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Here's how I understand it, as explained by the following example:

Suppose I start with no assets. Suddenly I inherit a net 10,000,000 shares of a given stock, valued at $100 per share. For the sake of simplicity, forget about inheritance taxes or anything else.

Now, I suddenly have a "net worth" of $1 Billion "on paper". But, I still don't have any cash. So, unless somebody's willing to accept a transfer of stock as payment for goods or services, I still can't go out and buy a house or car or even a pizza, right? Unless I sell some stock for cash. Or unless somebody extends to me a line of credit based upon my net worth--but even so I'll eventually get a bill that has to be paid in cash (or a transfer of stock), right?

And here's a rub: Selling large quantities of stock will drive down the price per share, won't it? So, converting even a portion of my stock to cash has a cascade effect upon my overall net worth, driving it down. Right?

Now, switch gears and consider the Enron scandal. I understand that, through clever accounting--mark to market (recording future anticipated receipts as current receipts), whilst obscuring losses--among other strategies, showed the company as being very profitable "on the books", which in turn drove the stock price higher. And that anybody who sold such stock while it was valuable was able to convert it into cash.

But, a company like Enron also undoubtedly had huge operating costs, not the least of which was payroll for thousands of employees. Some of that cost was probably mitigated by encouraging deferred compensation in the form of Enron stock as a retirement investment. But, still, that's a lot of outlay in real money--not just perceived value that exists "on the books".

So, where did this real money come from to pay real expenses? My assumption is that it came from the cash that investors paid to the company (through brokers, I guess) to buy Enron stock. It also came from buying-up small utilities whose employees had invested real money in pension plans that were subsequently converted to Enron stock, and (defaulted) bank loans taken out in exchange for future receipts that never happened. Am I right?

Most articles I read just seem to gloss over these details and talk about net worth and on-the-books values which, to me, don't actually pay the bills!

So, please help me understand what I'm missing. Thank you!

closed as off-topic by Joe, user32479, Dheer, Victor, keshlam Jan 20 '16 at 3:23

This question appears to be off-topic. The users who voted to close gave this specific reason:

  • "Questions on economics are off-topic unless they relate directly to personal finance." – Dheer, Victor, keshlam
If this question can be reworded to fit the rules in the help center, please edit the question.

  • In so far as your question is about how Enron paid their expenses, it's off-topic here. But in so far as you are talking about personal finance (e.g. if you inherited 10 million in stock, could you buy a house), it's (probably) on-topic. Would you mind editing it down a bit? – ChrisInEdmonton Jan 19 '16 at 16:32
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    You're very kind Chris, I'm struggling to see a real question here. – JoeTaxpayer Jan 19 '16 at 16:33
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    There are some other questions that touch on aspects of this, and might help you understand what you are looking for: Calculate large stock position?, Does stock market create value?, Selling stock lead to free money? – Ben Miller Jan 19 '16 at 16:48
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    You are correct, stock is "equity" and not "currency". Equity is converted into currency by selling it at a price to be determined at sale between you and a buyer. (Probably similar to a prior price, but no guarantees). Equity gives you the rights to a share in currency that the manager of the entity may choose to divide among owners. You may pledge your equity as collateral for a loan. You can substitute "house" for equity in the above - the dividend would be the rent over expenses you give yourself when wearing a landlord hat. – user662852 Jan 19 '16 at 18:12
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    What did I just read – CQM Jan 19 '16 at 21:36
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1) You ignore dividends. You can hold your 10 million shares and never sell them and still get cash to live on if the security pays dividends. McDonalds stock pays 3% in dividends (a year). If you owned 10 million shares of McDonalds you would get 75,000 every three months. I am sure you could live on 25,000 a month.

2) Enron was an energy company. They sold energy and made a profit (or rather were supposed to). Enron didn't make their money by selling stock. McDonalds makes their money by selling hamburgers (and other food). The income of a company comes from their customers, not from selling stock.

3) IF you sold all of your 10 million shares within a short time frame it, likely, would drive the price of the stock down. But you do not need a billion dollars to live on. If you sold 1000 shares each month you would have plenty for buying cars and pizza. Selling 1000 shares may drive the price of the stock down for a minute or two. But the rest of the transactions, for that security made the same day, would quickly obscure the effect you had on the stock.

4) When you buy stock your money does not (usualy) go to the company. If I were to buy 100 shares of McDonalds, McDonalds would not get $11670.That money is (usually) paid to a 'Market Maker' who, in turn, will use the cash to buy MCD from other individual shareholders (presumably for less than 116.70 a share).

  • Jack , your answer is pretty thorough, but the math in the first paragraph is a bit off. The share value is $116 or so. 3% isn't 300,000 per year, but $30M/yr – JoeTaxpayer Jan 19 '16 at 22:36
  • Thank you. I forgot about dividends. I recall reading that shareholders wanted Microsoft to pay a dividend. I think they did at least once, but not on a regular basis. – Jason Jan 20 '16 at 18:03
  • MSFT has paid a dividend every three months since 2005. link to proof – Jack Swayze Sr Jan 21 '16 at 9:11

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