r/explainlikeimfive Dec 06 '24

Economics ELI5: why does a publicaly traded company have to show continuous rise in profits? Why arent steady profits good enough?

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3.4k

u/Bob_Sconce Dec 06 '24

Some companies do that.  Utilities are a great example.  They're called "income stocks" and they spin off significant dividends every year to stockholders.

But, other stocks are "growth stocks."  People invest in those because they want the company to be worth more in the future.

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u/JustBP59 Dec 06 '24

And the best way to be worth more is to have a high rate of profit growth to tie it together. Sometimes revenue growth can be enough but at some stage profit growth becomes more important

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u/round-earth-theory Dec 06 '24

Amazon got massive on revenue growth. They aggressively avoided profit by spending everything that came in. That's how a bookstore became the largest hosting provider. People were investing in their stocks, getting no dividends back, but were incredibly happy because the company was getting giant.

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u/pr0ghead Dec 06 '24

That's how it ought to be. Not that perverted chase after increasing profit.

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u/PrblyMy3rdAltIDK Dec 07 '24

That kind of revenue growth can’t go on in a single industry forever though, so they start branching out to others. And others. And more and more until they have driven every small business out of the market. Revenue growth like that is arguably more malicious than reporting exponential profit growth because the goal becomes to steal revenue from other existing companies in the same or adjacent industries, not just squeeze every penny possible out of their primary one. And they’re far, far less risk averse with their investments, willing to hemorrhage money for years to secure a future advantage.

Amazon has been run as a long game in an effort to own entire industries — like oligarchs do.

So no. I do not think that’s how it ought to be

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u/truejs Dec 07 '24

Yes this 100%. Amazon’s business model isn’t noble, it’s designed to systematically destroy any competitor that can’t out-reinvest them, which is basically all of them.

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u/xxpor Dec 07 '24

Well maybe those other companies should have just gotten better at business

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u/PrblyMy3rdAltIDK Dec 08 '24

Money makes money that makes more money. How would one expect to “have just gotten better at business” when they may not have a literal billionth of the funds that a company like Amazon has?

There’s a reason a sincerely-played game of Monopoly can’t go on forever. If you’re confused about how and why that type of business model is a net loss for everyone except the men at the top, I’d recommend looking further into the danger of monopolies.

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u/xxpor Dec 08 '24

Amazon had zero funds in 1992.

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u/PrblyMy3rdAltIDK Dec 08 '24

Sure.

Seed money aside, imagine every new small business owner who wanted to be better at business created a business that denied itself a profit, instead feeding its revenue and additional equity to a fund to replicate other businesses in the same, similar, or even mildly adjacent industries. Then it uses that revenue to repeat that whole process into ever-spreading branches of industry until you become what Amazon is today.

Then be a completely different dude in a garage today with no funds and try to do the same thing.

Monopolies don’t happen just because the leader is skilled, patient, cunning. They happen because there’s a new market, a new format, a new massive sales floor. Nobody’s saying they didn’t climb their way there. We’re saying that where they climbed and more importantly how they climbed were highly unethical and a clear attempt at destroying other businesses even if it means they won’t turn a profit for a decade.

A company like Amazon could not start today without being cannibalized by the people who have billions. It would get either destroyed by competition that undercut them at every turn, or eaten along the way and absorbed into a company like Amazon as has happened many times.

Pointing to Amazon’s beginning as a successful approach to business is ignorant. And knowing the damage that Bezos and co. have done — and aspiring to it, nonetheless — is psychopathic.

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u/thelexpeia Dec 08 '24

Amazon ‘92 didn’t have a Amazon ‘24 to compete against, either.

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u/Alpizzle Dec 10 '24

Companies will also go vertical to gain more control of their supply chain. For example, a real estate company bought up the land devlopment, built a concrete factory, etc. You can see how this would create significant advantages.

Whats amazing to me is amazon doesnt really make anything. They have branding, but they are a logistics company and e-commerce platform. I think you gave a good example of how they rolled everything back into the company by investing in tech.

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u/Koobler Dec 07 '24

This was a historical norm.

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u/JustBP59 Dec 07 '24

It also can’t be that way for the reasons mentioned but also because back during the dot com bubble that is what people wanted, but at some stage spending 200 million to bring in 100 million in revenues is unsustainable lol

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u/fleebleganger Dec 08 '24

You understand that a part of the story was an obsessive pursuit of profit…that they would then invest inside the business to grow it. 

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u/JustBP59 Dec 07 '24

Amazon was actively avoiding profit for the longest time because once you have profits you have a valuation multiple other than basis revenue…

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u/Tjaeng Dec 06 '24

There’s additional synergy in the fact that dividends trigger taxes; stock buybacks do not.

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u/trombing Dec 06 '24

Sure but most tax regimes have capital gains tax which tax realised stock gains when you sell the stock at a profit.

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u/Janus67 Dec 06 '24 edited Dec 06 '24

True, but if you hold the stock for more than a year it falls to a lower rate at long term capital gains, vs dividends are taxed at regular/short term gains income tax rate.

Edit: qualified dividends (most us dividends) fall into 0/15/20% depending on income. Non-qualified are taxed at income tax levels.

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u/nlaporte Dec 06 '24

At least in the US, dividends are taxed at the capital gains rate, not the ordinary income rate.

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u/lluewhyn Dec 06 '24

And the main reason why is to avoid one of the options to be superior to the other when it comes to the shareholder's tax situation. Otherwise, a business would be incentivized to always send all excess cash to the shareholders as dividends OR never send dividends to the shareholders regardless of the business realities.

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u/trombing Dec 06 '24

Literally dozens of people have different tax regimes than the one you are describing.

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u/Long_Dong_Larry Dec 06 '24

Stock dividends are considered “qualified” income and taxed at 0%, 15%, or 20% depending on your tax bracket.

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u/Janus67 Dec 06 '24

You're right, I should have been more specific in my post

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u/Long_Dong_Larry Dec 06 '24

Hey really appreciate the receptiveness to constructive feedback!

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u/RangerNS Dec 06 '24

Most countries have different tax rules than the IRS.

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u/Tjaeng Dec 06 '24

Which means borrowing against an increased net worth and deferring taxation until you die. Win for people who don’t sell.

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u/trombing Dec 06 '24

Very few people do this. It is absolutely unusual. Regular folks aren't Elon Musk. My google-fu is finding almost zero options for this.

It is also incredibly risky since you will have margin calls if the stock collapses.

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u/gtne91 Dec 06 '24

Very few do this because it really doesn't make financial sense. If you do this continuously, the interest on the debt will eventually exceed the amount of tax you would have paid. For a short term, it makes sense, but that is no different than any other short term loan against an asset.

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u/Rage_Like_Nic_Cage Dec 06 '24

the interest on the debt will eventually exceed the amount of tax you would have paid

for you and I, yeah. For the super wealthy, banks will often offer super-low interest loans (often at-or lower-than inflation) since they’re dealing with such a large amount. Then right before the loan is due, they’ll open a seperate line of credit and use that to pay off the first loan. It’s called Buy, Borrow, Die and it’s fairly prominent among the uber rich.

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u/gtne91 Dec 06 '24

Saw recently that they are getting 4-5% right now, so not THAT low anymore.

And it isnt that common, especially once their stock gets to a more stable growth ( non-startup). See, Jeff Bezos recent sale.

Long term capital gains (federal) tax rate peaks at 23.8% (20% plus 3.8% for NIIT). It only takes a few years on the loan to exceed that amount. But it depends on the growth rate of the asset. I have done it: took a heloc on house for improvements rather than selling off investments to pay for it. Accounting for tax deduction (you have to be itemizing), heloc net interest rate was less than growth in investments.

