer, these no-dividend stock prices would be
totally inexplicable.
If stocks have no intrinsic value, then stocks are radically different
from other kinds of investments, even from other non-loan investments like
real estate, where it's presumed that the real estate itself is worth
having, for intrinsic reasons. Instead of trading stock, we might as well
be trading certificates for chewed gum or anything else with no intrinsic
value.
This last conclusion seems so wrong that I'm sure I must be missing
something... but what? Am I overlooking the intrinsic value of voting in
shareholder meetings? (I suppose it could give people pleasure to know
that they're partially controlling the resources of a big business, even
if they don't get any of that money for themselves...?) Or am I
overlooking some other way, besides dividends, that stocks could make
money for shareholders?
In other words, what do stocks supply?
And, as a related question: why would a firm's shares be worth more, all
else being equal, if the firm's profits increase?
-Dan
-unless you love someone-
-nothing else makes any sense-
e.e. cummings
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