Soo... Am I understanding this about the stock market correctly?

[AquaMan]

Charlie, the game is a lot like Monopoly. Whenever you get the chance, buy and hold. Then when you get a good offer, sell it and buy more of something else. And, if you get a chance...read the rule book!

[Cats Cats Cats]

That's a strange comment. Of course a company has a market value with or without a stock market. Simply because some one may want to buy it or its assets or a part interest (share) of it. So yes its market value is directly determined by what someone would pay for all or any part of it. Just like my bicycle.

Stock prices merely reflect the ability of a company to make and share a profit within a set of rules that are prescribed by a marketplace. That market place in America is represented by organizations like the NYSE. They are like the bookies for sports. So, yes, stock prices do match reality. Sometimes it takes a fair amount of research to determine that. Even the companies that are not making cash may still be really good values for a buyer because of patents they may hold, research that is soon to come to fruition or a million other factors. And some companies that look good are really in deep trouble.

Kind of like dating isn't it?

What I am saying is that the value of the company that would be created by creditors (which would be the new basis for how much a company was worth) would probably be a lot different than what the stock market says.  Thats why I say it doesn't match "reality".

[Cats Cats Cats]

Me thinks Mr. Sheen doesn't have much experience investing.

No offence Charles, we all need to start somewhere.  I stated investing when I was 20.  I wish I knew then what I know now!

I started when I was 18.  My point for starting this thread was there are many people who try to attribute stock purchase with giving a company capital.  Which it does to some degree by making it easier for them to get credit.  But I think the stock market makes it worse for companies.  1) they have to hit the quarterly earnings and I believe almost all of them forfeit future profits for the right now.  2) emotional response of the stock market on a daily basis.  There are mini-crises every day played up by the media.  People buy and sell on bs hype.  A companies real value isn't going to vary by 2% a day every day.

What it does do is add regulation to companies and makes it easier to buy and sell.  So if you want to get rid of regulation get rid of the stock market.

[AquaMan]

What creditors? How does a creditor determine market value? If you mean creditors in the form of institutions that may fund a corporation through loans, those loans are backed up with physical capital assets like printing presses or machinery.

That has little to do with a much bigger picture of what the market may perceive the value of the company to be. Debt is only one measure of value. That value is represented in the stock and like I said, that value is a judgement by investors using lots of sophisticated analysis tools. Or, a flip of a coin.

Take a small business for example. A pool construction contractor may accumulate a lot of debt in the form of heavy equipment, concrete, tools etc. If you look at his balance sheet he looks deeply in debt. Why would his bank loan him so much money? Because they know a few good contracts periodically increase the numbers on his income statement to such an extent they know he's good for repayment if not they take the equipment and sell it. They know from dealing with other pool contractors what those % debt to income numbers should look like and they probably know what the industry potential for growth is.

As an investor in his company my share of stock gives me a chance to play around as an owner without having to get my hands dirty. The bank feels the same way only they're backed with equipment, I'm not. The stock price represents my confidence in his business. On the other hand the bank loans him money based on what interest they can charge and how easy it will be to repossess and sell his equipment.

Two widely disparate valuations emerge.

It seems to me you're blaming the market rather than the easily swayed participants in the market.

[Cats Cats Cats]

What creditors? How does a creditor determine market value? If you mean creditors in the form of institutions that may fund a corporation through loans, those loans are backed up with physical capital assets like printing presses or machinery.

That has little to do with a much bigger picture of what the market may perceive the value of the company to be. Debt is only one measure of value. That value is represented in the stock and like I said, that value is a judgement by investors using lots of sophisticated analysis tools. Or, a flip of a coin.

Take a small business for example. A pool construction contractor may accumulate a lot of debt in the form of heavy equipment, concrete, tools etc. If you look at his balance sheet he looks deeply in debt. Why would his bank loan him so much money? Because they know a few good contracts periodically increase the numbers on his income statement to such an extent they know he's good for repayment if not they take the equipment and sell it. They know from dealing with other pool contractors what those % debt to income numbers should look like and they probably know what the industry potential for growth is.

As an investor in his company my share of stock gives me a chance to play around as an owner without having to get my hands dirty. The bank feels the same way only they're backed with equipment, I'm not. The stock price represents my confidence in his business. On the other hand the bank loans him money based on what interest they can charge and how easy it will be to repossess and sell his equipment.

Two widely disparate valuations emerge.

It seems to me you're blaming the market rather than the easily swayed participants in the market.

This is if the stock market didn't exist I would assume that the market value of a company would be calculated by their credittors before lending money.  This seems like one of the only institutions that would care about the value of a company.  Besides another company wanting to purchase them.  I am saying that the value of a company without the stock market and valued by whoever does the valuation would be very different.

[Gaspar]

What I am saying is that the value of the company that would be created by creditors (which would be the new basis for how much a company was worth) would probably be a lot different than what the stock market says.  Thats why I say it doesn't match "reality".

I see where you are going, but to understand it, you need to realize that there are two ways to value a company.

The first way is strictly by assets and liabilities.  When you approach a group of creditors to create a company they are very interested in looking at your assets vs liabilities and then adding any capital goods that the company will purchase with loaned money.  It's a collateral situation.  Sure, they assign some value to your business concept and plan, but that is very subjective.

Once a company gets to the point where it is eligible to be traded in the market, it has to jump through even more hoops and show an even higher degree of responsibility.  The performance of the company and the companies fiscal management weigh heavily on the value of the company as controlled by the actions of stock holders.

So, you are correct.  Neither actually reflects "reality" because companies are not static.  If I were to estimate the value of say a restaurant, based solely on "reality," I would have to value it based assets and liabilities alone.  

