Does our portfolio help anyone else?

[ERD50]

This may have been discussed before, I don't recall. I sometimes have trouble getting my head around the really big finance questions (like balance of trade, currency devaluation etc).

Many of us probably have half or more of our portfolio in equities. Sometimes you hear that "rich people" are 'hording' their money, and it would be better if it were spread out (and I don't mean for this to go into the topic of redistribution of wealth, that is just a statement). But is the money just siting there?

The answer I usually hear is, no - it is "invested" in companies that are providing products, services and jobs. It's working for us, and w/o that investment, those companies couldn't do what they do. But is it? I understand (or think I do), that the Initial Public Offering raises money for the company, but after that, what? Unless they sell off more of those shares, or make another public offering, supported by the current NAV (and doesn't that dilute the existing shares?), what good do my shares in my fund do for anyone (except me)?

And if the company pays dividends, it seems like they are paying off that initial offering essentially forever? It's like a low rate, infinite term, interest-only loan. How does NAV play into anything?

Am I missing something simple? Am I missing something complex?

-ERD50

[Big_Hitter]

aren't our investments considered "shareholders equity" on the balance sheet?

if so it seems that as investors we are helping the company employ people and that's a good thing

[exnavynuke]

The historic performance of the company's stock is an indication used by many to determine the financial health and thus suitability for financing that a company has. No one buying the stock = prices probably falling = bad financial health = more difficult to get financing for projects etc.

[pb4uski]

OP has a point in that the vast majority of stock trades do not directly benefit the company we are buying shares in since the transactions are between existing shareholders and the company is not involved. The company gets cash from the IPO and from secondary offerings but not from most routine trades.

However, the seller gets cash when I buy stock (or in my case, when the funds I buy purchase shares) and presumably the sellers of those shares use that cash for something... if it is to buy a house or a car or spend or something like that then there is "good" but I suspect that in most cases it is just later reinvested.

To me the major benefit to the issuer is that the market provides liquidity for it to issue new shares or issue shares for stock compensation or whatever or to buy back shares.

[GrayHare]

Quote:

Originally Posted by ERD50 It's working for us, and w/o that investment, those companies couldn't do what they do. But is it? I understand (or think I do), that the Initial Public Offering raises money for the company, but after that, what? Unless they sell off more of those shares, or make another public offering, supported by the current NAV (and doesn't that dilute the existing shares?), what good do my shares in my fund do for anyone (except me)?

Your ongoing ownership of shares supports the whole corporate system. If suddenly no one wanted equity shares, the price of those shares would drop precipitously, and new companies would find it more difficult to raise capital.

[MichaelB]

Quote:

Originally Posted by ERD50 This may have been discussed before, I don't recall. I sometimes have trouble getting my head around the really big finance questions (like balance of trade, currency devaluation etc). Many of us probably have half or more of our portfolio in equities. Sometimes you hear that "rich people" are 'hording' their money, and it would be better if it were spread out (and I don't mean for this to go into the topic of redistribution of wealth, that is just a statement). But is the money just siting there? The answer I usually hear is, no - it is "invested" in companies that are providing products, services and jobs. It's working for us, and w/o that investment, those companies couldn't do what they do. But is it? I understand (or think I do), that the Initial Public Offering raises money for the company, but after that, what? Unless they sell off more of those shares, or make another public offering, supported by the current NAV (and doesn't that dilute the existing shares?), what good do my shares in my fund do for anyone (except me)? And if the company pays dividends, it seems like they are paying off that initial offering essentially forever? It's like a low rate, infinite term, interest-only loan. How does NAV play into anything? Am I missing something simple? Am I missing something complex? -ERD50

An equity investment leads to job creation when an enterprise sells new equity to raise funds to create productive capacity. When they invest that money it generates economic activity and contributes to the GDP.

When we "invest" in equity shares we are not generating any economic activity aside from the brokerage transactions, we are only exchanging assets. The only change in GDP is the brokers commission. It's a form of savings.

