This may be a dumb question but Ill ask anyway...

joeybobby · #1 (**permalink**) 12-13-07, 08:30 AM

Im new to investing in stocks and I have a question that has been bothering me through all my reading....
Why do people buy into stocks when there are no dividends paid out? I understand that the stocks go up and you can sell at that point and make a profit but what motivates anybody to buy the stocks at higher prices when they make no extra money doing so? The share prices raise because people are willing to pay extra for them right? So what if the company has higher profits, does that benefit the stock holder if there are no dividends or can the company somehow say the stocks are worth more and raise the value of them?
Thanks in advance for any answers that might clear this up for me!

EvaluatingStocks · #2 (**permalink**) 12-14-07, 12:15 AM

Not a dumb question at all - that's actually a very good one. Basically, dividends can be detrimental to stockholders because they are doubled taxed. Keep in mind that stockholders are partial owners of the company, and dividends are one way the business can provide them with a return on their investment.

However, the company has to pay taxes on what it earns, and when it pays a dividend the stockholder has to turn around and pay taxes again on those dividends. This is one reason well respected firms like Berkshire Hathaway don't issue a dividend.

The other way that the company can give investors ROI is through stock buybacks. Basically, as a shareholder you have a claim on future earnings of the company. When the company buys back its own shares, there are less to go around in the open market. Therefore, your shares are worth more since you now own a bigger "piece of the pie".

Hope that helps!

joeybobby · #3 (**permalink**) 12-14-07, 08:03 AM

Thanks for your reply! It definitely helped a bit.. Im still a little foggy on why people would want to buy them at higher prices.... Is it because of the possible buy back from the company and that is where the incentive is? You mention having future claim for the profits.. Why would you received some of the profits in the future? Do companys pay dividends at a given point in time? Thanks again for the reply!

huracan · #4 (**permalink**) 12-14-07, 11:08 AM

I buy a stock at a higher price (I assume you mean that the price of the stock is now higher than it was 1 hour ago or 1 day ago or 1 month ago, etc.) because I believe that it will continue to go higher and I can sell it and pocket the difference (have you heard of "buy high, sell higher"?) My trading style disregards dividends, which might be important to someone with different investing goals.

Novice Investing · #5 (**permalink**) 01-01-08, 08:29 AM

joeybobby:

Why do people buy into stocks when there are no dividends paid out?
In the game of investing, some people lose money, some make money. If you buy stocks below fair value, you will certainly make money. However, the definition of fair value differs for each investors. For stock A, for example, I may think its fair value is $ 10 and therefore, I will not buy stock A higher than $ 10. Some other investors may think that stock A has a fair value of $ 20 and thus, they are willing to buy at a higher price, say $ 12.

The difference in fair value estimation lies on the information and the accuracy of this information. If you know a biotechnology company will issue a life-changing drugs (cancer cure? avian flu cure?), then you are willing to bet that current price is still below fair value eventhough price has risen significantly. Thus, you keep buying in the expectation of price will continue to go up towards its fair value.

moneymatters · #6 (**permalink**) 01-03-08, 04:18 AM

Quote:

Originally Posted by EvaluatingStocks

The other way that the company can give investors ROI is through stock buybacks. Basically, as a shareholder you have a claim on future earnings of the company. When the company buys back its own shares, there are less to go around in the open market. Therefore, your shares are worth more since you now own a bigger "piece of the pie".

This is the one thing that confuses me and that I have had no luck whatsoever in locating any information on.

If a company has a limited number of stocks, what happens if more people want to buy it than there are stocks available? And when someone "sells" their stock, who buys it?

What I mean is if a company has 1,000 shares, and all of those shares are purchased, can I just call up a broker and say "Hey, I want to buy a share"? And if so, where does it come from? If not, how do you know if there are shares available? And what if I want to sell my share? Where does it go? Is it possible to have shares that you want to sell but not be able to sell them?

Novice Investing · #7 (**permalink**) 01-03-08, 10:20 AM

Quote:

Originally Posted by moneymatters

What I mean is if a company has 1,000 shares, and all of those shares are purchased, can I just call up a broker and say "Hey, I want to buy a share"? And if so, where does it come from? If not, how do you know if there are shares available? And what if I want to sell my share? Where does it go?

The answer is: yes you can call up your broker and tell him that you want shares of company X. And the share came from those 1000 shares that people had purchased. It is a very simple mechanics. When there is buyer, there is seller. Otherwise, there will be no transaction. And there will always somebody out there who would want to sell if you offer them at higher price. If one of the shareholder needs money real bad, he/she can even sell his share to you at a lower price.

Quote:

Originally Posted by moneymatters

Is it possible to have shares that you want to sell but not be able to sell them?

No, i think in most cases, you will be able to sell them, if you offer them low enough price. If current price is $ 100 per share, and you want to sell it at $200 per share now, who would want to buy? On the other hand, if current price is $ 100 per share and you are offering $ 90 per share, you can always find a buyer for it.

optradersc · #8 (**permalink**) 01-03-08, 05:52 PM

Quote:

Originally Posted by moneymatters

This is the one thing that confuses me and that I have had no luck whatsoever in locating any information on.

If a company has a limited number of stocks, what happens if more people want to buy it than there are stocks available? And when someone "sells" their stock, who buys it?

What I mean is if a company has 1,000 shares, and all of those shares are purchased, can I just call up a broker and say "Hey, I want to buy a share"? And if so, where does it come from? If not, how do you know if there are shares available? And what if I want to sell my share? Where does it go? Is it possible to have shares that you want to sell but not be able to sell them?

First of all, there are market makers either trading electronically or those guys standing there at the exchange floors. Market makers are the guys setting the prices (bid and ask). Here's one important thing, they also have shares of that stock and must sell their own positions when no one else wants to sell. Of course, the easiest way to get someone to sell their shares is to raise the prices. That's how we get our up ticks and down ticks.

By the way, just because the company shows a float of 1000 shares doesn't mean they only have 1000 shares. You've got to remember that market makers will have additional shares that can be sold to the retail traders when needed. Of course, we'd be getting away from the subject if I add the aspect of how market makers hedge their positions. And those market makers are usually employees of large investment funds. Hope that helps.

On the sell side, say I wanted to sell my 100 shares of ABC, and there's no outside buyer, the market maker will have to buy my shares at the bid price. Ever notice why there are large spreads for thinly traded stocks? Let's say stock ABC only has 50000 shares traded daily. The bid price for ABC will probably be at $30.25 and the ask price at $30.75. Now, I sell my 100 shares of ABC to the market maker at $30.25. What he can now do is try to sell that same 100 sh. to someone else at $30.75. He also has a $0.50 leverage. If no one buys at $30.75, then he can lower to $30.50, and someone waiting on the other side will certainly buy it at $30.50. It's a win/win/win situation for everyone. I got rid of my shares, the buyer bought it for $0.25 less, and the market maker made $0.50 on the entire transaction. Getting too long