Index Investing Makes Markets and Economies More Efficient (2016)

Re:Index Investing Makes Markets and Economies More Efficien... by bandrami on Tuesday September 19, 2017 @04:49PM (#15288672)

I'm still missing something here. A stock is an instrument of potential income and control, but I've never seen a price that was anywhere close to correlated with that. In fact, if anything there seems to be a discount given to high-dividend stocks (for which I, as an income investor, am grateful to all you baseball card traders that I don't understand).

To put it another way: the actual value of a no-dividend no-vote stock is precisely zero. The price is whatever the buyer and seller agree on, right? So how can one price be more "accurate" than another?

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Re:Index Investing Makes Markets and Economies More Efficien... by kshitijl on Tuesday September 19, 2017 @10:19PM (#15290270)

In the event of liquidation, shareholders are on the list of those owed a portion of the proceeds. In fact they are last on the list, after creditors (those who have loaned the company money directly), bondholders (bonds are a form of debt), and holders of preferred stock.

That right is the ultimate determinant of the value of a no-dividend no-vote stock: fractional ownership of the right to proceeds in the event of liquidation, after those above have had theirs.

As a higher-risk asset, it produces greater returns, since otherwise there is an arbitrage: buy bonds issued by the same company instead. This arbitrage lasts until the bond becomes "expensive", and therefore produces worse returns (since its payout is independent of its price).

[ Parent | on HN ]