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.
Not everyone strives to own a company. All I really care about is that I own something (a tiny portion of the company) and that something goes up in value and allows me to resell at a higher price than I bought. 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.
I know that people don't need to strive to buy the company. 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).
A company generally doesn't own 51% of the shares. Effectively it will have a board of directors which will own pieces of the company.
I see. Does anyone know how to check this up for a particular stock? Is there a website where I can screen this?
You can, although I think it's usually a paid service. Update here if you find something free. :)
Public companies have independent boards and complex legal indemnifications to prevent this sort of thing.
A company already owns all the undistributed shares it is authorized, by the board of directors, to distribute. The company doesn’t get to vote the shares it holds. So in your scenario, shareholders will always have a controlling interest in the company. There are also legal protections for minority shareholders.
Assuming this is a publicly traded stock, there would be a price associated with each of these stock sales. Dividends would have to come from company profits (assumed). If they stopped paying dividends the shareholders still own their share of the profits which are not distributed through dividend, which should keep the share price higher than if they did distribute a dividend. What they lose by issuing stock is that part of ownership in the company, and therefore the implied profit/loss
The value of the shares are derived from their current and (growing) future expected cashflows not by the %distribution of holders.
51% is irrelevant, it is about voting rights. Goog and fb has very favorable voting rights for their founders. I think fb is 1 to 10 for Zuck. Market transactions are supply and demand. If the float ie number of shares trading is small, the supply is small hence you get higher price all else being equal. So extrapolating from market price to market cap is not ideal but that is what people do. When all the available shares would be sold in the market, most likely it would depress price. As a majority shareholder, your worth is from the extrapolation above hence you don’t want to mess with public perception. You want to keep promoting as much as you can ie Elon Musk. If somebody comes and wants to buy whole think, this way you can ask premium. Board has to vote it. As a majority vote holder you can accept to deny, which Zuck denied the famous 1bn purchase.
Your rational is essentially correct, but there are a few issues: 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.
(1) You are right, I just written 51% because I got lazy. I did not know about the other points, thank you. How do I find out about this? (2) That's true. If companies can execute this loophole, this makes me hesitant to pick certain stocks too easily, as there can be a minority that do. I'm not worried about this when I pick ETFs.
You should be hesitant about these kinds of things. Some Chinese companies screwed over US investors this way. Trump actually did basically the same thing himself too.
It’s a casino where you buy high and hope to sell to greater fool at a higher price. This is a market where people buy GME.
When one day they do sell, everyone's shares will be worth just as much.
That's definitely a good point, but one way companies can work around that is by never selling.
If they never sell and never pay a dividend then they can't access the built up wealth either (except fraud, illegal skimming etc)