The difference here is that "investing" means one thing in economics and another in finance, and the two meanings are not interchangeable.

[sengsational]

By having funds ready to snap-up a deal, "rich people" (and not so rich alike) are making production possible.

It's easy to see if you set-up a scenario in a 1600 village. Fred knows how to weave and has one loom. 9 other villagers each buy and own a loom, but let Fred operate it (the IPO). Now one of the villagers needs a cow more than he needs the monthly weaving profits. If there were no villagers that wanted to buy that loom (i.e. a "rich person", the guy who wants the cow would have to ship the loom elsewhere, sell the loom for scrap, or whatever, to get cow money. And the production capacity would be reduced by 10%.

[Mdlerth]

When I took economics (back when it was only the S&P five dozen), they said that the capital a business raised was always still there. Whether you bought their stock at the IPO or a century later only changes the name on the dividend check. The capital remains in the company in the form of factories and inventories and delivery trucks and forklifts, etc.

Elmer Fudd explains it all in "Yankee Dood It":

https://www.youtube.com/watch?v=NOX0_FUGM6k

So, yes, your investment is busy funding the world's economy. Thank you for doing good!

[ERD50]

Quote:

Originally Posted by MichaelB ... The difference here is that "investing" means one thing in economics and another in finance, and the two meanings are not interchangeable.

Thanks, that is probably where I'm getting hung up, trying to equate the two?

And thanks to others for their replies - I 'get' that those stocks support the whole system, but it still seems somehow like an illusion to me.

Consider a company that on their IPO, declare no dividend, and say they never plan to pay one. So my shares represent a % of the company? How? I guess it is similar to the US dollar - it is worth $1 because the Feds say so, and they are willing to back it up, to the extent that someone will give me $1 worth of goods in exchange for my paper (or ledger entry) dollar. And that's all that really matters.

So the company says that share is equal to 1 millionth of the company, and someone buys it from me on the trust that that is true, and that when the company valuation goes up, they can profit by selling to someone else who also accepts that it is worth 1 millionth of the company.

I guess that's it, it is still all a little 'virtual' for me, I'm sometimes a real nuts-and-bolts thinker, depends on the topic.

-ERD50

[MichaelB]

Quote:

Originally Posted by ERD50 Consider a company that on their IPO, declare no dividend, and say they never plan to pay one. So my shares represent a % of the company? How? I guess it is similar to the US dollar - it is worth $1 because the Feds say so, and they are willing to back it up, to the extent that someone will give me $1 worth of goods in exchange for my paper (or ledger entry) dollar. And that's all that really matters. So the company says that share is equal to 1 millionth of the company, and someone buys it from me on the trust that that is true, and that when the company valuation goes up, they can profit by selling to someone else who also accepts that it is worth 1 millionth of the company.

Don't get hung up on the dividend. Your initial investment entitles you to fractional ownership of all the future cash flows of that enterprise. If they generate a positive cash flow they have two (theoretical) options for the cash - pay it to you as a dividend or reinvest it. If they reinvest, they create even more economic activity and the potential for even greater future cash flows.

When you sell that share (or buy it) you are transferring ownership of that future cash flow.

[sengsational]

Quote:

Originally Posted by ERD50 Consider a company that on their IPO, declare no dividend, and say they never plan to pay one. So my shares represent a % of the company? How? I guess it is similar to the US dollar - it is worth $1 because the Feds say so, and they are willing to back it up, to the extent that someone will give me $1 worth of goods in exchange for my paper (or ledger entry) dollar. And that's all that really matters.

I wouldn't equate a fiat currency (the US dollar, or any currency) with something that produces something. Stockholders own a fraction of a producing asset. Completely not like a currency, which does nothing. Even though they don't pay dividends, they will still be producing. If not, they'll go out of business.