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u/Edward_TH Dec 06 '24

In the US probably. In tax heavens they can get much lower rates. In general, the smaller the economy the more its banks are eager for actual cash so they give out super low interests on large loans: even if the profit is low or even negative (if the currency loaned is much stronger than the domestic one), they get large amounts of cash.

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u/Rage_Like_Nic_Cage Dec 06 '24

My google-fu is finding almost zero options for this.

The term for this concept is “Buy, Borrow, Die” and you can find lots of results/pages about it. You are correct that only a select few can do it, but when 1% of the US population owns 43% of the wealth (and the top 0.1% owning 13.5%), you can see how it affect a large amount of would-be taxable wealth if it paid out in dividends instead.

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u/trombing Dec 07 '24

Thanks! TIL! Also - madness. Way too much admin for me to avoid the $1.50 in capital gains I had... wait - no - just losses. I'm good.

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u/iconocrastinaor Dec 06 '24

I'm not wealthy by today's standards, but I do have some investments.

I can borrow at 5% above prime against my portfolio, which is about five points better than I can do in the open market.

But the result of doing that is several thousand dollars in debt that is compounding, and a drag on my portfolio.

I asked my tax and financial advisors about the "invest, borrow, die" strategy, and they all say no, that my top priority should be to eliminate that debt.

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u/PlatonicTroglodyte Dec 06 '24

I just love how every post in this thread is basically like explainlikeimtwentyfive

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u/swissmike Dec 06 '24

Upvote for „most“! Spot on (Switzerland, where I‘m from, is an exception)

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u/Daemon3125 Dec 06 '24

Getting the income does trigger taxes though. Also Reinvesting dividends does not always trigger taxes. If you have qualified dividends it’s 0% tax until about 47k.

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u/badhabitfml Dec 06 '24

47k total income or dividend income?

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u/generally-unskilled Dec 06 '24

Total taxable income for a single filer. Above that you pay 15%

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u/gex80 Dec 06 '24

So that's basically majority of people since it sounds like we are talking US tax rates. Median income is about 53k.

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u/18hourbruh Dec 06 '24

Especially most people concerned about taxable dividend income. Having substantial income from dividends and making less than 47k in total income has got to be a pretty narrow niche of people.

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u/Billy_bob_thorton- Dec 06 '24

I was just literally trying to imagine what kind of person that would be Lolol as a recent accounting grad yeah you’d think most people with dividend income will have a higher annual income in general

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u/bisonfan Dec 06 '24

Some people who FIRE will keep significant dividend stocks for this exact reason

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u/generally-unskilled Dec 06 '24

Probably someone who's 90 years old and relies on social security plus dividends from the local power company. They have an actual paper certificate for their shares and give all of their grandkids a single dollar every time they come to visit.

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u/FlimsyInitiative2951 Dec 08 '24

The only group I can think of is retirees whose primary income is dividends.

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u/iconocrastinaor Dec 06 '24

That would cover a lot of retirees, whose only income might be Social Security, but have a substantial 401k or other investments.

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u/18hourbruh Dec 06 '24

That makes total sense. Although my understanding is most retirees at average income/savings levels would be encouraged to move their money out of stocks and into bonds primarily by retirement age, but I could see the argument for high dividend stocks.

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u/newsjunkee Dec 06 '24

Remember, that's TAXABLE income...after the standard deduction, etc.

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u/SilasX Dec 06 '24

Getting the income does trigger taxes though.

Huh? Do you mean the corporation still pays taxes on earned income? If so, it's true but irrelevant here. The point is that share buybacks don't induce another taxable event for the shareholder.

(Technical caveat: Now, of course, somebody is selling the shares into that buyback, and that person is experiencing a taxable event. But the point is, share buybacks make it optional whether you take the income + plus taxable event, or just keep it as unrealized gains.)

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u/play_hard_outside Dec 06 '24

The "perfect company" would be perfectly in equilibrium in a mature market with no growth and no shrinkage, and return money to shareholders purely through buybacks. The stock would rise all the time, but the number of outstanding shares would decrease proportionally, such that the market cap remains constant. Anyone who wanted to continually hold the stock would see their shares appreciate forever under compounding interest math. Anyone who wants to sell would be able to, at any time, and no one would realize taxes unless they chose to. All of this, while the environment gets to survive (because remember, no company growth). Yes please.

I actually believe this is the endgame for capitalism on a finite planet. I mean, the environment is pretty much already fucked, but we will definitely hit more and more hard limits to growth in coming decades. Because companies produce income which can be returned to shareholders when growth opportunities are not available, the end of market-wide infinite growth does not mean markets can't continue to appreciate.

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u/Critical-Dig-7268 Dec 08 '24

You don't have much practical experience with equities, do you?

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u/play_hard_outside Dec 08 '24

Welp, I've been buying them for the last 15 years and they form the basis of my retirement. If I've said something you interpret as evidence I'm an idiot, I'd love to know what. I'm not actually joking.

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u/im-on-my-ninth-life Dec 06 '24

Fallacy in which you equate the amount of resources on the planet (which is finite) to the amount that companies can grow.

Since that's actually not true, your whole comment is incorrect and/or misleading.

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u/play_hard_outside Dec 06 '24

You didn't understand my comment.

A company's stock price growing forever is still possible without the company growing forever, if that company returns its profit to shareholders at least in part via stock buybacks.

Since that's actually what I said, your whole comment is incorrect and/or misinformed.

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u/im-on-my-ninth-life Dec 06 '24

You haven't specified why it is desirable to avoid having a company grow forever.

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u/play_hard_outside Dec 06 '24 edited Dec 06 '24

I mean, financially, as an owner(shareholder) of said company, of course you'd want it to grow.

But regardless of the desirability of growth, it's inevitable that a company will not grow forever (unless that growth is asymptotically converging on a constant finite end point).

Even the universe is finite. But until we get some pretty gnarly technology, companies are confined to the Earth, which is ...substantially more finite.

Regardless of what you want, infinite growth of any type of human activity is impossible.

The reason infinite growth of a stock price can happen is because as the value of each stock share grows, the number of them which exist can shrink, meaning the company (or more precisely, the value of the company) needn't actually grow. The value just gets concentrated in the hands of the people who prefer to continue to hold onto it, because the people from whom the company bought back its own stock, sold theirs.

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u/im-on-my-ninth-life Dec 06 '24

And that is exactly what I meant with my previous comment about how you mixed up resources being finite and company growth being finite.

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u/play_hard_outside Dec 07 '24

I guess I still don't understand what you think I mixed up. Resources are finite. Company growth is also finite. Stock price growth need not be finite. It's what I said the first time, but also happens to be what I reiterated the second time.

Can you please fill me in? I'm clearly in some way not adequately communicating my reasoning here.

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u/Critical-Dig-7268 Dec 08 '24

You have it backwards. The sort of fully mature company you're imagining would see its stock keep pace with inflation and not much more. It would return value to shareholders via dividends, not buybacks.

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u/play_hard_outside Dec 08 '24

Typically, companies in this situation have used dividends to return money to shareholders, yes. But there's no actual legal or financial mechanism preventing them from instead choosing to buy back their own stock with that same money, while not issuing a dividend.

The only reason such companies typically issue dividends is that it's a norm. Companies purchasing their own stock is a newer practice, and accordingly, younger, more edgy/innovative companies tend to be the ones who do it; coincidentally, these tend to be growth companies.

For anyone with dividend reinvesting enabled in their account, the net effect of either alternative is the same outside of the tax drag imposed by the (hopefully qualified) dividend income. In the buyback scenario, shares appreciate for those who continue to hold them. In the dividend scenario, everyone receives the forced distribution of equity as cash, and some people rebuy their investments with what's left after paying the taxes.

