From: Lee Daniel Crocker (lee@piclab.com)
Date: Thu Sep 12 2002 - 12:20:23 MDT
> No, shareholders also participate in profits through capital
> appreciation.
> As a simplified case, imagine a company whose public share price is
> *only* a reflection of its assets minus its liabilities. If that figure
> is positive then the company is worth that amount on the market. This so
> because of the real possibility that a person or corp could buy it,
> liquidate it, and pocket the value in cash. If such a company makes a
> profit and only puts it in the bank then the company will grow in value
> accordingly, dollar for dollar.
I agree to the extent that some of the value of a stock represents
liquidatable assets of the company: physical things and cash it owns,
contracts, and even some intangible things like "goodwill".
But I was trying to answer the original question that started this
thread: what value is there in stock /ownership/? The stock's value
that represents assets can only be realized by selling the stock.
The same issues would apply to ownership of physical things: say you
own a large car. It certainly has value as an asset, and you could
sell it to recover that value. It might even appreciate if it's seen
by others as a "classic" or if you invest in a new paint job. But
if it just sits in the garage waiting to be sold, after which it sits
in the buyer's garage while he waits to sell it, it makes sense to
ask the question "why do these people want it in the first place?"
What good is a car that makes people want to buy and sell them? The
answer is that serves to transport you from one place to another; it
has an actual, physical, use that makes it valuable. All that other
value came about because of that original value. Stocks are the same;
sure, you can just stick them in your portfolio and watch the price
and sell to the next guy who sticks them in his. But that doesn't
answer the original question of what started this mess in the first
place. Why is the stock potentially valuable at all? The only
answers to that question are dividends and assets (and the latter
to a small degree, and not at all for some companies that don't really
have any--for example a trading firm that rents office space and has
no inventory). That's where the value /comes from/.
-- Lee Daniel Crocker <lee@piclab.com> <http://www.piclab.com/lee/> "All inventions or works of authorship original to me, herein and past, are placed irrevocably in the public domain, and may be used or modified for any purpose, without permission, attribution, or notification."--LDC
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