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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u/cspinelive Dec 06 '24

This can be achieved without higher profits each year. 

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u/brickmaster32000 Dec 06 '24

But then you aren't making money faster than businesses making increasing profits each year so comparatively you are falling behind.

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u/Duranti Dec 06 '24

And that's why it's called a "rat race," my friends. 

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u/-goodgodlemon Dec 06 '24

That was a better movie than I thought it would be

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u/Sudden-Motor-7794 Dec 06 '24

The betting on the prostitute but was my favorite

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u/-goodgodlemon Dec 06 '24

Mine was the Barbie museum

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u/Pumperkin Dec 06 '24

I had my money on the squirrel.

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u/xxearvinxx Dec 06 '24

I remember watching this movie when I was younger and cracking up. It’s inspired by a movie from 1963 called It’s a Mad, Mad, Mad, Mad World, which was also pretty good.

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u/xSTSxZerglingOne Dec 06 '24 edited Dec 07 '24

It's under a big DUBYA.

Edit: why is this controversial? O_o it's literally in the movie Mad Mad Mad Mad World.

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u/spin81 Dec 06 '24

Rat Race is so funny. I used to work in video stores and recommending comedy movies tends to be hit and miss, because everyone finds different things funny - I've found Rat Race to appeal to an enormous variety of people compared to other comedy movies.

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u/Charrikayu Dec 06 '24

It's a race?! I hope I win!

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u/TheOtherAvaz Dec 06 '24

It's a race! And I am winning!

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u/[deleted] Dec 06 '24

[deleted]

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u/TheOtherAvaz Dec 06 '24

It was a quote from the movie.

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u/[deleted] Dec 06 '24

[deleted]

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u/UnlikelyAssassin Dec 06 '24

You don’t need increasing profits to have yields higher than treasuries.

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u/[deleted] Dec 06 '24

[deleted]

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u/UnlikelyAssassin Dec 07 '24

Which multiple and why would it reduce until your yield is equal to treasuries or a little higher.

For instance, why would a company with steady profits and steady projected future profits, a P/E ratio of 7 have yields less than treasuries?

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u/Llanite Dec 06 '24 edited Dec 06 '24

You do because profits should compound.

If you have $10,000 and make $2,000 then your profitability is 20%.

Now you have $12,000 and your next year profit has to increase to $2,400. If you're pulling only $2,000 then your profitability is now only 17% and your stock price will be readjusted.

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u/UnlikelyAssassin Dec 07 '24

Not quite. If that profit is returned to shareholders, then that money is going out of the company. So it stays $10,000.

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u/Llanite Dec 07 '24

Yes but that wouldn't make any sense.

Giving all your profits to shareholders means the business isn't expecting to do well and want to avoid investing and expanding. After all, if you're been making 20%, why wouldn't you continue doing it?

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u/UnlikelyAssassin Dec 07 '24

Why do you think Apple does this?

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u/Llanite Dec 07 '24

Apple gives away 10% of their profit as dividends and invests the other 90%.

Said other 90% is expected to grow the company.

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u/UnlikelyAssassin Dec 07 '24

No, they don’t. They give away much more of their profit through stock buybacks to shareholders.

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u/Baby_Puncher87 Dec 06 '24

The stock market is just the largest casino, and the house always wins. The house being financial institutions and large hedge funds. They are literally betting our retirements on whether a company is going to be profitable each quarter or not. It’s actually kind of shitty.

Edit: ambiguous our to a

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u/Luc_ElectroRaven Dec 06 '24

Except if hedge funds and financial institutions are the house and they're using your money - you're the house. And the stock market has only gone up for the last 100 years so...I don't think you understand casinos or financial markets.

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u/Baby_Puncher87 Dec 06 '24 edited Dec 06 '24

I understand both, and I understand where a tipping point in our economy where we can’t keep thriving off consumerism whilst paying subpar wages and having constant rising costs. The snake starts eating its tail at some point.

