Well that was posted that a year ago... I'm not sure since it's timely resurrection tonight that anything new has been added... As grateful as I am for the pointers, I'm still generally dubious and partially clueless!

Is there a particular part that you are having difficultly with? I might be able to help, I run a small hedge fund, and do research modelling complex systems part of which is financial systems.

As for share price. People buy shares to own a stake in a company. They do it for two main reasons. One, they believe that the company is going to make money, and therefore the shareholders will get some of the prophets, known as a dividend. Two, a good company should grow and make more money, therefore the stake and the dividends will be worth more, this drives the price of a stake up. Up goes the share price based on what people believe will be the future of the company. If you want to know more about what drives shares very high, and causes them to crash then this conversation will probably go on for a while, and would be better carried out in a pub, or at least with beer.

As a part-time spelling nazi, I have to point out that this kind of prophet is as in 'Old Testament Prophet' or 'Prophets of Doom'. This feels somehow appropriate, but in someone working in this area, it may be a Freudian slip...

The speculators seem to be more in this on the basis of the 'bigger fool' theory. "I may be a big fool for buying it at this price, but I'm sure that, in turn, I'll find a bigger fool and so get my money back and make a profit". You will have noticed that, ignoring the fact that this stuff is connected to something real, and puts real jobs at risk, this process has some similarities 'pyramid schemes' (Ponzi schemes in the US?) - the early investors can make gains on the back of the later investors, particularly if the price expectations can be manipulated by propagating rumours.

There is an element of herd behaviour in there too; if everyone else has been thinking that the price should have been going up, I think the price should obviously go up even further. If you were struggling to be nice about this, you might call it 'momentum investment' or 'the wisdom of crowds' but it is still really herd behaviour underneath,

In some respects it also resembles betting on Lucky Lady in the 2:15 at the races, or putting all your money on red, although that doesn't pay out regular dividends. And you know what percentage the house creams off.

It seems to me that no one has really understood what acid_kewpie was getting at with his question, so I'll try to add to the info that has been given.

The stock price, as quoted during a day of trading, is a 'report' of the actual price at which shares were last traded -probably a composite of several transactions and not just the last transaction.
People who want to sell shares offer them by 'puts' and people who want to buy do so with 'calls'.
Say a ceratian stock is listed at $10.00 per share. I own some shares which I would like to sell -since I bought them at $5.00 per share i stand to make some profit. The price has recently risen to $10 but I don't think it will go higher. I can use a 'put' to offer them for sale at $10. If they sell for that amount, the listed price will stay the same. But, say that the price has flattened out at that level and no one wants them at that price. Another fellow has been watching this stock and thinks it may go higher over time. He has placed a 'call' with his broker to buy the stock at $9.50. If I place a 'put' at $9.50, then the other broker will buy them on behalf of his client. Then the listed price will go down to refelect the new transaction price.

I don't think you were having trouble understanding the concept of supply and demand -simply that you didn't understand the mechanism vis-a-vis stock prices. Again, the listed price just shows an average which reflects the real price with current transactions. The pressures which (may) raise or lower prices are transmitted by buyers and sellers offers (tenders is the term I believe) to buy or sell at a certain price.

Freudian slip no, I happen to be /very/ dyslexic so spelling (and some other aspects of English) is a total mystery to me. But make of it what you will, as increasingly people seem to think dyslexia doesn't exist, not a point of view I agree with.

Back to topic, I was leaving out speculators and just describing some of the original intent of shares and markets. Hoping that if acid is still interested that he might come back and tell us a little more about the parts he is interested in learning more about. Esp. as I may have misunderstood which part of the process he is having difficulty with (as above post).

As for speculators, I agree that a speculator is trying to buy when the price is down, or on the turn. However not really that they are just hoping that there is a bigger fool to buy at a higher price. If that is their single reason for buying they are just a fool. Also I think that it is very different from my experience of pyramid schemes, were the next fool is actively sort out and brain washed into buying. However I would agree that it would seem that some people in the city (which ever) have seemed to be doing some very questionable things.

I would like to point out that I am a scientist, and I don't work in the 'city'. My research is into complex systems and I am putting it to good use to secure my own financial future. Mainly because scientist pay in the UK is poor and if I want to be able to raise a family and maybe own a house I need to make the most of my money.

