What sustains the secondary market?

[eastbay]

When you think about the forces that sustain the secondary market for stocks that have no voting rights and pay no dividends, it's not hard to become an ultrabear, wondering when, not if, the market will collapse and never recover. But maybe I am missing something about the forces that sustain it.

It seems to me the value of a stock with no dividends and no voting rights comes from basically two places:

1) the possibility of a buyback or dissolution of the company and distribution of assets to the shareholders.

2) the "baseball card" or "beanie baby" effect, where something has value because people believe it has value, and they expect a greater fool to come along soon and believe the value is greater still.

It seems to me that almost everybody invests on value from component 2), not 1). Which seems worrying. A mere shift in public perception that owning stocks is in some way materially contributing to or owning a company (which it's hard to make a case for), to the idea that it is really just shuffling entirely useless "collector items" like baseball cards or beanie babies could have devastating effects on valuation. Stocks carry an aura of respectability that other "frivolous" collector type investments don't have. Take that away, and it could be serious trouble.

Since companies tend not to dissolve unless they and their shares are worthless, the dissolution value seems almost nil. The buyback is a possibility, but a relatively rare one, and one that seems to make a terrible bet without the existence of 2).

If I'm missing additional forces that sustain the secondary market, please tell me what they are.

eastbay

[AvivaSimplex]

Third-party buyouts, and the expectation of future dividends.

[Dazarath]

Number 2 applies to anything with generally accepted value. Gold would be worthless if no one cared for it. Even currency is useless unless enough people are willing to accept it as a standard medium of exchange.

[dc_publius]

Stocks are fractional shares of a company. Most of a company's stock will carry voting privileges. Some shares can be non-voting shares but they piggy back on voting shares. If the company is worth more, the stock is worth more. You might think it's still paper money, but if the stock is worth less than the breakup value of the company because it becomes 'unpopular', people will acquire enough stock to dissolve the company and sell its pieces or turn it around. It's been done many times. Google '1980s corporate raiders'. In contrast, baseball cards and other trinkets have no intrinsical value, no balance sheet, and no cash flow, and no real resellable assets. If they go out of style, you can't just sell them to a papermill.

I guess your question is how are stocks valued. The answer is that they are valued on their future earning potential. The millions of private and institutional investors determine how much they think a company is worth.

[DcifrThs]

possibly the greatest motivational took around:

donuts.

and the possibility of MORE donuts to come.

Barron