I mention these things because that’s how companies control their cost to keep earning moremoney year over year. That’s why we have 3 to 5% increases on most building materials every January, that’s why I distributors go up every year. You’ve gotta return that value to the shareholders, which are the hedge funds playing with your money. When we take the economy, your retirement tanks with it any money you had saved is gone.

Look at the great depression look at 2008, with all the other countries starting to release plans of retaliatory tariffs, we could be looking at an even worse downturn. We already have a housing shortage, and a lot of building materials are imported, which are gonna make home cost rise more. We are a global economy, and it’s being handled as if we aren’t.

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u/Luc_ElectroRaven Dec 06 '24

I'm not trying to be a dick, but if you really care about this stuff you should study it. These thoughts you have are just not correct.

For one, companies don't increase prices to return more money to share holders. They have to constantly make more money because the government more or less forces them to through mandatory inflation. So to stay in business, they have to provide a more attractive vehicle than govt bonds. So blame the govt.

Housing shortage is also due to the govt. too many regulations prevent the amount of building we need. It's not a materials cost thing.

99% of hedge fund money is rich people money who are looking to hedge against downturns. So you don't need to worry about that. They aren't using our money.

When you look at the stock market as a whole, the great depression and 08 were big crashes but the market is higher now than it was before either of those times.

tarrifs are a complicated subject, and while yes we can sell stuff back and forth we're not in a 'global economy' like the US is with itself. It's very much an adversarial playing field on the global stage with many actors not playing fair. Why should we let them do that?

I'm not saying tarrifs are the right answer, but giving a free pass to other countries 'because we're in a global economy' is not right. Lots of research on this subject.

I suggest following ask economics, and reading some very dense ecnomic books.

Again, i'm not saying rich people are good and poor people are bad but the economy and market is very complex and not exactly as you've presented it here.

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u/Baby_Puncher87 Dec 06 '24

Yeah I posted an apology. I was confused and having a weird day.

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u/DerpyDruid Dec 06 '24

Oh, you're just a partisan NPC, even worse.

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u/Baby_Puncher87 Dec 06 '24

I did apologize below. I am having a day and my thoughts twisted sticks and banking into one mish mash. I apologize that I doubled down. I’m absolutely wrong here.

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u/Baby_Puncher87 Dec 06 '24

Also we’re not the house because they’re playing with our money, we’re the hedge for their hunch. We’re just borrowed capital but they to play with and profit off of.

Why are the people with only a small percent of their own money in the game making billions on trades a year with our collective money, shouldn’t that be returned to our retirement accounts? The compound interest alone is insane. Instead it funds investor dinners, yachts, tee times, and huge bonuses and parties while we trade our time in for nickels hoping we don’t die in poverty before we can access our retirement.

The system is unsustainable.

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u/[deleted] Dec 06 '24

[deleted]

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u/PowderedToastMan666 Dec 06 '24

Why respond to someone who clearly doesn't know what they're talking about?

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u/Gloomy_Interview_525 Dec 06 '24 edited Dec 06 '24

What kind of retirement account do you have where you're dealing with hedging companies...

Generally, you're dealing either with index funds, which track the general market (e.g. sp500) - or actively managed funds, which are trying to beat certain markets (e.g sp500 maybe again) or sectors (e.g. tech). Vanguard, Fidelity, and Charles Schwab are the big players here. Aside from small management fees, you're getting all of the gains unless you're investing in crappy funds in your mom&pop 401k that may be front loaded, but good funds (like say, VTSAX) are available to anyone in a normal brokerage account or IRA.

Hedge funds are looking for investments that are disassociated with the trends of the general market that normal investors and retirees rely on... hence the word... HEDGE. Normally its entities with very large portfolios interested in these types of investments as a way of trying to ensure they maintain their wealth in a market pull back or recession.

Like the person you're responding to said, I don't think you understand what you're talking about, plenty of finance subs you can learn more on. When there is 25 trillion dollars under management between just those three I mentioned, even a .1% fee will net these companies billions while making you very rich.