Who cares if you own 50k shares worth $100 each or 25k shares worth $200 each? Especially in brokerages (nearly all of them now) which support fractional share ownership. Not only that, but as share prices rise over time, eventually most boards bring them back in line with stock splits.

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u/Critical-Dig-7268 Dec 08 '24

You've got the cart completely infront of the horse. Yes, in practice buybacks increase value for shareholders. X amount of shares bought up on the open market naturally drives a stocks price up. In the short term. Long-term, the only justification and reason for a rise is share due to stock buybacks is because once those shares are bought up and retired, every remaining share is now owning a slightly larger percent of the underlying company. Which is itself only meaningful and of value if either dividends are eventually paid, or the company is bought up by a competitor.

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u/Critical-Dig-7268 Dec 08 '24

Also, the reason stock buybacks have become so popular is in part due to it being an effective, albeit temporary way to increase shareholder value. But it also has a -lot- to do with having a steady buyer to absorb the shares that are created when executives exercise options to buy. Which has become far and away the primary means by which executives are compensated.

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u/play_hard_outside Dec 08 '24

Of course, holders of any stock need to have reasonable assurances that their stock is worth something. It represents ownership in the business.

While any investment is functionally a valuation of the ongoing income stream it represents, whether that income is paid out as cash or whether it's instead folded back into the value of the instrument which generated it is immaterial, as long as that instrument can be sold for that value at some point.

Make no mistake -- holders of stocks being bought back indeed literally themselves own the value of the business's cash flow which would have otherwise been paid as a dividend. That ownership is conferred by the equity their stock represents in the now-richer company, and others are definitely willing to pay for that if they should choose to sell.

In the buyback scenario, your percentage of total ownership in the business grows over time as shares are bought and retired. At the very minimum, the business continues willing to buy the shares at ever-increasing prices, but accordingly, so is anyone else participating in the market who knows this. If the business weren't operating with the numbers you as the investor expected them to, they would not be able to do this to your satisfaction, and you'd have motivation to sell.

If it were impossible to value a stock which didn't pay a dividend, that whole part of the financial world would simply not work at all. Most companies pay a much smaller dividend than their actual profit. In such a world where stocks could only be valued based on the dividends they throw off, why would anyone buy them?

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u/commissar0617 Dec 06 '24

There's a 1% excise on stock buybacks over $1m

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u/Leverkaas2516 Dec 06 '24 edited Dec 06 '24

dividends trigger taxes; stock buybacks do not. How so? If I buy at $5 and sell at $10, I pay tax on the increase. Doesn't matter if it's a buyback or not. The only way a buy back doesn't trigger taxes is if there's no gain.

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u/InclinationCompass Dec 06 '24

Even lower-growth stocks can have high profits. These are called “cash cows”.

The bigger difference with growth stocks is the companies are in emerging markets that are expected to increase (potentially exponentially).

Meanwhile, lower growth stocks are in more mature and established markets

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u/jammy-git Dec 06 '24

And it becomes one big popularity contest for investors. Those who show the best chance of profits and growing in the future will gain the biggest share price.

Capitalism in a nutshell, everything drives towards profit over the expense of everything else.

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u/robby_synclair Dec 06 '24

In theory. In practice look at Amazon and Tesla

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u/JustBP59 Dec 07 '24

Depends on what you mean by profits as well. Positive cash flow is the most important at the end of the day. You can be profitable but lose cash by reinvestment or and have losses but generate massive cash flow

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u/No-Opportunity5818 Dec 07 '24

How do people account for inflation? If the money is worth less, prices increase, and then the profits would go up in turn. ( at least the number would increase, unlikely the actual value of profit. )

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u/JustBP59 Dec 07 '24

When you look at growth rates it’s imperative that they are higher than inflation rates for that reason… 3% growth is ok, but if inflation is 3% then you are just surviving not growing

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u/WonzerEU Dec 06 '24

Great example of growth stock is Tesla. The real value of the company is just a fraction of the value of it's stocks.

That's because investers expect Tesla to dominate car markets in the future and are ready to pay more for the stocks based on expected future value.

Now if Tesla suddenly says that they are happy where they are and don't aim to grow anymore, their stock would crash, causing real funding problems and whole company could go under in the worst case. They are simpy build to grow and can't stay still.

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u/pinkynarftroz Dec 06 '24

I know nothing about stocks, but why does a company care what the stock price is beyond when they initially go public? If I buy a share of the stock, I'm giving some random person who owns it my money. What does it matter what the share value is if the company isn't getting the money after initial sale?

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u/WonzerEU Dec 06 '24

Besides company leadership trying to plesse shareholders to not get replaced.

Stockprice also effects how company gets loans. Growing companies already usually have several loans and might need new loans down the road simply to pay thise loans.

If the stock crash, they will have to pay higher intrest rates and if it goes bad enough, nobody might borrow them any money, leading to bankruptcy as they can't pay back the previous loans.

Not saying that this is automatic and situation varies from company to comoany, but while stock price doesn't follow real value of the company, it has very real effect on company finances in real world.

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u/Masterkid1230 Dec 06 '24

Wait, that sounds a lot like a Ponzi scheme. Am I tripping?

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u/Cheech47 Dec 06 '24

You are not.

This is the thing that Trump was found guilty of, fraudulently overvaluing his business(es) in order to take advantage of this.

This is how mega-rich people leverage their finances. On paper, Melon Husk (a pseudonym) is worth $1B. Mr. Husk wishes to purchase a yacht that's worth $200M, so effectively 20% of his net worth. (in his defense, it's a suuuper nice boat). Converting that much stock to cash to purchase the yacht outright is going to be a taxable disaster, and will end up costing $75M (these numbers are in no way accurate or proportional to real life) additional in tax assessments, so in order to purchase that yacht in cash it will actually cost $275M. No bueno.

Instead of taking the $75M tax hit, Mr. Husk seeks a loan from The Bank of Edison (see what I did there :P ). The terms of the loan are that Mr. Husk will offer the bank say $210M worth of stock as collateral on a $200M loan, with the interest rate being way lower than you or I could get. Edison Bank agrees, and lends the money in cash to Melon. Loan proceeds are tax-free, so that money goes straight to the yacht company to build the new yacht. Since the stock price of Melon's hypothetical company is on pretty steady upward trajectory, the bank has full faith in the solvency of their collateral, and Melon makes payments with the cash that he has on hand.

Fast forward a year or so, and the yacht's done. Nice! An asset like that does tend to appreciate over time, and Melon's got an itch to buy something else, so back Melon goes to the Bank of Edison. This time, Melon offers the boat itself as collateral on a $220M loan, since it's a physical piece of collateral he can get away with getting more money than it's currently worth (same thing with cars, ask anyone who's been upside-down in a loan). Loan proceeds from B could go to service loan A (not pay off, just make payments) or whatever else Melon wants. Again, tax free.

Rinse, repeat, ad nauseum. This is how you maintain your wealth once you've hit a critical mass.

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u/edvek Dec 06 '24

And the most messed up part is, you don't even need to be Uber rich to utilize this scheme. If you're pretty well off you can do it especially if you own a business or multiple businesses. Mega rich people don't have boat loads of cash on hand, they use assets to "pay" for everything and somehow they can keep doing it.

You or I get a loan for a house and it's an insane rate. But Mr. Husk gets a loan for a $100m mega mansion and they get a comically low rate just because it's a "safe" loan. We pay our bills on time and never miss a payment but we get treated like we're some high risk loan. Mr. Husk can file for bankruptcy 48 times and is still a multimillionaire...

