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This question already has an answer here:

I want to invest in the stock market, but can't get one thing clear.

It is seen that as a company's earnings increase, its stock value also increases.

Why? The company is earning more money, not the people who own the stocks.

I know that some company give dividends. But what about those that don't?

What if there is no dividends or stock buy-backs?

marked as duplicate by mhoran_psprep, MD-Tech, JoeTaxpayer investing Jun 17 at 13:25

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  • The company earns more, so it's worth more. A lot of it, though, in the past 35 years, has been irrational exuberance. – RonJohn Jun 15 at 17:22
  • If the company is making a profit and not returning it to investors than the profit is either being reinvested into the business or held as cash. Either way, the overall value of the company should rise and the stock price should go up. Of course, if the company foolishly invests this money they could just lose it and decrease the value of the company. – Brian Borchers Jun 16 at 1:43
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The company is earning more money, not the people who own the stocks.

The people who own the stock OWN THE COMPANY. What you think stocks are? All the shares together are 100% of the ownership.

So, that is your misunderstanding.

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Quite simply, any marketable item (including a company or share of stock in a company) is worth only what people are willing to pay for it.

That's why there is a stock market. Literally every trade made is because there is a seller with an "ask" price, i.e. "I want to sell my share of XYZ for $100", and someone is willing to buy that share for that amount. Likewise, someone can say, "I'd like to buy a share for $100" (that's called a "bid"), and a seller agrees to sell at that price. The stock market just helps connect those buyers and sellers.

Some stocks don't sell at the price asked, and the trade doesn't happen. Some stocks have low volume and hardly trade at all. Investors use all sorts of reasons and criteria for setting their prices. Often, those criteria include earnings and dividends, but sometimes those things don't factor much into the price.

Ultimately, the price of a stock is set by the the people buying and selling shares, not by the company itself.

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The value of a stock is usually based on the expectation of future dividends.

While a company is growing, it may not be paying a dividend (instead it would be using the money to expand), however by the time it gets to a point where it no longer needs to grow, it should begin to pay a dividend and/or buy back stock. If the company buys back stock it has the effect of increasing the dividend because there are fewer shares that need to have a dividend paid out.

If earnings are increasing, the value of the company should increase, because if the company decided to stop expanding and pay a dividend instead, the dividend would be higher (than if earnings had not increased).

Ultimately the shareholders can control the company. Shareholders can appoint members of the board, and the board can hire and fire the management of the company. An owner of the majority of the shares of the company (51%) can control the company outright.

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