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This is a question that has bothered me for awhile about the fundmental nature of the stock market as a whole, and no one has given a satisfying explanation. What is root cause of a stock having value to purchasers if the stock doesn't pay dividends?
The obvious answer is that they can re-sell it to the someone and make a profit. However, that leads to the question as to why the next person feels it has value, other then to sell it to a third person etc etc. At some point some other source of income has to come from the constant selling/buying of the stock or else this is nothing more then a collectables bubble making Ameritrade rich on commisions. There must be some other intrinsic value to owning non-dividen stocks, but I'm not sure I fully understand the market forces involved.
To put things in an absurdly nerdy manner I feel as if I'm missing the base case in my inductive reasoning. If I'm trying to prove that person P should expect to profit from purchasing stock my inductive reasoning, projected backwards in time, would look like:
Prove: buyStock(p) = buyStock(P+1) + $ (my potential profits are > profit seller expects) because: Inductive: buyStock(P-1) = buyStock(P) + $ (someone in future will buy from me for a profit) base case: buyStock(0) = $$$ (person 0 profits ....somehow?)
In cases where companies pay dividens the base case is easy, person 0 gets a dividen as profit, proof done QED. But what about cases where a company is not currently paying dividens and is unlikely to do so?
I know that the stock price will go up as the company performs better, but I don't know why that is true either! If I own only 1% of the company I have no way of accessing the companies money, goods, or other resources. Rather the company is near bancruptcy or has trillions in their coffers does me no good because I can't access it in any way! I don't fully understand what market forces should cause my slip of paper to be worth more if the company I have no say, controll, or access to happens to do better. I'm sure if I knew my 'base case' I would be able to fully explain the correlation between company profit and stock price, and vic-versa, but simply knowing people will pay more for stock from a better performing company doesn't explain the intrinsic value.
So far I have two potential explanations to explaining my 'base case' as to the root advantage of trading stocks, but I don't feel either fully explains the advantage. The first is that companies often do stock buy-backs. This is definitely a source of profit for amateur traders, but I don't think this answers the question so much as makes it more indirect. The reason the company buys back it's stock is to 1) increase stock price and 2) have stock to sell back later. The company is not gaining immediate profit (I think) from the buyback, so they are not my base case in my inductive reasoning. The only reason the company seems to care about stock price is to resell later. In effect I could envision the company doing the buy-back as just another trader buying and selling stock (person p-1).
The other explanation, and so far the only one I like, is the risk of hostile take over. As long as there is a chance for someone to, one day, purchase 51% of the stock and now own the company this gives the stock value. Even if there is no reason for me to expect someone to try a hostile take over now, or close to now, there is still a chance that at some point eventually someone will be interested in doing so, and so everyone is really buying stock in the hopes of eventually selling it to someone who values it not for resell, but for a hostile takeover.
I like the above explanation, but it still fails to cover one use case. What about companies that only place 49% of their stock out there, while maintaining 51% for themselves. If these companies also refuse to pay dividends is there any incentive at all for anyone to buy this stock? how is the stock anything more then a sheet of paper?
So...can anyone explain market forces I'm missing? are there other advantages to holding of stock, or other means of making a profit from stocks, that make them ultimately worse constant trading? what forces stock price to have a correlation to company success rate?