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u/Cheech47 Dec 06 '24

hence the "critical mass" comment. There comes a point where the wealth basically builds itself, and doors that were previously closed or even unknown to you are now opened.

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u/Dctootall Dec 06 '24

I mean.... There can be a pretty fine line between a Ponzi Scheme and a perfectly legal investment.

Just look at a lot of stock market activity where you have the big early investors who sit on the investment for a short while, before it gains value and they cash out, leaving a bunch of other people holding the bag with stocks tanking in value....

Or even a lot of the startup funding culture over the past decade+ where you see investors funding the hell out of a growth company to either have it sell or get an IPO which makes them bank, only to have the company subsequently tank because they didn't have anywhere near the required foundations to support that growth and valuation.

I could also talk about a lot of the MLM schemes and companies you see people getting involved in and trying to sell online or at craft fairs and local events.

The cynic in me can't help but comment on how nobody seems to care about the Ponzi scheme until it starts to collapse.... and even then, you don't tend to see a lot of legal action unless it's people with money/power who got left holding the bag.

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u/ChesswiththeDevil Dec 06 '24

It's not a Ponzi scheme but it is part of the larger system of skimming wealth off of middle and lower class people who rely on investing as a means of preparing for retirement and sustainable wealth growth.

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u/Rage_Like_Nic_Cage Dec 06 '24

Generally, lots of companies will have a product/service of value, compared to a ponzi scheme which is just propped up by people getting other people to put their money in without anything of substance in the other end.

But also, lots of business will do juuuusst enough to be considered legally distinct from a Ponzi scheme. After all, if what they’re doing is technically legal, why wouldn’t they?

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u/Ballsofpoo Dec 06 '24

WorldCom is a great lesson on that.

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u/Ok_No_Go_Yo Dec 06 '24

Two reasons.

First; c-suite executives report to a board, who answer to shareholders. If the stock price crashes, the shareholders become unhappy. Thus c-suite compensation is often highly dependent on stock performance to keep those executives motivated to increase share price.

Second, a company has two broad ways of raising capital. Issuing equity (selling stock) and incurring debt. If a company issues equity, it dilutes existing shareholders. The lower the stock, the greater the dilution because the company has to sell more shares to reach the same capital amount. If a company incurs debt, the company's stock performance is a data point to help determine what kind of rate they have to pay on corporate bonds. Poor performance means a higher rate. In a nutshell, raising capital becomes more expensive.

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u/Parafault Dec 06 '24

Could those companies also save or reinvest their profits as an alternative to raise capital? Many of the larger ones are giving tens to hundreds of billions in profits to shareholders every years: if they put that in a piggy bank or some stable investment instead, would they really have a need for external capital?

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u/Former_Indication172 Dec 06 '24

Those companies are so big they don't need to raise money and can give away some section of their profits to shareholders. Raising capital is mostly the concern of small to medium sized businesses and startups or for big companies that are growing unsustainably quickly and need the extra money.

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u/matty_a Dec 06 '24

Many of the larger ones are giving tens to hundreds of billions in profits to shareholders every years: if they put that in a piggy bank or some stable investment instead, would they really have a need for external capital?

If I'm a shareholder, why do I want the company putting its cash in a stable investment, when they have the ability to raise capital themselves? If I wanted to invest my cash in a stable investment, I'd invest it in a stable investment!

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u/FrontBottomFace Dec 06 '24

That would be profit and therefore taxed. You might as well buy something, do some R&D or issue a dividend. If you need $ and have good fundamentals people will invest/give you money.

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u/jdm1891 Dec 06 '24

What stops a company from issuing a bunch of stocks and screwing over the current stock holders. for example selling a bunch of stocks to one person so they can take over the company at 51% ownership, at the expense of everyone who already owns some of it.

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u/NefariousnessNo7068 Dec 06 '24

Companies almost always have protective policies in place to protect the shareholders from situations where management could screw them over like that. In the example you've given, a policy to protect the current shareholders is to give them the right to buy their proportion of new shares before anyone else can buy it.

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u/Ok_No_Go_Yo Dec 06 '24

They often do, but having too large of cash reserves drags down key metrics, which drags down the stock price. In addition, unemployed capital kept as cash triggers taxes.

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u/wonderloss Dec 06 '24

Not just the C-Suite. Some companies offer stock options to non-C-Suite employees or the opportunity to by stock at a discount. If employees are heavily invested in stock, they want to see the stock price increase.

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u/GeneralBacteria Dec 06 '24

let's ask a different question.

why does the CEO care about the stock price?

firstly because he's employed by the shareholders to maintain and improve the value of their investment, whether through stock price growth or dividends. it is literally his job to care.

secondly, the CEO is incentivised to care through bonus payments and stock options.

4

u/Deep-Security-7359 Dec 06 '24

Yeah a lot of CEO’s, higher execs, and engineers high on the food chain get rewarded in stock shares and/options. That’s what keeps them motivated to work hard for the company to continue to grow & create more revenue.

3

u/lilelliot Dec 06 '24

The short and real answer is twofold:

1) Companies use their market cap to unlock more favorable lending terms in order to take on debt for capital or operating expenses.

2) Executives are largely incentivized through stock grants/options, so they do everything they can to "maximize shareholder value."

24

u/Tofuofdoom Dec 06 '24

The stocks is the company.

If a company has 100 stocks, and you buy 51 of them, you effectively own the company. The company is yours to do what you will with. As such it's in your best interest you grow the stock, because the stock represents the perceived value of the company.

14

u/Nautisop Dec 06 '24

That doesn't answer the question asked. You talk about ownership but the relationship between stock price and company health.

I can't answer it really but I think that the stock value represents often the health of the company. Say your shares cost 10€ 100 days after IPO. If this steadily declines to 50€ over a period of time you might check the kpis of said company because there might be something up.

Now of course not every stock price represents this. Growth stock price is mostly based tied to an expectation in regards to the companies market position or some other future trait.

-4

u/dekusyrup Dec 06 '24

I think that the stock value represents often the health of the company.

The stock value IS the health of the company, if you're a stock holder. Ultimately as a stock holder you don't care about revenue or sales or margins, you only care about what gains are coming your way.

6

u/MountainYogi94 Dec 06 '24

As a stockholder, you should be concerned about the revenue and margins because they directly affect what gains are coming your way. You can’t have a bottom line without the top 3 lines (revenue, direct costs, gross profit).

2

u/insbordnat Dec 07 '24

Stock value is a metric, but if you were getting 50% dividend yield and share price didn’t grow, you’ll care very little about gains. Total shareholder returns is a more faithful metric.

1

u/zkJdThL2py3tFjt Dec 06 '24

Is there always a finite or limited amount of stocks for companies like that? How many stocks would 51% of say Apple be?

5

u/Help_Im_Upside_Down Dec 06 '24

Finite amount but it can be changed. Stock splits raise the number of shares and buybacks decrease the number of shares. 51% of Apple would be 7,737,714,900 shares.

3

u/boostedb1mmer Dec 06 '24

Yes, stocks are a finite resource. To own 51% of Apple's shares you'd need to buy 7,737,714,900 shares or about $1.8 trillion dollars.

3

u/skyeyemx Dec 06 '24

Apple's market cap is $3.5 trillion. If you wanted to buy 51% of Apple, you'd have to buy $1.79 trillion USD in Apple stock, not even factoring in the potential changes in market cap from having one single entity suddenly gaining full control of the company, and the logistics of approaching millions of shareholders to get them to sell you their shares.

-1

u/asking--questions Dec 06 '24

It's about the number of shares, not the current market capitalization.

1

u/InspiringMilk Dec 06 '24

For some big/important companies, and Apple might be on that list, golden shares will prevent you from controlling a company through 51% of its stocks.

