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People generally buy stock because they expect the price of the stock to rise.

The main force that determines stock price is, as far as I can tell, the force of the market, i.e. supply and demand for the stock like any other good.

But stock prices often fall when, say, company profits fall, and rise when company profits rise. Are these price changes driven entirely by expected changes in dividends? This seems implausible to me, if only because some stocks don't pay dividends.

Am I missing something? What, other than dividends, tangibly links stock price to corporate performance? Does stock ownership imply any specific obligation on the part of the company to distribute profit, or is it just an implicit understanding?

I understand that the market is in an equilibrium where people buy stock because they think other people will buy stock. I'm wondering about actual incentives other than belief about what other people believe.

  • Possible duplicate of money.stackexchange.com/q/1385/17681 but leaving it open in case there are some differences – shadowtalker Jan 29 '15 at 15:17
  • Dividends and the promise of dividends would be my thinking as companies like Berkshire Hathaway haven't paid anything yet. – JB King Jan 29 '15 at 19:47
  • Shares from profitable companies that don't pay dividends could always become shares that do pay dividends. – Chris W. Rea Jan 29 '15 at 23:49
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There is certainly an obligation in some cases of a company to distribute profit, either as dividend or a stock buy back. Activist investors frequently push for one or the other when a company is doing well - sometimes to the detriment of future growth, in some eyes - and can even file shareholder lawsuits (saying the company is not doing its duty to its shareholders by simply holding onto cash). Apple famously held out from doing either for years under Steve Jobs, and only in the last few years started doing both - a large dividend and a share buy-back which increases the value of remaining shares (as EPS then goes up with fewer shares out there). Carl Icahn for example is one of those investors in Apple's case [and in many cases!] who put significant pressure, particularly when they were sitting on hundreds of billions of dollars.

Ultimately, a (for-profit) corporation's board is tasked with maximizing its shareholder's wealth; as such, it can buy back shares, pay dividends, sell the company, liquidate the company, or expand the company, at its discretion, so long as it can justify to its shareholders that it is still attempting to maximize the value of their holdings. Companies in their growth phase often don't return any money and simply reinvest - but the long-term hope is to either return money in the form of dividends on profits, or the sale of the company.

  • So are there explicit laws mandating that eventually the stockholders be compensated with money rather than simply a higher stock price? Or is the entire stock market predicated on an implicit understanding between firms and shareholders? The obligation of firms to shareholders is often cited, but is it a statutory obligation or a moral one? Also how was the Apple suit decided, and on what basis? I'm sure you didn't mean to be vague, but that vagueness is exactly why I asked this question – shadowtalker Jan 30 '15 at 0:40

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