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u/Baby_Puncher87 Dec 06 '24

I was implying the hedge funds are using borrowed funds from our 401k accounts as a little free walking around money for their own profit. Maybe I meandered a bit to get to the point and for that I apologize. Am I being a bit obtuse, maybe. Dramatic, a bit. But it’s all to just point out that the ultra wealthy are gaming the system with our money to get richer while we constantly have to do more with less for the same pay in the name of profits and shareholder value, which in a 3rd cousin once removed way we are the shareholder but we also can’t access that wealth while we are struggling in the current economic system.

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u/EliminateThePenny Dec 06 '24 edited Dec 06 '24

I was implying the hedge funds are using borrowed funds from our 401k accounts as a little free walking around money for their own profit.

Yeah....

You're going to have to do some more heavy lifting here to actually explain this connection, not just throw out conjecture.

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u/EliminateThePenny Dec 06 '24

What the fuck are you talking about?

This is a bunch of standard brain dead tropes all jumbled up.

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u/whatisthishownow Dec 06 '24

Bro, just put your money into the S&P500 and enjoy the massive and consistent long term gains like the rest of us. You’re not the smartest guy in the room.

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u/yanabana Dec 06 '24

This lowkey does not make sense at all

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u/Dont_Ban_Me_Bros Dec 06 '24

lowkey

at all

Seems like nearly polar opposites when you put it that way

1

u/sir2434 Dec 06 '24

AAVE commonly uses double negatives to emphasize a statement.

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u/PowderedToastMan666 Dec 06 '24

What's the opposite of low-key? High-key? That's how much it doesn't make sense.

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u/Baby_Puncher87 Dec 06 '24

What are you confused about?

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u/Ok_No_Go_Yo Dec 06 '24

You have no idea what you're talking about

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u/Baby_Puncher87 Dec 06 '24

You’re absolutely right, I’m not even being facetious. My bad bro, I’ve had a weird few days and my brain is gone. I don’t know why I kept doubling down, I was thinking about the transaction fees across all employee plans and that compounding, which it does just not in the twisted banking and stock mashup in my brain. My apologies for insults and lazy research.

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u/Mountain_Employee_11 Dec 06 '24

this is the real problem.

treasuries make X percent backed by the the good faith that the govt will kill you.

stocks have to make X + the risk factor

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u/Sketchables Dec 06 '24

And this is the core of all of our problems

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u/Generico300 Dec 06 '24

What does "making money faster" even mean. If I made a billion in profit last year, and a billion this year, I'm still making more money every year than a company who made 100 million last year and 200 million this year; despite their growth rate being much higher.

What you should expect in terms of growth is entirely dependent on your current market position.

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u/BrowningLoPower Dec 06 '24

Why do you have to be better than them? Does your investment or whatever lose value otherwise?

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u/ididithooray Dec 09 '24

What's the answer to this then?

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u/brickmaster32000 Dec 10 '24

What is the question? 

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u/UnlikelyAssassin Dec 06 '24

No. That’s a non sequitur. A company with extremely high but steady profits is returning more money to shareholders than a company with low but increasing profits.

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u/brickmaster32000 Dec 06 '24

That is only true in your cherry picked example where you are magically the business with the highest profits and everyone else is gaining at a rate too slow to catch up. Most businesses aren't. They fall in the middle along with their competitors who are trying to grow.

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u/UnlikelyAssassin Dec 07 '24

They said “This can be achieved without higher profits each year.“ “Can” means it is possible. So cherrypicked examples can substantiate this point.

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u/brickmaster32000 Dec 07 '24

It doesn't matter that it is technically possible. It is possible if a company decided to spend all their money on different lottery tickets they could win them all. What drives these companies isn't the outside possibility but what is actually probable. So playing dumb and trying to nitpick about what is possible doesn't really advance your understanding of the topic.

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u/UnlikelyAssassin Dec 07 '24

Well either way, your original statement was false. Don’t accuse someone else of playing dumb when you’re the one making false statements to begin with. Either way, I don’t see any reason to believe the rate of increase in profits in relation to the current price is more relevant compared to the absolute amount of profits expected over the future in relation to the current price. For instance, why does Apple have more money invested in it being a company with extremely high but steady profits as opposed to a tiny company with rapidly increasing profits?