[haha]

Quote:

Originally Posted by ERD50 Thanks, that is probably where I'm getting hung up, trying to equate the two? And thanks to others for their replies - I 'get' that those stocks support the whole system, but it still seems somehow like an illusion to me. Consider a company that on their IPO, declare no dividend, and say they never plan to pay one. So my shares represent a % of the company? How? So the company says that share is equal to 1 millionth of the company, and someone buys it from me on the trust that that is true, and that when the company valuation goes up, they can profit by selling to someone else who also accepts that it is worth 1 millionth of the company. -ERD50

First of all, I doubt many shares are traded based on much other than a feeling that prices are going up, get on the train, or prices are going down, get off quick!

As to the fractional ownership of a company, it isn't because the company says so, it's because if you own 1000 shares, and the company has 1 million shares outstanding, you have residual claim to 1/1000 of the profits of this company. But getting cash is going to depend on payouts like dividends or return of capital, or selling shares. In the very rare circumstance of a shutdown, in the even more rare circumstance that there is any equity left after all claimants ahead of you including various legal beagles and "officers", you would be entitled to 1/1000 of the remaining equity that could be turned into cash.

Probably poker chips have more certain value, in a serious game where losses will be enforced in favor of winners.

It is an unbalanced game, but for many of us, at certain times anyway, it is worth playing.

Ha

[ERD50]

Quote:

Originally Posted by MichaelB Don't get hung up on the dividend. Your initial investment entitles you to fractional ownership of all the future cash flows of that enterprise. If they generate a positive cash flow they have two (theoretical) options for the cash - pay it to you as a dividend or reinvest it. If they reinvest, they create even more economic activity and the potential for even greater future cash flows. When you sell that share (or buy it) you are transferring ownership of that future cash flow.

I was just trying to eliminate the dividend, to strip it down to its simplest form.

OK, so here's one thing that is sinking in from this discussion, that makes this more tangible for me. If the owners sell off say 3/4ths of the company, they are limiting themselves to a 1/4 share of any future profits. I can see the intrinsic value better when I think in terms of the original owners losing something, so therefore some else must gain - it's a real thing.


Well, that assumes I know how an IPO works - does that initial offering represent a % of the company, in a legally binding form? So if they sell off that 3/4th portion of the company, and issue 3 million shares for that 3/4 portion, each share represents 1/4 of one millionth of the company? And the company is essentially holding back (or actually holding) one million shares?

-ERD50

[pb4uski]

Quote:

Originally Posted by sengsational By having funds ready to snap-up a deal, "rich people" (and not so rich alike) are making production possible. It's easy to see if you set-up a scenario in a 1600 village. Fred knows how to weave and has one loom. 9 other villagers each buy and own a loom, but let Fred operate it (the IPO). Now one of the villagers needs a cow more than he needs the monthly weaving profits. If there were no villagers that wanted to buy that loom (i.e. a "rich person", the guy who wants the cow would have to ship the loom elsewhere, sell the loom for scrap, or whatever, to get cow money. And the production capacity would be reduced by 10%.

Not a great analogy... the villager that wants a cow would have to just either reduce what they are asking for the loom or keep the loom until someone wanting to buy it comes along... same thing would happen with a stock, the holder would have to reduce their asking price until it entices a buyer.

[haha]

Quote:

Originally Posted by ERD50 I was just trying to eliminate the dividend, to strip it down to its simplest form. OK, so here's one thing that is sinking in from this discussion, that makes this more tangible for me. If the owners sell off say 3/4ths of the company, they are limiting themselves to a 1/4 share of any future profits. I can see the intrinsic value better when I think in terms of the original owners losing something, so therefore some else must gain - it's a real thing. Well, that assumes I know how an IPO works - does that initial offering represent a % of the company, in a legally binding form? So if they sell off that 3/4th portion of the company, and issue 3 million shares for that 3/4 portion, each share represents 1/4 of one millionth of the company? And the company is essentially holding back (or actually holding) one million shares? -ERD50

All you need is a very basic look at balance sheets. Once about 20 years ago my former wife gave me a great book for Christmas. It explained the operation of a firm with diagrams of flows and reservoirs. I wish I still had that book.

