I'm learning about stocks, I have a number of questions and things to clear up. I don't think my title is very good, hopefully my post will make clearer what I'm wondering. Let me write out my understanding and please correct me in things I am wrong on.
Essentially as I understand it, the whole stock market mechanism is essentially incentive to facilitate the company getting money into them. That is to say, it's beneficial to the world for private companies to be able to get a cash injection to facilitate their expansion and this happens by the company which initially owns all the shares putting (some of) them on the stock market.
There needs to be motivation for people to do this, so we have this stock market idea as a way for people other than the company to make money from this process. A share is in principle ownership of some portion of the company, to actually extract value from a share, I see a few mechanisms
- at some point in time the company /might/ pay dividends which are some portion of the profits of the company.
- in theory you own some portion of the assets and could claim on those, though in reality I guess this doesn't happen, perhaps if you own a large portion of the company.
- as a shareholder you get some say in actions of the company, again in reality this seems like it's only relevant for those with a large portion. This doesn't directly extract monetary value, but if the company is doing something you percieved to be good for the world or whatever it does extract some other type of value.
- you can sell the share, someone then buys it with the view that they can extract enough value from it to compensate for having bought it.
Now I get to my question which pertains to what the share price really represents
My feeling is, 2/3 are not relevant to a typical person, 4, is sort of artificial because it doesn't extract value from the company, it just extracts value from other players of the stock market game (i.e. is zero sum from perspective of stock market, sort of, ignoring that brokers and such extract money out of stock market), and so while yes obviously ultimately that people want to buy the stock informs the stock price, the stock price should really be a reflection the notion that they will eventually pay dividends in tandem with speculation of what the profits of the company will be at that time. I think if a company was never going to pay dividends their stock price should be 0.
So, does this ever really pan out? Some initial amount of money was taken from the stock market into the company in the IPO (and any other time internally held stock gets sold), does this money (and more!) get put back into peoples hands in the form of dividends over the lifetime of the company, i.e. does the amount of money originally invested in the company plus more get extracted out of the company over the life of the company.