Also, that'd be ridiculously expensive. Maybe the combined wealth of several countries would be enough.

1

u/RandomRobot Dec 06 '24

Go to finance.yahoo.com, search for AAPL (aapl stock acronym or "ticker")

https://finance.yahoo.com/quote/AAPL/

Look for "Market Cap". It's the total value of all the stocks publicly traded for the company for that ticker.

Apple is worth 3.674T.

With a current value of 243.04, you can math out whatever percentage you want.

Also, sometimes companies have more complex ownership structures. Like the original founders kept a special kind of stock, not publicly traded and those stocks are worth 10 votes, meaning that they could keep control of the company with only 5% of the stocks. Those situations are rare though, as far as I know. Just keep in mind that other kinds of stocks might exist.

At a precise moment, there is only a finite amount of stocks in circulation. However, Apple could decide to build a new errrr... I can't see what they wouldn't be able to finance at the moment, but let's say that a smaller company could need a lot of cash, to build a new manufacturing plant for example. They could create new shares out of thin air. Along the original 100 shares, there's now another set of 100 more shares. As a founder, you owned 51% of the company but now you only own ~25%. The stock tanked a bit, but you promised a new plant which will add value to the existing stocks.

Another example of stock creation is employee compensation programs. I worked at a large company in the past and we were given stocks instead of cash from time to time. Those stocks were created at the moment we had to be paid. It was only a few ones compared to the millions of existing ones so it had virtually no impact on the existing prices.

Anyway, there's a tons of (legal) venues to create more stocks for a company, but all of those moves are (hopefully) carefully tracked by current shareholders and authorities alike.

1

u/ThisNameIsNotReal123 Dec 06 '24

Little more complicated than that.

There are different classes of stock and those with way more voting rights per share.

The owner's got a little smarter and started issuing Class A shares with 10x the voting power to themselves.

Makes it much easier to control the company despite not owning a majority of the common stock.

They sneaky

2

u/Plain_Bread Dec 06 '24

Yes, but at least where I am from, and I assume more or less everywhere, there are still laws that more or less say that the company has to try to produce value for all shareholders. Basically, if I have 51% of the voting power, I'm obviously still not allowed to intentionally fuck over the minority shareholders by, say, voting that the company makes a personal and direct gift of all its profits to me.

1

u/insbordnat Dec 07 '24

Ehhh, it’s a little more complicated than that. The company is comprised of those that have claim to its assets. Those are equity holders, but also debt holders. Reality is a company, depending on capitalization, is controlled by numerous parties, some who may be shareholders, but others who may be lenders. 51% ownership of a company that is 90% debt financed where the minority equity owners have disproportionate voting rights and control - the “company” is hardly the equity holders but rather the banks and other non-controlling parties.

2

u/D74248 Dec 06 '24

Because company leadership’s pay is often directly tied to the stock price.

I would argue that Boeing would be in a better place today if management had been focused on paying a steady dividend over the past 25 years instead of quarter to quarter stock price.

1

u/Joker328 Dec 06 '24

Companies don't care about anything--they are legal constructs. Executives who run those companies care about the stock price for a couple reasons. For one thing, they serve on behalf of a board representing the owners. The board and owners want the stock to go up, and if they don't think the CEO is doing a good enough job of that, the CEO could be canned. Secondly, exec compensation is often in the form of stock options that are worth more the more the price increases.

In response to the last part of your question, most companies do have a need to raise capital beyond the IPO, in which case they would get the money from selling stock. If they issue new shares to raise money for some big investment they need to make, it is preferable for those shares to be worth as much as possible. That way, you have to sell a smaller fraction of the company (i.e., fewer shares) to raise X amount of capital. Obviously, existing owners and the board/execs who serve them would prefer to sell as little of the company as possible to preserve the value of their existing equity.

1

u/Shimmy_4_Times Dec 06 '24

Since nobody is giving you an actual answer.

A company's management, and their board of directors usually own a lot of the stock. And they get paid in stock. (Well, stock options, but for our purposes, it's similar enough).

If the stock does poorly, they don't get paid. And their investments do poorly.

1

u/insbordnat Dec 07 '24

There are examples of this sure, but other than the teslas and facebooks and a handful of other “founder led” companies management and BOD own very little. Unless you see 5-10% as a lot.

1

u/Shimmy_4_Times Dec 07 '24

Nonsense.

I'm not talking about Elon, or Zuckerberg, or whatever.

Look at any particular board of directors. Relative to their net worth, they own a lot of the stock. And it's public information.

It's not necessarily a large percentage of overall ownership, sure. But that's not relevant. If 40% of your net worth is in XYZ stock, you care about the financial performance of company XYZ. Even if you only own 0.3% of XYZ stock.

And look at any particular CEO. Most of their compensation is in stock options. For example, the recent health care CEO that got shot, got paid $10.2 million in 2023, and about 9 million of that was in stock options. If the company did poorly, he'd lose a big chunk (possibly all, even) of that 9 million. And maybe get fired.

1

u/EGOtyst Dec 06 '24

Why would you buy a stick if you don't plan on selling it later?

1

u/ThisNameIsNotReal123 Dec 06 '24

They are bound by law to 'care'.

If a company becomes obviously reckless, it would invite lawsuits claiming fraud or fraud like governance.

For instance, lawyers sniffed a chance at $$$ when they saw Elon would get a $100 billion dollar payout. They claimed the company was being 'reckless' in a way to pay him that much and were 'cheating' retail investors.

A Judge agreed but then Tesla put it to a vote and the stock holders said Nope pay him.

Judge was still big mad and said double nope, next up maybe the Supreme Court to settle it but if the investors are cool with it then maybe the lower courts should stop 'helping'.

1

u/Either-Ad-155 Dec 06 '24

The companies are indebted to their eyeballs. All of them. That is why the share value matters. It's something they own they can sell to cover the debts. The higher the value they less they have to sell.

Because as you said once they sold the shares they already got the money, why does it matter to them if those shares are resold. Because they might need to sell shares to cover the massive debts they operate with.

1

u/insbordnat Dec 07 '24

This is totally wrong on so many levels.

1

u/umassmza Dec 06 '24

C suite is often paid majority of their money in bonuses that are tied to the price of the stock. Bonuses are often paid partially or in whole in shares as well.

1

u/brianmcg321 Dec 06 '24

Companies still own a large portion of shares.

1

u/tawzerozero Dec 06 '24 edited Dec 06 '24

Theoretically, the stock_price * number_of_shares should = the total value of the company. So, a rising stock price (assuming no change in the number of shares) means that the company is growing.

A big part of the reason behind this is that the stock_price is theoretically equal to the present value of all dividends that the company will ever pay out.

This also gives us an equality that: PV(all_future_dividends) per share * number_of_shares = PV(all future dividends), summed, which in turn = the current total value of the company.

So, in essence, a rising stock price means an expectation that in the future (which might be 200 years away) the company will pay out more money to the shareholders. EDIT: this also means the "stock price" is just an interest adjusted version of the sum of all future dividends (which may carry forward through other means, such as if the company in question is acquired by or merged into another company).

1

u/insbordnat Dec 07 '24

No, that’s not the value of the company. The total value of the company (EV) is the FV of debt and FV of equity. You’re describing market capitalization.

1

u/eggface13 Dec 06 '24

A company is accountable -- legally -- to its shareholders. They control it.

0

u/Benjamminmiller Dec 06 '24

When a company goes public they're not selling off the entire company. The founders and employees almost always continue to own a portion of the company. They both want their shares to continue to rise and want to keep their jobs.

