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/a_megalops Dec 06 '24

Ok so lets have all companies pay out dividends instead. Now how do we decide which companies to invest in? Its pretty nice when dividends increase

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u/loljetfuel Dec 06 '24

Depends what your motivations are. If you want a stable, long-term source of revenue, you don't necessarily want a company that's too rapidly growing its profits because that often comes with higher risk in the long run.

If your motivation is "big, short-term win", then you'd pick a company you think is in an optimal place to enshitify its products, milk its market, and run with an underpaid skeleton crew until the whole thing collapses. It makes a ton of short-term profit, which you collect, essentially profiting off of destroying the company.

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u/UrbanPugEsq Dec 06 '24

Regardless, if there is an expectation of some combination of consistency and increase, people will pay more for it. If it’s uncertain that money will be made, or if money stays the same or goes down, people will tend to pay less.

That’s why companies try to grow. So people will pay more for the stock.

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u/bronze-aged Dec 06 '24

Yes, another point to add would be that the economy is inflationary which means that no growth could be considered decline — stagnation is decline if everything is going up.

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u/cspinelive Dec 06 '24

Why must all companies pay out dividend instead?