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!