Loophole in stock market? What gives shares value if company holds more than >50%?
I am new to investment and would like to see where my logic is wrong, here goes nothing:
The reason why shares hold value is because the company holds value. It's the potential that someone can buy the entire company. For example, someone can buy out an entire company and keep all their profits to themself or liquidate it. Even if the company doesn't pay dividends, it holds value this way. I understand this much.
However, does that person ever have the right to buy the entire company? What if someone holds 51% of shares? Can the person holding 51% of shares ever be forced to sell?
So, what a company could do is:
* Hold 51%, gradually sell 49% of their company shares.
* Pay high yield/dividend annually to attract people to buy their shares.
* Once the 49% of shares are sold, stop paying all dividends. No-one can buy out the company since they hold 51% of the shares. The dividends they paid out are nothing compared to the amount gained from selling all of the stocks.
* The company which holds 51% of shares has control, and will never ever sell (unless for an unreasonable price). The person who purchased the shares in a sense got ripped off and the shares do not really have value because of this. The company doesn't care what their shares will be worth in future, they'll just hold it and don't care if it goes to near 0.
What prevents this from happening? Does your explanation apply to all stocks listed on all popular exchanges? Otherwise, literally every single company can keep 51% of their shares, sell 49% of their shares, and never "lose" anything in the process, effectively, gaining FREE money for the 49% of shares they sell (in other words, the 49% of the sold stocks are worthless if the 51% holder never sells and the company does not pay dividends).
I am trying to understand the stock market better and understand why stocks have value (PE ratio, potential growth, assets), and whether there are loopholes.
comments
1. You don't need 51% of shares, you need 50% + 1 voting shares. Many companies have multiple share classes , some with extra votes like 10x regular, or some where certain shares have no votes.
2. Often many employees hold stock. If you make the stock value for down they may quit, potentially lowering productivity and this company value.
Replace stocks with Pokémon cards or houses. Same concept. If you told me that I could buy Pokémon cards for $0.20 today and sell them in two months for $20, I’m totally there. The cards don’t need to pay me dividends or provide any real benefits to make this worth while for me.
But the share's value is driven by the possibility to buy it out.
If the share's value is so low that it's worth someone to buy out the company, then someone will buy it out and liquidate or keep the earnings for themselves. The value is driven by the earnings (PE ratio) and potential growth in earnings.
Stocks do provide benefits because they do represent an ownership of the company, but this falls apart if they don't (for example, if the company stops paying dividends and forcibly keeps their 51% of shares). The possibly of buy out is what lets someone resell it at a higher price, otherwise there's no "value" to stock and will be a game of hot potato (eventually collapse).
Corporations have a fiduciary obligation to its shareholders. If they sell shares to raise funds and intentionally use the money for a purpose not in the interest of those shareholders, they just broke the law. Often it isn't as clearcut as you describe, but there are lawsuits all the time claiming something to this effect
Because I saw some attractive looking stocks, but this loophole came across my mind when I saw the company still held most of its stocks and had great earnings.
Some companies could do this more discretely and it is very difficult to enforce.
If the dividend pay is too high it will impact the bottom line and quarterly report. The stock crashes… the only way to create fake perceived value is to cook the books to make the company appear a lot more profitable or growing than it is. There was one company who succeeded at doing this for sometime before it was caught… Enron…. I still remember the commercials. Why why why ….. lol
The issue I pointed out is even if the company provides completely accurate reporting, but stops selling after it issued 49.999% of shares and also stops giving out dividends. The gain I would have is the amount I gained from selling 49.999% of shares minus the dividends I gave out - this would be completely "free" money for the company that issued the stock if the company was persistent on not selling the remaining 50.001% of shares no matter what. E.g. if the company sold 49.999% of my stock, and always kept 50.001% no matter what, it gained free money and doesn't have to relinquish ownership of the company ever - this would even work with or without giving dividends in the first place. In my example I have written I never written about lying about reporting, just imagine a standard company with accurate reporting for the example.
"no one buys stock hoping of owning the whole company some day" - the ability to is what provides it value, that and the voting rights. When a company is sold, it pays its shareholders. If the share prices get too low, then another company would rather buy out the whole company. That's why it's okay for people to buy the stock, without the intention of having to own the whole company one day.
People who buy stocks never factor in or think about ability to own a tiny tiny fraction or fancy voting in the shareholder meetings. It’s purely for growth and set by supply and demand.
The dividend scam scheme you described will never take off in the realm of public companies as the intent is deception and fraud and will be obvious to the regulators.