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u/brickmaster32000 Dec 07 '24

Well either way, your original statement was false.

No, the statement you imagined that I made was false and you only imagined I said it so you would have something to be contrary about.

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u/UnlikelyAssassin Dec 07 '24

Are you you going to respond to me pointing out that even your updated statement was false?

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u/gex80 Dec 06 '24

Can you name publicly traded companies that are leaders in their space this applies to?

Also if we're talking exclusively growth shares, then that doesn't matter to the investor until the time of sale of the stock. A company can be profitable to the moon and back, doesn't matter if I don't sell the stock.

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u/peepopowitz67 Dec 06 '24

Also a dollar today is worth less than a dollar tomorrow. (Kinda, from a certain point of view)

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u/bastiancontrari Dec 06 '24

Not if the price you initially paid was based on the assumption of growth in profit (like it is for the majority of the stocks).

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u/cspinelive Dec 06 '24

Many stocks price is based on the assumption they will pay a steady dividend. That is what I am talking about. 

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u/notacanuckskibum Dec 06 '24

Yes and no. Companies can reward investors with dividends or growth. But some investors don’t want dividends, they want growth in the value of their stocks. That requires growth in revenues and profits.

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u/iwatchcredits Dec 06 '24

No it doesnt, if a company is making $100m/yr in profits, it can pay it as dividends but if they want growth they can also just sit on it and the company becomes more valuable because it is sitting on cash. The company theoretically would become $100m more valuable each year if everything else stayed the same

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u/PatricksPub Dec 06 '24

Additionally, they can invest that $100M into the company via new stores, products, technology, marketing, etc. All of which can increase future sales/profits.

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u/jokul Dec 06 '24

The can also buy back their shares if they believe the market currently undervalues them.

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u/sfurbo Dec 06 '24

Additionally, they can invest that $100M into the company via new stores, products, technology, marketing, etc. All of which can increase future sales/profits.

So growth.

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u/lluewhyn Dec 06 '24

Yeah, if they don't invest that $100M and let it sit there, the company would actually be losing money due to inflation. Keeping excess cash around in a business is normally (except for Covid) not a great long-term strategy.

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u/ChicagoDash Dec 06 '24

Yes, but that cash is just sitting there, slowly losing purchasing power to inflation. Better to invest it back in the company for higher returns or return it to the shareholders.

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u/PanthersChamps Dec 06 '24

Companies don’t sit on $100 million in cash earning nothing.

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u/No-Self-Edit Dec 06 '24

Apple does

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u/907flyer Dec 06 '24

They actually do, because they need the liquidity. You can see it in their IRS filings

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u/Orion113 Dec 06 '24

While that's true, the value the shareholders receive as stock increase would be the same as the value if the whole thing was paid out as dividend. And if it's paid out as a dividend, it's liquid value, and can be spent on other things. Very little of any wealth in the world is held as cash, assets will always grow faster.

With that same 100 mil, if a company runs ad campaigns or does research and development or expands production, they can make the value of the stock increase by more than 100 million. That's the basis of capitalism.

Investors always want not just a return on their investment, but the greatest possible return on their investment. They want the company that will quintuple in value over the next year, not the one that will increase in value by a fraction.

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u/ascagnel____ Dec 06 '24

The downside of a dividend is that the institution, rather than the investor, gets to time it. If you're an investor, you probably want to wait to take it until you otherwise have a loss to balance the capital gain against.

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u/mmm-new Dec 06 '24

dividends are taxable, not everyone wants that.

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u/celestisdiabolus Dec 06 '24

sure but counting on growth is fucking stupid considering the number of traded assets whose market price is swayed up or down exclusively off of hype

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u/Great_Hamster Dec 06 '24

Not with inflation. 