Phil

If you buy a share, and you think that the price should go up, but you don't know why the price is what it is, then you are doing exactly that. This is what most short-term buyers do.
I was specifically thinking of 'the ones that get in (and out) early get the money, effectively ripping off the ones who (greedily) enter later. Who, presumably, should learn something about greed, but probably don't. However, on the 'actively sought out' point, I note that is exactly what the boiler room operators do. And you can argue the brain washing idea applies to the same degree, too...

In my opinion if they have no idea why the price is what it is then they are gamblers, not speculators. I haven't met a great many traders but the ones I have met have at least done some research into the companies that they buy and sell.

Boiler room operators must generate an extremely small percentage of trading, esp if they are selling unlisted shares, but I agree they are behaving more like a pyramid scheme. I still wouldn't describe the entire market system as a pyramid scheme. The behavior you describe exists but I would argue that its still possible to trade on stock markets in the medium term and benefit from good research into companies that grow and prove to be a worth while investment.

Philip

is there a direct proportion that i as a stock holder would expect to get.

lets say i own 1 share in a company and that company has a profit of $ 1 million in its first year.
lets say there are a total of 10,000 shares.

at the end of the year is that 1 share now worth:

$ 1,000,000 / 10,000 = $ 100
?

Almost.

If there are 10,000 shares, your share is worth 1/10,000 of the value of the company.

Usually, people reverse the thinking: The share price is $2,30 and there are 1 billion shares in the market, so the value of the company, the "market capitalization" is $2,3B.

In your example, if the company makes $1M profit and decides to pay this to the shareholders you could expect to receive $ 1,000,000 / 10,000 = $ 100 payout

(It usually is less due to taxes, expenses etc... Also, mgmt might keep some of the profits to invest or have contracts entitling them to a piece of the profits as a bonus)

As you expect to receive $100 from your share, its price will be significantly higher that $100, because after the payout you will *still have your share*!!

Its value will be based on the *expectation* of future payouts, including the relatively sure $100 soon and unsure payouts later in the future.

Share prices are all about expectations!!

Dutch
(who is currently buying shares)

I'm sorry that dutch got at this before I saw it, but this is about as wrong as wrong gets.

If you had read the rest of the thread, you'd have seen the comment that the worth of a share is what you can sell it for. That's it. That's the worth of the share. The worth of the share is that.

You might think it ought it be something else, but it isn't.

You seem to have assumed that the management of the org decides to pay out all of the 'profit' to the shareholders. Generally they don't; its easy to see why they should pay out less (why go to the effort of making a profit, if you don't get to keep any of the money?) but sometimes they also pay out more (in general, this is when the management 'want to make a statement' about the future of the org...this may or may not be a good thing).

This problem of the payout (dividend) is, however, irrelevant; once you have been paid the dividend, it doesn't directly contribute to the worth of the share; it's money, and you've got it. It is unclear why money that you have in your bank account should be the cause of the value of something else that you are trying to sell to someone else (unless of course you are trying to sell the money itself).

What it may do is create an expectation of a future payout (depending on future market conditions, special charges, etc, etc) and that will influence market valuation, although it will more directly influence market valuation amongst those who might stay around for the next payout rather than those who intend to make a quick killing.

What this also ignores is how much the org could be sold for; if we assume a semi company, you'd have lithography machines for which there is a market, you'd have a pile of cash/debts which also have a realisable value and you'd have a pile of things which are more difficult to value, including IP and brand sentiment. Just assuming, for the moment, that you could see a pile of realisable value that was $1m high and that based on market cap (number of shares times market value per share) the company was worth less than that, you might feel that the shares were undervalued and buy (either because you intended to buy it all and seel it off for a profit, or hoped that someone else would or hoped that the management would be replaced by one who could do its job and that therefore the market value would soar).

So you might think that having a bad (unsuccesful/unlucky/inept) management, or bad record of profitability helps sell the shares and ups the value; but this only works in some 'get a new management/asset strip' scenario; otherwise having a succesful management is what you want.

(Note also that the value of stuff like lithography equipment can change wildly; in the current market conditions, it probably easier to sell secondhand cars; in a boom it will be otherwise. And once something is no longer capable of working with the latest, finest, geometries, its value will be hit.)

In order to build this pile of value, the management has needed money; this has either come from keeping/reinvesting profits (ie, not paying all the profit as dividends) or from borrowing. Borrowing to buy things that depreciate isn't buy itself going to make you a profit, so if you borrow money to buy assets, you have to work those assets to make money, otherwise you are on to a certain loser.