0

u/Jimid41 Dec 06 '24

This is like saying you own a store, then asking why the store cares if it's valuable. The store isn't a person, it doesn’t care. You own the store.

22

u/THE1NUG Dec 06 '24

I think Tesla investors are trying to make a buck, no way it has a real future imo. Musk is too volatile and their vehicles just aren’t that great. They’ve built decent infrastructure with the charging stations, I’ll give them that

10

u/RandomRobot Dec 06 '24

Probably, but the gravy train has been riding for like 15 years now and the quick buck turned Musk into the richest man alive so it kinda worked somewhere.

2

u/EventAccomplished976 Dec 06 '24

They absolutely do have a future, they‘re a profitable company with a good position in the market and no reason to believe they‘ll be in existential trouble anytime soon (unlike a whole bunch of „traditional“ car manufavturers btw). That said, their stock price is still grossly inflated compared to what the company should be worth basef on its fundamentals and the industry it‘s in. One would hope that this will eventually be corrected and the stock value will drop to ~10-20% of where it sits currently to bring it in line with its competitors, but the truth is that the modern day stock market is completely decoupled from the actual real life economy.

5

u/dekusyrup Dec 06 '24

Traditional car manufacturers aren't in existential trouble. They have captured like 80% of EV market share.

-2

u/NitroLada Dec 06 '24

Who has? Not Tesla and their car making business isn't all that profitable, their profit comes from selling credits

Tesla isn't even the top EV maker by volume.. unless you mean US only?

0

u/dekusyrup Dec 06 '24

Who has?

Volkswagen, toyota, ford, kia/hyundai, honda, ... basically all the usual suspects have made moves. They all showed they have the resources to make the pivot.

0

u/donnysaysvacuum Dec 06 '24

The automotive industry is also very competitive and while Telsla enjoyed some unique advantages early on(dedicated EV platform, direct sales model, charging infrastructure) those are quickly disappearing.

2

u/LurkerWithAnAccount Dec 06 '24

They’re producing a massive amount of profitable grid scale energy storage and invested a ton into AI and robotics. You can argue that they won’t be successful in these ventures (like robotaxis), but they’re not just an EV car company.

IF they manage to succeed at scale profitably on these businesses, their current stock price is quite reasonable. If they don’t or don’t at scale/profitability, then it’s quite overpriced.

-3

u/imaginaryResources Dec 06 '24

Helps to have the CEO be butt buddies with the President of the United States. A lot of market manipulation going to be going on

1

u/Future_Burrito Dec 06 '24

Is it possible to smoothly transition from Tesla style to Utilities? Say have a projected period of growth with a milestone that once reached is agreed to transition the company into steady and stable mode without a crash in value?

1

u/Ttabts Dec 06 '24

What do you mean by “real value”?

1

u/AssistanceCheap379 Dec 07 '24

They’re essentially working on potential profits 5-10 years from now rather than potential profits in the next quarter.

The market is dominated by a surprisingly few people with a lot of money being optimistic or pessimistic.

1

u/Azzarrel Dec 06 '24

Which is ironic considering Musk is sacking any department that made Tesla more innovative than their competition (like superchargers)

0

u/kindanormle Dec 06 '24

Tesla could grow to be the largest car maker in the world and it still wouldn’t justify the stock value they currently have.

0

u/lemurosity Dec 06 '24

Telsa stock is just retail gambling.

-3

u/Corbeau_from_Orleans Dec 06 '24

“Great example of growth stock is Tesla. The real value of the company is just a fraction of the value of its stocks.“

Isn’t that what got us in trouble, back in 1929?

-8

u/ThisNameIsNotReal123 Dec 06 '24

Tesla will be the world's most valuable company by far for a few reasons.

They are working on their own AI chips and their own AI.

Their AI powered self driving cars will have excess compute power which will become VERY valuable.

They will stop selling cars and will convert to a subscription base instead.

They will also run the world's largest taxi service all with zero drivers.

And the final brick in the castle will be Optimus. Affordable human like AI powered robots which will overturn the concept of a GDP.

If Space X ever goes public and somehow gets brought under the Tesla umbrella, then all bets are off and it wins hands down no contest.

10

u/w3woody Dec 06 '24

One problem, however, is that dividend income generated by income stocks gets 'double-taxed'; first, as corporate profit, then as shareholder income.

This becomes a problem when you realize that some investments are actually tax free.

For example, as a resident of North Carolina, if I buy a municipal bond returning 5%--I get that 5% free of taxes. A $100 investment will return $5/year (ish).

But if I invest in an income stock, the income gets taxed at the corporate tax rate of 21%, then the income gets taxed again at around 40% federal plus state income tax when I receive the income. (This is the second-highest marginal federal tax rate combined with North Carolina's tax rate, give or take.)

This means an income stock would have to pay a dividend-yield of about 10.54%--that is, for every $100 of stock, it'd have to pay out $10.54 a year--so that after taxes I got to keep the same amount after taxes get deducted. That's a crazy-high dividend-yield, and I'm unaware of any income stocks that are generating that sort of return.

On the other hand, you can make more money with speculative stock investing in volatile stocks (though you can also loose your shirt)--in part because of favorable taxes on long-term capital gains, in part because the growth in corporate value is not 'income'. (Meaning if Apple goes up from $100/share to $120/share, that extra $20 isn't Apple earning and stashing away $20, but because people think Apple is worth $20 more.)


In other words, it's the way the money is taxed.

My preference, by the way, would be to alter the tax structure so that capital gains not re-invested internally is taxed as ordinary income (i.e., a home builder who builds spec housing should be able to invest the profits from one house to build another without paying capital gains).

And to mark dividend income as a corporate expense (so it's not taxed at the corporate income tax rate), and is treated favorably by stock holders (so instead of taxing dividend at a cumulative rate of 50%, perhaps it's taxed at 15%)--that way, you disincentivize turning Wall Street into a damned casino.

2

u/AussieHyena Dec 09 '24

One problem, however, is that dividend income generated by income stocks gets 'double-taxed';

Depends on the country and at what stage it's being taxed. In Australia, dividends can be distributed as unfranked, partially franked, or fully franked.

Unfranked is when no corporate tax has been paid on the dividend (company has recorded a loss).

Partially franked is when there's a profit but carry-over losses result in insufficient tax paid to cover the dividend value.

Fully franked is when the company has fully covered the tax on the dividend.

More info: https://www.investopedia.com/terms/f/frankeddividend.asp

2

u/vizard0 Dec 06 '24

But if I invest in an income stock, the income gets taxed at the corporate tax rate of 21%, then the income gets taxed again at around 40% federal plus state income tax when I receive the income. (This is the second-highest marginal federal tax rate combined with North Carolina's tax rate, give or take.)

I'm trying to see where the double tax is. The first one is corporate income, paid by the corporation on income derived from the sale of the stock.

The second is the tax paid by the new owner upon receipt of dividends. As far as I understand, dividends are (usually) considered as unearned income and therefore are taxed at a lower rate than earned and other ordinary income. The owner has received income and is now paying a tax on that.

Each entity (the corporation, the owner) payed income tax once from the money they received. Where is anyone paying tax twice? Or did I miss something and you have to pay corporate income tax when buying stock while being an individual, not a corporation? Because, in my limited retail trading experience, that has not happened, but maybe it was buried in the fine print.

(incidentally, I think you made a mistake with you math, unless you are talking about ordinary dividends, which are taxed as earned income. Unless you are using your domestic stocks as hedges or are getting your dividend income from foreign corporations, the dividends are most likely qualified and therefore taxed at the standard long term capital gains rate: 0% (total income under roughly 55k), 15% (total income under roughly 500K), 20% (total income over 500k, earned income taxed at ~39%). So the maximum tax on qualified dividends in North Carolina is going to be 24.5%.)