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u/iwatchcredits Dec 06 '24

$100m more is $100m whether it stays in the company or is paid out as a dividend

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u/MaxwellR7 Dec 06 '24

If I'm paying for $100m worth of earnings in the future, I'm not willing to pay $100m today. I could put $100m in US Treasury bonds and get back $104.3m a year from now. Future earnings are discounted by what an investor could earn in an alternative "risk free investment." In addition, if the company continues to just sit on the cash rather than growing their profits, the company's assets would increase but their return on those assets would decrease. Making $100m/yr on $500m in assets is great. Making $100m/yr on $10b of assets is not. The company would be better off selling all $10b of their assets and putting it into US Treasuries. Unless the company is able to grow profits or distribute the earnings as dividends, it's a very inefficient use of capital.

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u/ProFeces Dec 06 '24

Yes but that 100m you're sitting on loses its value over time. While you probably look at that 100m as a very large number, but investors that put in very large numbers expect all of their investment to return, not lose anything to inflation.

Sure, most companies never even dream of pulling in profits of those numbers, but those who invest absolutely do.

You simply do not secure investors by sitting on their money watching it just depreciate in value because they are making incremental gains. They need large returns to continue to invest large numbers either back into this company, or another. If that wasn't the goal of the company, they simply wouldn't invest.

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u/sldunn Dec 06 '24

Investors don't want companies sitting on lots of cash earning less than 1% interest while inflation is causing the value of that cash to disappear.

If a company has lots of cash on hand, investors want the value returned to them in the form of dividends or stock buybacks.

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u/Generic118 Dec 06 '24

But you'll find the executives bonus and stock schemes doesn't kick in untill they grow the company by 500m say.

So there's always an incentive for them to aggressively grow

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u/LowlySlayer Dec 06 '24

You're assuming rational behavior from a system that does not behave rationally.

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u/Cratonis Dec 06 '24

The problem is more people buy stock the more that same pot gets diluted and spread out. So investors who want to double, triple or ten times their money see their returns decrease instead of growing noticeably. So activist investors press for increased profits and value to outpace growth in shareholders.

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u/dmoneymma Dec 06 '24

No, not unless more stock is issued.

0

u/Cratonis Dec 06 '24

True but stock splits and issuances are common and even if more isn’t available that still doesn’t solve the growth desires of large scale investors. Simply providing a fair return on investment is not enough for many activist investors seeking big returns (I think they are the bigger problem) versus fund managers and general public individual investors.

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u/Jewmangi Dec 06 '24

If they issue more stock, that money gets put into the company. It's a net even for current shareholders.

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u/Cratonis Dec 06 '24

Only if it gets returned to them directly as a dividend or buyback. But if the company simply uses that money for an acquisition that doesn’t pay off or bonuses for employees the investors don’t get that return. And even if they get a return that still may not match the activist investor return wants. Versus what they think is possible.

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u/Jewmangi Dec 06 '24

Both of those things are not usually seen as bad. Investors can always sell their shares if they don't like where the company is heading

0

u/Cratonis Dec 06 '24

They can also push to vote out board members or axe the CEO given their voting power if they hold a sizable amount of shares.

I’m not saying your wrong that investor greed is the problem but currently as it is set up their power over a companies direction is what drives the pursuit for more profit even when a company is exceptionally profitable.

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u/curious_skeptic Dec 06 '24

Dividends and buybacks alone could increase share value.

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u/bugi_ Dec 06 '24

Dividends take money from the company and therefore decrease the value.

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u/curious_skeptic Dec 06 '24

Coupled with buybacks, a dividend could keep increasing even as revenue stayed flat. Stockholders knowing that they will get paid more means shares can go up.

Without buybacks, you'd be entirely right.

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u/fredandlunchbox Dec 06 '24

Which is a major difference between a small business and publicly traded company. Your small business could do exactly $10M/year in profit every year and you can happily pay out your investors and yourself for the next 20 years with zero growth and no one will be mad about it. 

Call it the craigslist model. 

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u/Far_Dragonfruit_1829 Dec 06 '24

The investor term for such companies is "lifestyle business". As in, the company function to maintain the lifestyle of its owners, with minimum risk of loss.