Share values are not just set by dividends (expectations of future dividends, whatever that expectation is based on); this is probably rather less than half of the story.

this is obviously displaying my ignorance in the subject but
if i pay for 1/10,000th of a company how is it that someone keeps that money without my consent ?

so i guess it isnt exactly a direct proportion. (i expect to pay taxes) but if management decides to keep $ 50 of my money my share is realistically worth 1/20,000th of the company.

assuming no taxes:

($ 1,000,000 / 10,000 shares) - $ 50 (management share) = $ 50 (the amount of profit i gain from 1 share)

$ 1,000,000 / $ 50 = 20,000

i assumend that management (president, vice-presidents, cto, cfo, ceo, coo, cmo, chairman of the board, board of trustees, ...) would own a significant portion of stock (in my 10,000 shares example, more than 5,000 would probably be split among them).

im probably wrong but
i thought that profit --not revenue (revenue - cost = profit) would be shared equally with shareholders.

since management are employees i see their base salary as an operational expense (covered under cost) so their stocks would be like a bonus (incentive for a strong performing company).

so lets say that a car company makes $ 10,000,000 last year:

revenue:
$ 10,000,000

cost:
pay employess - $ 5,000,000
steel - $ 2,000,000
electricity - $ 500,000
gas heat - $ 250,000
r & d - $1,000,000
marketing - $250,000
______________________
total cost - $ 9,000,000

profit:
$ 10,000,000 - $ 9,000,000 = $ 1,000,000

would the president be able to keep all the profit (would that mean s/he owns a 100 % share in the profits) ?
if s/he kept only $500,000 and the rest went to the shareholders (would that mean s/he owns a 50 % share in the profits) ?

thanks,

Look, you bought a share. You didn't buy the right to manage the company. If you, and enough of the other sharholders, don't like the current upper management you can (theoretically) get rid of them; practically, you may only be able to sell up and move on.

As a shareholder, the management should be your servant. You may not think its a good servant, but micro-managing the org is not in your gift.

If (and I know this isn't quite your example) 10,000 people each own one share, they can't all decide what the organisation does with its money; that's what the management is for, and you buy into the org (or not) depending, amongst other things, on your confidence in the management.

I don't want to make this thread over-complex with preference shares and the like, but not all the shares are alike and the shares have the rights that they've got and if you didn't like that you shouldn't buy them.

Personally, no. But, as I seem to keep saying, no one seems to want to account for the company retaining profits.

Of course, he can decide how much of the profit the org keeps, but that is money that the org keeps and not money that he keeps personally. He will have a salary, probably quite a good one, and he will probably have shares and/or share options too, but if you think he is not acting in the interests of the shareholders, vote to replace him. If you think his remuneration is too high, vote to replace him.

but what if the org wants to invest, say, $100k in the next year in replacing existing equipment? what if he needs to keep extra cash on hand to finance possible, but currently unknown, M & A (and of which he can't currently disclose the detail without throwing money away)? Are you saying that, as a shareholder, you feel one of his duties is to throw your money away?

Their choices are dishing out the $1m now and having to borrow 100k (and pay interest on that...which seems like a bit of a waste, given that five minutes ago they had the cash) or only dishing out 900k.

So, in general, the org will not pay out in dividends an amount equal to the profits, although the profits really ought be a factor in deciding how much to pay out.

Check out the links on this page - http://www.google.co.in/search?hl=en...G=Search&meta=

That should help.


debian

Actually, in an way, you did.

In the shareholders meeting, shareholders vote on critical and strategic decisions. The mgmt board proposes and the shareholders accept or reject proposals.

This meeting is held at least yearly to accept or reject the year-end balance, which includes operating profit, depreciation and proposed dividends. Major decisions like a large merger will require ratification by a shareholder meeting as well.

In practice, however, the vote is decided by a few major stockholders (banks, inverstors etc.) My couple of M$ shares are really no match to uncle Bill's millions and millions of shares, so I don't even bother to go to the meeting and just hope for the best...



http://en.wikipedia.org/wiki/Shareholders


http://en.wikipedia.org/wiki/Shareholders%27_meeting


Oh, and some shareholders simply show up to the meeting for free coffee and lunch...sad but true.


Dutch