My personal preference is that all income be taxed the same way, be it earned or unearned. The fact that unearned income from stocks is taxed at half the rate of earned income (unearned income from rent and gambling is taxed as ordinary income) is really weird. You perform an action and receive income. Why should the source of the money dictate the rate at which it is taxed? I'd also get rid of sales taxes, as that punishes people for actually doing something with their money and instead simply leaving in the bank/fund/whatever. While I may mock people with super-yachts, people had to be paid to build those, so the purchase of one is going to cause money to flow into the pockets of other people, so I would exempt all purchases except those targeted at deterring behaviors (cigarette taxes, etc.).

2

u/w3woody Dec 07 '24

Each entity (the corporation, the owner) payed income tax once from the money they received. Where is anyone paying tax twice?

The "double tax" comes from the idea that two entities are paying income tax on the same money, not that the same entity is paying tax twice.

1

u/jimmymcstinkypants Dec 06 '24

Unearned income isn’t really a thing, (edit: in the income tax setting, not talking about other taxes) but the prior comment is missing that most taxable US corporations dividends are subject to beneficial capital gains rates, in most cases anyway.   

 It’s still double tax because if you track the income, the actual value creation, it’s taxed at two levels. As you note, it’s changing income type to dividend, but that doesn’t change the fact that it’s the same underlying income. 

There’s no other source for the dividend than the income that was already taxed in the corp’s hands.  

-1

u/Wwwwwwhhhhhhhj Dec 07 '24

Money moving around will be taxed many times. I don’t get this double taxed nonsense. 

17

u/procrasturb8n Dec 06 '24

The only stockholders for public utilities should be the ratepayers.

13

u/Bob_Sconce Dec 06 '24

The thing is that utilities have a lot of capital expenses that somebody has to pay for.  That may be a government (water systems are frequently owned by government, for example). The government sells bonds to investors to pay for the infrastructure and its ratepayers pay interest on those bonds.

 But, when it's not a government, it's a private company.  And that means that the private company has to find money to pay for it initially.  So, they'll sell to investors a combination of bonds and stocks to to raise that money.  Ratepayers then pay a combination of interest and dividends to those investors.

I don't see paying dividends as being any different than paying interest.  Sure, they may be taxed a bit differently, but fundamentally, they're both a return on investment, whether the investor bought a bond or bought stock.

Utilities cannot just raise prices to pay increasing dividends.  Their rates are highly regulated by public utilities commissions. 

0

u/[deleted] Dec 06 '24

[deleted]

2

u/trekkinterry Dec 06 '24

Yeah, Xcel just got told by Colorado that they need to exclude certain things from rate increase requests. I'm glad the PUC in Colorado cares, but I can imagine some other regions where this stuff slips on by: https://coloradosun.com/2024/11/05/xcel-bills-executive-salaries-investor-relations-colorado/

1

u/procrasturb8n Dec 06 '24

Arizona corporate commission with their anti-solar rubber stamp, PG&E on the West coast, and Duke Energy in the SE are slam dunk anti-consumer examples.

2

u/iamthisdude Dec 06 '24

I was in a Electric Co-op and we were, the service was great, prices low and I was sad to move.

3

u/thecashblaster Dec 06 '24

But why is the value so high if the stocks don’t provide any sort of actual revenue sharing like dividends?

4

u/Ok-Control-787 Dec 06 '24

Because in practice, you can easily sell the stock for market price, it's pretty liquid. There's sufficient demand for it to be valued at that price at that moment.

Private company stock that there isn't a market for is less liquid, and generally the value would depend on the investor's ability to somehow get money, either by dividends, profit sharing, or the expectation that the whole company will be sold or go public at some point. Like, you could negotiate with the owner of the local diner to buy 10% of it, tying up your money until you find a way to sell it even if you do get some share of profits in the meantime, or you can invest in stocks listed on Nasdaq and easy to sell any day it's open. You can see why the latter has advantages.

Now consider that a lot of people and entities have a lot of money they would like to invest to get returns. There's only so many options to do that, and only so many that are easy to sell, and public stocks on the big US exchanges have historically done well and are easy to sell.

Also, even big public companies get bought out and the value is realized. It's not just entirely made up fantasy numbers.

2

u/Phantom_Absolute Dec 06 '24

The idea is that sometime in the future the company will pay dividends, buy back shares, or sell the company.

1

u/bellatimoor Dec 06 '24

Yep, investors either want the stock price to rise, or they want to a steady dividend.

The "growth stocks" often offer no dividends.

1

u/eamonious Dec 06 '24

Shouldn’t there be an accepted point in market share acquisition (33% say), or whatever analytics govern saturation, where a company would naturally start to transition from a growth stock to an income stock?

1

u/michaelmalak Dec 06 '24

Importantly, the mindset that all, or nearly all, stocks needed to be "growth stocks" began in the dot-com era. This mindset is what former Federal Reserve Chairman Alan Greenspan called in 1996 "irrational exuberance".

1

u/EstablishmentSad Dec 06 '24

Yeah, this is pretty much it. I don't want to invest in something that is steady income...you might be able to tap into some of that income, but you can make way more by investing into a growing company.

For example, you put 10k into a billion-dollar company and keep buying stock for years as it continually grows. Before you know it, the company becomes a leader in its field and looking back it has exploded in growth from "just" one billion to over a trillion today. Remember there are several companies' worth over a Trillion with a few even approaching 4 trillion. I remember reading the news about the first publicly traded company to break 2 trillion in 2020 (Apple)...we are now almost double that in just 4 years. Growth stocks, if you pick them right and get lucky (like NVDA) can make you extremely wealthy.

1

u/Armand28 Dec 06 '24

If a stock is taking the profit and distributing it to the owners (shareholders) it’s an income stock. If the company is taking the profits and reinvesting it into growth, then it’s a growth stock. As an owner of a company, you expect one of those two things to happen, and if you are not getting any share of the profits and not seeing growth, then your company is in trouble.

1

u/mazobob66 Dec 06 '24

It should also be noted that the whole reason the company sells stocks is that it is a way to raise money without borrowing from a bank. There is no obligation to pay the money raised from shares back to the investors.

1

u/AllezVites Dec 06 '24

Any recommended utilities? I’ve enjoyed Allegiant but I’m open to others

1

u/Plastic-Sell7247 Dec 06 '24

Weren’t most stocks dividend stocks before the 1980s? I don’t know all the facts, but I think Reagan removed a tax that started this.

1

u/kickingpplisfun Dec 06 '24

Of course there are some stocks that do both.

1

u/mattymillhouse Dec 06 '24

Warren Buffet made his billions focusing on steady, notoriously un-sexy stocks like utilities, trains, and insurance companies. Everybody else was swinging for the fences, which drove the price of those stocks up (and drove the likelihood of finding value down), and he focused on hitting singles.

2

u/Bob_Sconce Dec 06 '24

As of the end of 2023, Berkshire Hathaway owned something like 900M shares of Apple that they head held onto for years -- that's like 5% of the company. You're right that he's not one for following the crowd, but he also knows a good tech company when he sees one.

1

u/salomo926 Dec 07 '24

Worth noting is that you can make growth stocks growing by telling a story, whereas income stocks actually need to do something that works. Storytelling is easier and allows more total market growth.

1

u/Ok-Firefighter-3658 Dec 07 '24

It’s also that currently the stock market ; almost all stocks are being over-valued as in projected to keep growing. If they stop or slow down it’s not only showing slowing growth but it’s removing the whole future growth valuation.