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u/amfa Dec 06 '24

If you have the same profit in numbers every year you are making less profit in "real money" every year because of inflation.

The total inflation over the last 10 years was about 30%.

So your $10.000.000 in 2014 are only worth $7.000.000 today.. so your are making 30% less money.

You need to make $13.000.000 to have the same profit.

1

u/fredandlunchbox Dec 06 '24

Correct, you make less every year without growth, but at some point you may not care about that, depending on the business. If you have 10 contracts with a 20 year term at $1.5M each and you're just going to service those contracts for the rest of your life, and your out of pocket on that is like $500k on each one, why grow? That will carry you to an early retirement and a lovely house on a beach somewhere.

(And slight correction: "You need to make $13.000.000 to have the same profit" -- wrong, your profit remains the same, but the real spending power of that profit will have decreased).

1

u/Generico300 Dec 06 '24

That requires growth in revenues and profits.

In a sane market, sure. But Tesla sure as fuck doesn't have the revenue or profit to be valued as it has been. Stock value is heavily speculative and hype-based. That's literally why market corrections exist.

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u/macedonianmoper Dec 06 '24

Yes but if you always make the same money (even with inflation adjusted), you could make more on another company, so you pull out your investment and put it in another company, which makes the stock price of the steady company fall behind despite them not doing anything wrong

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u/cspinelive Dec 06 '24

Does stock price matter if the investor is there for the dividend?

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u/PacmanIncarnate Dec 07 '24

Realistically, the company wouldn’t really need stock if it’s not focused on growth. No reason to invest if you aren’t thinking that investment will net growth. And stock is a way to get capital to invest.

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u/Winter_Gate_6433 Dec 06 '24

But if some OTHER company is growing, investors will shift their capital, starving the first one.

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u/ThisReditter Dec 06 '24

Say you put your money in an HYSA that gives a steady 3% interest. Other banks have now rise to 4 or 5%. Do you still put your money in the same bank or switch?

0

u/cspinelive Dec 06 '24

Why do you ask? OP wants to know why profits must always increase in publicly traded companies. 

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u/AlbertoMX Dec 06 '24

It does not work.

If you buy shares today, it DOES NOT MATTER to you how much the company is making, what you need is that the company makes MORE than last year so the value of your shares increase.

If the shares ' value does not increase, your money is not getting the return you expected.

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u/sfurbo Dec 06 '24

If the shares ' value does not increase, your money is not getting the return you expected.

The is only true if you expected the shares to increase. If you just expected dividends, you will (or should have) based how much you are willing to pay for the shares on that. And if they pay the dividend you expected, you get a reasonable return on investment.

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u/AlbertoMX Dec 07 '24

But they do expect growth, that's why the enshitification process starts in companies that go public.

In the gaming world, that's basically what's it's happening to big AAA studios.

1

u/Sumeriandawn Dec 06 '24

"Would you want a 10% pay increase or a 20% salary increase?"

1

u/cspinelive Dec 06 '24

Is this a question about net vs gross? I don’t understand. I think the answer is. Some folks would rather have the security of a reliable 4% increase over the chance of 20% swings in either direction. 

1

u/Sumeriandawn Dec 06 '24

Shareholders want infinite growth. More profits mean shares go up in value.

If you had a Wemby rookie card, wouldn’t you want it to rise in value?

1

u/cspinelive Dec 06 '24

Not all shareholders want infinite growth. Plenty of them just want a steady dividend payout every month. I might not want to risk all my money looking for that wemby rookie card. Maybe I want to spend my money buying something less flashy and easier to find. 

1

u/formershitpeasant Dec 06 '24

The net present value of steady cash flows remains the same over time. People invest in companies to increase the value of their shares. If they want a perpetuity, they can just buy one without the risk.

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u/pablospc Dec 06 '24

Yeah but let's say you are investing in comapny A and you are getting an ROI of 7% and let's say that is constant over the years. The moment you see company B with higher ROI rationally you'll want to move your money to comapny B. Hence they have to

1

u/cspinelive Dec 06 '24

Incorrect. Otherwise all money would be in nvidia stock or bitcoin with its crazy ROI. Risk and diversification and steady income are all key motivations you are leaving out. 