Ha

[dixonge]

Quote:

Originally Posted by ERD50 I was just trying to eliminate the dividend, to strip it down to its simplest form. OK, so here's one thing that is sinking in from this discussion, that makes this more tangible for me. If the owners sell off say 3/4ths of the company, they are limiting themselves to a 1/4 share of any future profits. I can see the intrinsic value better when I think in terms of the original owners losing something, so therefore some else must gain - it's a real thing. Well, that assumes I know how an IPO works - does that initial offering represent a % of the company, in a legally binding form? So if they sell off that 3/4th portion of the company, and issue 3 million shares for that 3/4 portion, each share represents 1/4 of one millionth of the company? And the company is essentially holding back (or actually holding) one million shares? -ERD50

I was researching this just the other day! So what helped me wrap my head around all this was an understanding of primary and secondary markets. The IPO is primary - mainly institutional and large investors. But if they feel like they might get stuck holding stock, they may want better prices or dividends. But with a healthy secondary market, they gain liquidity, knowing they can find buyers if they want to sell. Any selling to the secondary market is taking an original share and trading it. No new shares are created. So the ownership of the company stock is being shuffled infinitely every day.

So boycotting a company by not owning their stock doesn't really work, unless a large number of investors join in and drop the price. Even then, it only works because it's dropping the net worth of employees and management who own employee stock options. Here's some info:

https://en.wikipedia.org/wiki/Secondary_market_offering

[Sunset]

Quote:

Originally Posted by ERD50 ..... Well, that assumes I know how an IPO works - does that initial offering represent a % of the company, in a legally binding form? So if they sell off that 3/4th portion of the company, and issue 3 million shares for that 3/4 portion, each share represents 1/4 of one millionth of the company? And the company is essentially holding back (or actually holding) one million shares?....

Yes, the company registers a total of 4 million shares.
Now normally a company can issue more shares, which dilutes the existing ones as each existing one becomes less valuable.
So if this same company issued an extra 4 million shares, then the value of all shares would be worth 1/2 of what they were before the issuance.

[rayvt]

Quote:

Originally Posted by ERD50 So the company says that share is equal to 1 millionth of the company, and someone buys it from me on the trust that that is true, and that when the company valuation goes up, they can profit by selling to someone else who also accepts that it is worth 1 millionth of the company. I guess that's it, it is still all a little 'virtual' for me, I'm sometimes a real nuts-and-bolts thinker, depends on the topic. -ERD50

Don't get hung up on overthinking it.
"Res tantum valet quantum vendi potest" (A thing is worth what someone else will pay for it.)
Basically, a thing is worth what you can get for it. With a $5 bill you can get a cup of (overpriced) coffee at Starbucks. The $5 bill isn't "worth" anything in and of itself -- you can't eat it or drink it. But you can get a coffee or a hamburger.

[calmloki]

Thank you for this thread. I have had the same difficulty understanding how a company benefits after the initial stock sale, except in any retained shares. Have a huge problem with understanding how the market - people swapping stocks for money - has any validity if dividends are ignored. Company value going up or down makes some sense - Ox Yoke Inc. probably dropped in value when Ford demonstrated a functional truck. OTOH, we bought some Amazon stock a few days ago - P/E of 190? How does that make sense unless it is just a matter of "everyone knows and uses Amazon, therefore it must be worth a bunch" - "Look - the price of Amazon is through the roof - we better get on board".

We have bought into the market, because everybody does it and I know I'm not smarter than everybody. Still, loaning money to house flippers makes a lot more sense to me.

[Texas Proud]

Quote:

Originally Posted by MichaelB Don't get hung up on the dividend. Your initial investment entitles you to fractional ownership of all the future cash flows of that enterprise. If they generate a positive cash flow they have two (theoretical) options for the cash - pay it to you as a dividend or reinvest it. If they reinvest, they create even more economic activity and the potential for even greater future cash flows. When you sell that share (or buy it) you are transferring ownership of that future cash flow.

A good example of this is Amazon... now worth $385 billion....