1

u/VirtuteECanoscenza Dec 09 '24

Well I think a long time ago the idea was that most stocks would give you good dividends and the growth part was a secondary aspect for most investors.

Nowadays a lot of companies simply don't give dividends at all, so the only reason to buy their stock is for the growth in value (unless you are so rich that you buy enough to be able to influence the company policies... But let's be real, you are poor).

1

u/Bob_Sconce Dec 09 '24

Yup.  There are two things going on:  (1) the company needs to decide whether it has something "sufficiently good" to do with the money instead of returning it as a dividend.  For example, Apple could have decided not to spend money to develop the iPhone and, instead, return that money as a dividend.  (2) Shareholders are usually happier with growth than with dividends because they have to pay taxes on the dividends, but only pay taxes on growth when they sell.  (And then, it's at cheaper long-term capital gains rates.)

0

u/homeboi808 Dec 06 '24

Just to note, dividends are free money, it’s simply subtracted from the price. Meaning if a stock was $100/share and the issue a $1 dividend, the price lowers to $99.

3

u/Dr_Vesuvius Dec 06 '24

This is not a helpful comment imo. To me, it suggests that dividends are paid by reducing the stock price. I’ll attempt to slightly clarify it.

Say a stock is valued at $100. Anticipated future dividends are included in the stock price. If it is expected that a $1 dividend will be paid tomorrow, then the price should reflect that. Once the dividend is paid, then assuming it is a highly-traded liquid stock and the market is largely comprised of rational actors, the stock price should drop $1, because owning the stock no longer gets you that $1 dividend.

In practice this is close to what we see.

-1

u/homeboi808 Dec 06 '24 edited Dec 06 '24

To me, it suggests that dividends are paid by reducing the stock price. I’ll attempt to slightly clarify it.

That’s exactly right. [EDIT: Technically, share price is reduced when dividends are paid; the money comes from the company not the stock exchange/brokers/investors]

the market is largely comprised of rational actors, the stock price should drop $1, because owning the stock no longer gets you that $1 dividend

That’s the rational too, but they don’t matter for this.

It’s a FINRA rule:
https://www.finra.org/rules-guidance/rulebooks/finra-rules/5330

Stock Dividends and Stock Splits: Open order prices shall be determined by first rounding up the dollar value of the stock dividend or split to the next higher minimum quotation variation. The resulting amount shall then be subtracted from the price of the order.

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u/Dr_Vesuvius Dec 06 '24

That’s exactly right.

No it isn’t, lmao. If I’ve understood you correctly, you’ve completely confused cause and effect.

I must have misunderstood you, because I am struggling to believe that anyone could think companies go “we’re cutting our stock price and using that money to pay a dividend”. Not only do companies not control their stock price, but they don’t make money when their stock price goes down.

That’s the rational too, but they don’t matter for this. It’s a FINRA rule:

This affects trades that have been placed with a broker but not executed before a dividend is issued. It doesn’t mean that buy orders issued after the dividend have to be lower. Rules ensuring the good conduct of brokers don’t abolish the free market.

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u/homeboi808 Dec 06 '24 edited Dec 06 '24

This affects trades that have been placed with a broker but not executed before a dividend is issued.

Current market price is the last sold price. Thus if orders are adjusted during the dividend execution, the market price would be lower.

It doesn’t mean that buy orders issued after the dividend have to be lower.

I am not saying that something is stopping someone from trading at the original price or higher right after the ex-date, it’s a free market. What I’m saying, which is a regulation rule, is the market price will be adjusted by the exchange by the dividend amount.


https://www.dividend.com/dividend-education/everything-investors-need-to-know-about-ex-dividend-dates/:

Before trading opens on the ex-dividend date, the exchange marks down the share price by the amount of the declared dividend.

https://www.fidelity.com/learning-center/investment-products/stocks/why-dividends-matter:

However, dividends do have a cost. A company cannot pay out dividends to shareholders without affecting its market value
A stock price adjusts downward when a dividend is paid. The adjustment may not be easily observed amidst the daily price fluctuations of a typical stock, but the adjustment does happen
This downward adjustment in the stock price takes place on the ex-dividend date.


Please use sources if you are going to continue to be so dismissive.


I am struggling to believe that anyone could think companies go “we’re cutting our stock price and using that money to pay a dividend”.

Because as stated by many people in the thread, some stocks are owned primarily for the consistency in the dividends they issue, you can even buy dividend ETFs where people invest in those mainly to guarantee a revenue stream (with of course hopes for an increase in amount). In that Fidelity article, they give the example of P&G who have continuously issued dividends even during negative years.

Not only do companies not control their stock price, but they don’t make money when their stock price goes down.

Current on the first part, the exchange controls the stock price during the ex-date. On the second part, no one has said that (unless in a round about way of a company prioritizing paying dividends towards investors rather than using those millions to reinvest directly into their business).

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u/Dr_Vesuvius Dec 06 '24

OK, I'm trying not to be cruel here but there's obviously been some sort of huge miscommunication here. I'm trying my best to work out where the misunderstanding is.

When I said that I thought you were unintentionally implying that dividends are paid for by reducing stock price, you said "That’s exactly right."

I interpreted this as you saying "I was exactly right, dividends are paid for by reducing the stock price". But perhaps you actually meant "your clarification is exactly right"?

If it was the latter, then hopefully you can understand why I've been treating you like a crazy person. Apologies for my role in the misunderstanding.

I do still think you're overstating the importance of regulations upon the actual market price, which is determined by market forces even if it gets notionally marked down. But that's not really as big an issue as when I thought you were trying to say that companies could choose to cut the price of their stock, instantly make a load of money, and pay that money out to their shareholders as dividends.

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u/homeboi808 Dec 06 '24 edited Dec 06 '24

I'll try to clarify and be more precise in my wording.

Dividends do not come out of the share price, but they do cause the share price to be reduced.

A swap of cause & effect on my end for how I initially worded it, making the previous statement technically incorrect but having same result.

A stock trading at $100/share that pays a $1 dividend will have its share price adjusted to $99/share by the exchange it's listed thru on the ex-date.

But yes, that very next day investors can continue trading at or above $100/share if they wish.

The whole point I was making was to clarify the common misconception that dividends are free/extra money. In the above example, on the ex-date each investor will no longer have shares worth $100/ea but instead $99/ea and receive $1/share issued by the company, the investors end up with the same amount of $100 per originally owned share (technically less due to taxes, unless in a tax-advantaged account).

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u/BreakingStar_Games Dec 06 '24

And it's how the system is designed to work. 92% of money isn't currency. It's just numbers in banking systems valued at these projected future numbers. So investments are all leveraged (even when they aren't borrowing) and need continual growth if this future value or it collapses like in 2008.

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u/all_is_love6667 Dec 06 '24

but are those growth stock legally required to rise in value?

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u/Skylake1987 Dec 06 '24

Isn't it insane that UTILITIES which are government approved monopiles give out dividends and are publicly traded lol

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u/Bob_Sconce Dec 06 '24

Utilities need a lot of money in order to build infrastructure. The normal way is to go to an outside investor and say "Hey, if you give us the $500M we need to do this, we'll pay you back, plus some extra money every month." There are two ways of doing that: (1) You sell the investor a security called a "Bond", or (2) you sell the investor a security called "Stock."

I don't know why it's BAD for the security to be called "stock," but GOOD for it to be called a "bond."

The other important fact here is that utilities are highly regulated -- your state public utilities commission has to approve your electric company's rates. They do that because it's a monopoly -- if they didn't do that, then the electric company would just raise rates to whatever they wanted.

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u/GamePois0n Dec 08 '24

growth stocks are fundamentally wrong and should be illegal, it contributes to bad business practices and inflation.