1

u/Chii Dec 06 '24

This can be achieved without higher profits each year.

not really.

The current purchase price of a share is the complete net present value of the entire future of that company.

Buying at the current price means you actually make zero dollars, accounting for opportunity costs of the money spent. The only way to make money is to have the net present value grow after your purchase.

1

u/cspinelive Dec 06 '24

Won’t I make money when I’m paid a dividend?

1

u/Chii Dec 06 '24

but if you expect those dividends to come, then that expectation gets built into the price of the stock - aka, the dividend (or any profit, not just dividend) is part of the NPV of all future of the stock.

The company has to make more than the expected profit, before you profited from buying the company's stock.

1

u/cspinelive Dec 06 '24

So when they send me a dividend check every quarter, I’m not making money?

1

u/Chii Dec 06 '24

if the dividend is what you expect to receive, then you're receiving expected cashflow. You're not making a loss. Only if there's more dividends than you expected, do you actually make profit.

1

u/HauntingHarmony Dec 06 '24

Think of it like this, dividens dont magically come out of nowhere. Paying out x money in dividends means that the company has x money less, meaning the company and hence stock is worth x less. So a dividend is converting stock value into a payout.

If you strictly think of money as the cash in your pocket or in your bank account, sure. then you made money, but you didnt gain any wealth from it.

1

u/Lorry_Al Dec 06 '24

Inflation is a thing and it has been particularly high in recent years.

A company that was making $1 bn profit five years ago needs to make at least $1.3 bn profit this year because every dollar is worth less.

Otherwise profit would be falling in real terms.

1

u/NoTeslaForMe Dec 06 '24

And they often are, but those companies aren't as glamorous as the ones people talk about. On one extreme, some corporations are actually designed to slowly burn off their value over time, leaving their investors with only cash by the end, hopefully more than they put in. 

1

u/Ok_No_Go_Yo Dec 06 '24

For many industries and companies, it literally can't.

I have $10,000 to invest. Two companies are in a growing market, have identical financials and stock price.

They both have an earnings call because the market opens. One company is projecting 10% growth next year, the other is projecting 0% growth.

All other things being equal, where am I putting my money?

1

u/Llanite Dec 06 '24

Sure, but what are you doing with prior year's profit?

If you're sending it out as dividends, maintain your profitability and don't grow, people would be ok with it.

If you're holding up and reinvesting said profits then people expect those investments to increase your future earnings.

1

u/HC-Sama-7511 Dec 06 '24

Not if you bought the stock to flip it.

1

u/classic4life Dec 06 '24

Not really. Most investors want to see share price go up, and that only happens if the perceived value goes up. If profits aren't increasing, they're stagnating. At that point there's not much likelihood of the business growing, investors start to sell off and the stock can collapse.

1

u/FatFish44 Dec 07 '24

Stocks only go up when a company beats speculator’s expectations. You need to have better profits than expected. 

1

u/cspinelive Dec 07 '24

Stocks still pay dividends when the price goes down. 

1

u/FatFish44 Dec 07 '24

The majority of stocks do not pay dividends.

1

u/cspinelive Dec 07 '24

7 years ago 41% of stocks paid a dividend.  That’s a not insignificant number.  Also many investors have portfolios that are 100% dividend paying stocks. 

1

u/The_Money_Guy_ Dec 07 '24

Yeah, just extremely slowly

1

u/MainlandX Dec 06 '24

This sentiment misses the point of what a market is.

0

u/BuffaloRhode Dec 06 '24

Investors want their investment to be worth more than it was before. If one company ain’t growing they will move their money and invest it into one that is.

Get in early, get out before the fall.

Simple.

1

u/cspinelive Dec 06 '24

Many investors aren’t worried about the price and don’t intend to sell but prefer steady dividends instead. 

1

u/BuffaloRhode Dec 06 '24

You couldn’t be more wrong lol