If I were to estimate the value of the same establishment as a private investor, I would subjectively account for my interpretation of whether or not that business could perform according to whatever prospectus I was offered.  I would also look at the past performance of the participants.

The stock market takes it a step further and requires the business to publish several metrics or "fundamentals."  So, based on how well you understand and interpret those metrics, you actually get a far clearer picture of the health and direction of that institution.  

To further complicate the scenario, some companies (the ones I like) pay significant dividends.  This allows them to award stock holders for . . .well . . .holding stock.  This makes the fluctuations in the market less important.  For instance, Kraft Foods pays me an approximation of 3.33% every year.  So even though that stock may experience fluctuation in value within my portfolio, it pays me cash to keep it there, and over time that is significant.

[AquaMan]

Good explanation Gaspar.

Charlie, I would add that there is no requirement for a company to go public and offer stock. They may prefer to stay out of the market as you suggest and gather their operating capital through private ownership, bank loans or a combination of both. In that case you are correct that the value of the company would likely be different than a stock market valuation as it should, since its not the same type of company.

[Gaspar]

Good explanation Gaspar.

Charlie, I would add that there is no requirement for a company to go public and offer stock. They may prefer to stay out of the market as you suggest and gather their operating capital through private ownership, bank loans or a combination of both. In that case you are correct that the value of the company would likely be different than a stock market valuation as it should, since its not the same type of company.

In fact, in many cases it's very wise for a company to stay out of the market.  An IPO takes away a significant amount of corporate freedom.

[Cats Cats Cats]

Dividends drive me nuts.  Companies that require heavy capital investment give out most of their capital they could invest...  I say keep the money and grow the business.  Create more jobs.  The only reason to offer a dividend is to keep your stock price up.  The only reason to get your stock price up is to take out more debt..

Kraft (Dividend 1.16)
Total Cash (mrq): 2.35B
Total Cash Per Share (mrq): 1.33
Total Debt (mrq): 29.65B

They are giving money away that they could reinvest in the business or pay down debt.

Apple  (dividend 0)
Total Cash (mrq): 28.40B
Total Cash Per Share (mrq): 30.63
Total Debt (mrq): 0.00

[Conan71]

In fact, in many cases it's very wise for a company to stay out of the market.  An IPO takes away a significant amount of corporate freedom.

Yes it does.  When I went to work for a chemical company headquartered in the Dallas area in 1994, they were aggressively buying back their stock and completed that task in 2002.  The main reason was having more flexibility as well as a really strong aversion to debt.  When I hired on, I owed more on my mortgage and car payments than they owed in long-term debt.

[AquaMan]

Dividends drive me nuts.  Companies that require heavy capital investment give out most of their capital they could invest...  I say keep the money and grow the business.  Create more jobs.  The only reason to offer a dividend is to keep your stock price up.  The only reason to get your stock price up is to take out more debt..

Kraft (Dividend 1.16)
Total Cash (mrq): 2.35B
Total Cash Per Share (mrq): 1.33
Total Debt (mrq): 29.65B

They are giving money away that they could reinvest in the business or pay down debt.

Apple  (dividend 0)
Total Cash (mrq): 28.40B
Total Cash Per Share (mrq): 30.63
Total Debt (mrq): 0.00

In which case their stock is likely to drop in value cause guys like Gas enjoy the fruits of their investment. The character of an Apple investor is way different than the character of a Kraft investor.

Its a pie with many ingredients and changing them alters the outcome.  Or maybe I should have used 'Que as an analogy.

[Cats Cats Cats]

Good explanation Gaspar.

Charlie, I would add that there is no requirement for a company to go public and offer stock. They may prefer to stay out of the market as you suggest and gather their operating capital through private ownership, bank loans or a combination of both. In that case you are correct that the value of the company would likely be different than a stock market valuation as it should, since its not the same type of company.

It is exactly the same company it isn't any different though.  Just the way it got capital.

[Conan71]

In which case their stock is likely to drop in value cause guys like Gas enjoy the fruits of their investment. The character of an Apple investor is way different than the character of a Kraft investor.

Its a pie with many ingredients and changing them alters the outcome.  Or maybe I should have used 'Que as an analogy.

Not necessarily.  A well-balanced portfolio would have a Kraft and an Apple in it as well as other stocks for different market sectors as well as different growth and income strategies.

[Gaspar]

Dividends drive me nuts.  Companies that require heavy capital investment give out most of their capital they could invest...  I say keep the money and grow the business.  Create more jobs.

Kraft (Dividend 1.16)
Total Cash (mrq): 2.35B
Total Cash Per Share (mrq): 1.33
Total Debt (mrq): 29.65B

They are giving money away that they could reinvest in the business or pay down debt.

Apple  (dividend 0)
Total Cash (mrq): 28.40B
Total Cash Per Share (mrq): 30.63
Total Debt (mrq): 0.00

Typically, companies that offer dividends are mature companies.  They value stability and want long-haul investors.  It makes a great deal of sense to offer dividends.  I've bought and sold Apple about a dozen times going back to the mid 90s.  I will continue to purchase and sell Apple.  Apple can always be assured that investors will buy low and sell high.

Kraft has taken some of the same jumps and dips over the years.  I continue to acquire more, and as they pay my dividend I purchase more shares of the stock.  They can always be assured that they will sell more stock across the price spectrum over time.

Rabbit or the tortoise in many ways.  Sure the rabbit is fast, but the tortoise is always moving forward and lives a hundred years longer.  

[AquaMan]

It is exactly the same company it isn't any different though.  Just the way it got capital.

No, actually it is not the same company. You can put a Kenmore badge on a Whirlpool produced washer. It is now a Kenmore.

A privately held company may produce the same cheese as Kraft, and in the same manner, but it is not the same type of company. Its funding recipe makes it different.