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Many stocks don't pay dividends, and it's not like a shareholder has any direct financial gain from increased company earnings. Plus, they can only benefit from earnings if the company goes bankrupt and has to sell its assets. Then what influences demand for stocks?

I get that investors can make money through dividends and through capital gains, but I don't get how they make those gains. Earnings, or future earnings, can lead to gains because it shows the health of the company. But it seems too arbitrary for investors to just invest in a company just based on earnings alone, since they won't get to enjoy those profits.

I also don't understand how investors are expected to make money since they "have a claim to the company's assets", since they can only enjoy those assets if the company goes bankrupt, and usually what's left over for common stock shareholders is negligible (that is, when compared to what creditors are getting).

So do investors only make money based on arbitrarily following the profits of a company's stocks and by observing analyst estimates of future earnings? This doesn't make sense to me since stock value can sometimes go down even if there is an earnings surprise or the company is reporting an increase in profit...

Is it the appreciation in the stock's book value that attracts investors?

marked as duplicate by Victor, JB King, ChrisInEdmonton, Dheer, Joe Jan 7 '16 at 17:51

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  • Do you get how some people look long-term? Like the children in Grades 1,2 and 3 that will likely have a decade or more of education before there is fruit there? This seems like a short-sighted view. Berkshire Hathaway's shareholder letters would be good reading on how some manage companies well. – JB King Jan 7 '16 at 16:00

Small companies need not pay out heft dividends. It makes much more sense to invest it directly in to the company to build a stronger company and produce future results. For example just say Mike see's a company called Milk Inc. Milk inc is doing very well and for the last three year's the amount the profits are increasing by has been going up by 10% the company is still small and doesn't do dividends. Mike see's opportunity and snatches up 1000 at 2.20 , He knows this company does not pay dividends. 10 years pass and this company is absolutely booming profits are still going up the company has decided to start paying hefty dividends as it no longer needs as much money to invest in it's growth. Shares are now valued at 6.80 . Mike banks.

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