0

Lets exclude dividend stocks for this question.

When a company originally goes to the stock market, they're able to raise a lot of money from their shareholders. But does the company ever have to pay that money back to the shareholders in any way, or is it essentially free money for the company?

9
  • 4
    Downvoted because of the exclusion of dividends, which are the way companies "pay back" their stockholders. If a startup company is a flop, and never earns enough to pay dividends, then the stockholders lose their investment. (Excluding trading: more accurately, the last person to own the stock loses.)
    – jamesqf
    Commented Jan 31, 2021 at 17:23
  • 2
    Will leave this as a comment but I think your question is fundamentally flawed as shareholders pay to own parts of the company. This is hardly free money since the owners are selling their ownership of the company.
    – ApplePie
    Commented Jan 31, 2021 at 18:24
  • They pay it back immediately. It isn't a loan. You are buying something. You get ownership in exchange for money.
    – JohnFx
    Commented Jan 31, 2021 at 23:00
  • 1
    @jamesqf but dividends are (hopefully) paid from continuing operations, not from Shareholder Equity.
    – RonJohn
    Commented Feb 1, 2021 at 0:56
  • @jamesqf not every stock comes with dividends. I understand the value of a stock that comes with dividends, I don't understand why the other stocks have value though Commented Feb 1, 2021 at 3:44

4 Answers 4

8

does the company ever have to pay that money back to the shareholders in any way, or is it essentially free money for the company?

You pay back loans, but shares are portions of ownership (and it doesn't make sense to pay back ownership).

What the company can do is buy back shares; when this happens, there are fewer shares outstanding.

11
  • but why is it valuable to own part of a company if there's no monetary value attached to it? Commented Feb 1, 2021 at 3:39
  • @JoshuaSegal your phrase "if there's no monetary value attached to it" confuses me. I of course know what it means, but not in the context of a functioning, non-bankrupt[see note] company (which by definition has a positive net worth, meaning that the company has some value). [note] Unless it's about to file for bankruptcy.
    – RonJohn
    Commented Feb 1, 2021 at 3:56
  • @JoshuaSegal just think of the example, you and I own a restaurant together, half each. your share is valuable - you can sell it. similarly imagine if you own a share in a house (perhaps with some siblings). of course, your share has value.
    – Fattie
    Commented Feb 1, 2021 at 13:11
  • 1
    note however that many people (like you) think that stocks are conceptually useless - the only reason to own them is that someone else will buy them from you. remember too that companies get taken-over all the time. if apple wants to buy google, the price of the stock will soar because Apple has to secure X% to gain control.
    – Fattie
    Commented Feb 1, 2021 at 16:57
  • 1
    @JoshuaSegal the bottom line is that you have some deep and fundamental misunderstandings about ownership that we are not able to correct.
    – RonJohn
    Commented Feb 2, 2021 at 3:49
2

investors gain realized value from partial ownership in a company 3 ways:

  1. dividends

  2. selling their shares upon company issuing stock buybacks [capital gains]

  3. selling their shares to other investors upon appreciation of share price from dynamics other than buybacks [capital gains]

#3 is caused by a variety of mechanisms, but is overall driven by sentiment, desirability, profitability, solvency, future revenue/earnings projections, analyst price targets, and a ton of other metrics and ratios.

If a company isn't paying dividends, there's a reason for that - likely that the company sees more value in investing those earnings into R&D and growth, to bring better products/services to market, in order to increase earnings, so that the stock appreciates even more, satisfying investors.


a less common one is

  1. obtainment of additional stock as a direct consequence of acquisitions and mergers

an even less common one is

  1. repayment mandated by bankruptcy law, if a company files for bankruptcy

the last one isn't rare because bankruptcy is rare, but rather owners of common stock are often the last ones on a long list of stakeholders who get bankruptcy-related distributions.

1

When a private company goes public it does an initial public offering (IPO) where it offers a portion of its shares to the public in a new stock issuance.

The capital raised from selling these private shares belongs to the company as well as the early shareholders (founders as well as early investors), allocated based on whose shares are sold.

Owners of publicly traded shares can get money back (the amount depends on whether share price is higher or lower than what they paid) if:

  • They sell it to other investors/traders
  • The company does a buyback
  • There is a merger/acquisition
4
  • Missing option (albeit it rarely happens): the company is liquidated and the its remaining value is divided among the shareholders.
    – SJuan76
    Commented Jan 31, 2021 at 18:43
  • 1
    In Chapter 7 bankruptcy, common stock rarely get anything at all because they are last in line when assets are distributed. Commented Jan 31, 2021 at 19:53
  • A company might be liquidated by decision of its management, without need of going into bankruptcy (as I said, it is highly unusual)
    – SJuan76
    Commented Jan 31, 2021 at 20:05
  • 2
    The OP didn't ask for how many ways a company can disappear from existence. My answer explained how owners how `Owners of publicly traded shares can get money back'. I think that you're off on a tangent here. Commented Jan 31, 2021 at 20:17
1

Stocks that aren't dividend stocks today could start paying dividends in the future.

And since a company's shareholders (owners) elect the company's board of directors, and the board of directors can declare dividends, shareholders can, indirectly, control whether the company will pay dividends (or buy back stock.)

Profitable, growing companies that could pay a dividend but don't are choosing to reinvest profits in the company. By forgoing paying a dividend with today's profits, the company may boost its future profits — and future dividends.

As an example: Microsoft was founded in 1975, went public in 1986, and didn't pay a dividend until 2003. That's a long time with no dividends, but eventually the board of directors decided to pay a portion of profit out to shareholders instead of reinvesting it all. High growth, profitable businesses tend, over time, to become "cash cows".

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .