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Sorry if the title is a little vague, let me be more precise.

This post says that the value in shares comes from:

  1. The dividend payout
  2. Voting rights
  3. Owning part of a company, therefore receiving money in case the company becomes liquidated

Furthermore this post says that shares showcase the "health of a company".

But I have a few (naive) problems with this.

Firstly, some companies do not provide dividends, so while I can understand it as adding to a shares value this cannot be the underlying reason for shares having value.

Secondly, most people do not end up owning enough shares to have voting rights in a company. Are these people then holding onto shares in the expectation that if some big bucks fella comes along willing to buy these shares so that they can engage in voting rights that they'll be able to make money this way by selling to him? Furthermore, are voting rights really a motivating factor when people engage in the stock market?

Thirdly, I would imagine a company would only liquidate itself if it is not doing terrible well... at this point the share price would have dropped sufficiently to make the idea of recouping money through liquidation silly.. unless I am missing something?

My question would be what provides shares with value if not for the above three points, or have I confused myself?

Glorfindel
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sloth
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  • "I would imagine a company would only liquidate itself if it is not doing terrible well" Not at all! Companies are sometimes taken private or purchased by another company when they are doing reasonably well, but somebody thinks they could do better (Dell Computer for example). – Charles E. Grant Jun 07 '20 at 17:34
  • @CharlesE.Grant I think "liquidate" is being misused. You're talking about a takeover, and the possibility of such is indeed an important reason for the value of stocks. When OP talks about "liquidate itself if it is not doing terrible well...share price would have dropped", that would describe an actual liquidation. The possibility of a takeover is a real generator of investor demand. So, I think OP identified the wrong concept and used the right word for it, whereas you identified the right concept and used the wrong word for it. :) – nanoman Jun 07 '20 at 21:44

2 Answers2

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Firstly, some companies do not provide dividends, so while I can understand it as adding to a shares value this cannot be the underlying reason for shares having value.

See: If a stock doesn't pay dividends, then why is the stock worth anything?

Secondly, most people do not end up owning enough shares to have voting rights in a company. [...]

Note: here, I will assume the simple and common case where a company has a single class of stock with equal voting rights.

All shares have voting rights. You get one vote for every share that you own. You don't need to own "enough shares" to get voting rights. If you own one share, you get one vote.

Thirdly, I would imagine a company would only liquidate itself if it is not doing terrible well... at this point the share price would have dropped sufficiently to make the idea of recouping money through liquidation silly.. unless I am missing something?

Why do you think that it is silly to recoup money through liquidation? Suppose a company's liquidation value is $10 million. Further suppose that the market value of the company is only $5 million. So the company is worth $5 million when alive, but $10 million when dead. Liquidation is clearly a good thing for the shareholders, because they would then have something worth $10 million instead of $5 million.

Flux
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I think the underlying problem comes from the first question you linked. There are many similar questions (which is why yours may also be closed as a duplicate), but the one you linked has an accepted answer that I consider incomplete. It talks about a company being "liquidated" but this somewhat misses the point. (See my comment on your question.) It's understandable that this would be unsatisfying because, as you noted, actual liquidation tends to happen to failing companies, not healthy ones.

I think we should replace item 3 with "receiving money in case the company is taken over". In a takeover, the money to buy out all current shareholders comes not from the company itself, but from a third party (often a bigger company). Takeovers do happen to healthy companies when they are undervalued on the stock market. And the possibility of a takeover can definitely provide concrete value, even to a stock that doesn't pay dividends. Small investors buy stocks they think are undervalued in large part because over any given weekend, there is a small but nonzero chance of a "bolt from the blue" takeover announcement (and because everyone knows this, the stock will rise when the chance of a takeover rises, even if it doesn't happen yet).

And why would the big third party want to buy a stock that doesn't pay dividends? Well, once they own at least 51% of the company, they can make it pay dividends (now or at some point in the future, under their control) or use its assets in any other desired way (that is fair to other remaining shareholders). And if they own 100%, they can pretty much do whatever they want with the company's assets. So this overlaps with your item 2, where a "big bucks fella comes along willing to buy these shares so that they can engage in voting rights". "Engage in voting rights" can suddenly become very lucrative when you're the controlling shareholder!

nanoman
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