The idea is! I just don't understand how stock prices go up and down. I understand that during IPO, company would get all the money that got collected selling the IPO stocks and then that is it! Once the stocks are listed on secondary market whatever transaction is happening will be between Buyer and Seller and of course the stock broker who collects the brokerage charges.
The company is not necessarily "entirely out of the picture". Sure, the company is not directly involved with the day to day transactional minutiae in which shares of stock are exchanged from one investor to the next, and the firm doesn't receive proceeds from these transactions. But the company can conduct several types of corporate actions (besides dividends), such as splits, reverse splits, secondary offerings, and can institute share repurchasing programs.
The company is also bound to all of its investors who hold common shares in the company; originally they were committed to their early-stage investors (angels, venture capital firms), but during IPO, those early investors sell out of their position, so the firm's primary responsibility as a publicly traded corporation is now to satisfy their new investors by:
- optimizing profits (maximizing EPS)
- reducing costs when possible
- hiring and retaining strong leadership and efficient workforce
- establishing a competitive moat
- maintaining auspicious financials / balances
- investing heavily in technology and research that will drive future sales
- provide voting opportunities to all common stock shareholders
Hence company is entirely out of picture.
again, the company is not "out of the picture". they are obligated to appease and cater to their investors, who have partial ownership in the company.
I understand some stocks pay dividend on a quarterly basis in best case scenario. Let us assume apple decided to pay 50 cents per stock hence in a year my return from stocks would be $0.5x100 = 50 x 4 quarters = $250/Year [sic].
uhhhh your math is real bad. $50 / quarter * 4 quarters = $200 / year, not $250. in your hypothetical, it would take 5 years, not 4 years.
you're also not taking into account time value of money. money is worth more today than next year (because investing money means that you're delaying the ability to consume with those funds), and this time value of money factor is determined by the market and its participants through auction of securities. the equation I'm about to show takes this into account, but makes an assumption of what r is.
Hence to even recover what I have invested it takes me 4 Years [sic] assuming the company is doing good and being loyal to its investors making payments on a timely manner for 4 Years [sic].
under your hypothetical, the value of a single share's dividend, if treated like an annuity, and assuming that the time cost of money is r = 0.03, is worth
For sake of simplicity, I'm ignoring inflation. (I'm also ignoring DRIP.)
The dividend provides added value that does not necessarily detract from your initial investment. At the end of 4 years, you could conceivably liquidate your position by selling all 100 shares, even at a modest 3% CAGR price of $10 (1.03)^4 to break even, and pocket the $800 you received from dividends.
Thus, you shouldn't think of an investment into a dividend-paying company as "recovering" your initial investment with dividends, because the company can appreciate enough (and possibly more) to compensate for any loss in share price from the company issuing dividends each quarter, and also enough on top of that to compensate for the time value of money.
So another way to make profit is when the stock price goes up. Now this is the part I don't understand. Since the company has already got it's share of money and no further money will be received so obviously why should they care?
After a company goes public through an IPO, it doesn't fully own itself. The shareholders OWN that company. THEY determine who the Board of Directors are by voting (although executives preliminarily nominate candidates who they, based on inside knowledge, think are ideal for the position). THEY drive the company's strategic decision-making through voting. THEY decide if the company splits its stock. The firm should care a lot about who owns their stock, what the total equity of common shares is, and whether or not their stakeholders are happy with the stock's alpha and the company's fiscal policies, competitive direction, performance, and future prospects.
Ultimately, any share price growth is determined by the markets and market participants; if investors are excited about the firm's performance and direction, the company's desirability among traders/investors drives share price up.
That leaves the investors who have invested there money. Now why would I want to buy apple's share paying $11 [sic] and wait for another 4 years [sic] to recover the invested amount.
that's an investment decision that YOU have to make? and again it's not about recovering an invested amount, but rather acquiring cash flows (from the dividends) on top of at least a preservation of capital invested, if not strong growth in addition to the dividends.
I mean if I had a piece of land in middle of a city someone will come and buy it from me for a higher price because it is giving them physical benefits.
you can only compare these two investments if you believe that they are equally risky.
saying this with definitive diction like "will buy it from me" demonstrates that you have not considered the risk involved in every capital market - including real estate
having a piece of land means that you had to acquire it at some price at time t=0 (or you inherited it from someone who did), and if you're talking about selling that land at t=T to an investor who could optimally capitalize on the land, there's risk that the value of the land by t=T is less than the amount that you paid for it at t=0, discounted T years by the time value of money, r. you are not guaranteed a return in the housing market.
you are also framing this in a way that disregards that a publicly traded company has tangible assets, just like land. companies own land, property, buildings, plants, machinery, production equipment, hardware, supplies, and they also own inventory not yet sold. they also hold securities in other companies that also own these things, as well as maintain a cash balance for opportunities such as strategic acquisitions. not only that, but the company also owns intellectual property such as logos and branding, name recognition, software licensing rights, patents, and trade secrets, among other intangibles. to imply that a company does not provide any physical value to an investor is not only misdirected, but patently false. when an investor goes long on a stock, they aren't just buying a ticker, they are in fact acquiring a sliver of all of these physical assets and intangibles.
However what am I going to get when I purchase a share, I understand I am entitled for a fractional ownership of the company
exactly, so why have you been asking "what value do I get out of doing this!"?
but for that to be really effective I would have to buy a large chunk of shares which requires huge amounts of money, hence it is not an investment.
the undercapitalization myth is a debunked fallacy. every share you own gives you a vote. you don't need to exceed a certain minimum to vote, most of the time.
you don't need to invest a massive amount of capital in order to begin the process of trading and generate wealth. return should be thought in terms of PERCENTAGE and consistency rather than QUANTITY.
So should I conclude that share market is for people with Big Big Money and not for a common person.
wow that's quite a leap. there are millions of successful retail traders. the ones that fail fall into the same traps, while most of the successful ones avoid those traps.
this is what losers in the market do:
- trade in the largest quantities possible, very often
- treat trading like gambling or recreation
- refuse to diversify
- trade only 1 type of asset or sector
- trade only risky assets, such as futures and options
- have no risk management strategy
- use no risk mitigation techniques, such as stop losses
- have no psychological strength and falter their positions
winners do the opposite, they:
- trade strategically
- treat trading like a business
- diversify their portfolios
- only trade securities with a high probability of success
- implement a risk management strategy
- deeply research their investments before trading
- check their emotions, closing positions only when they learn of new information/data. emotion/fear doesn't factor into their trading decision-making process.
you'll notice that most people who fail at trading in the market in the long term do none of these things that winners do, and almost certainly do the majority of things that losers do.