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From what I understand is that Bonds and loans have extrinsic value, i.e if I decide to lend my money to someone or an organization, I will get paid a certain interest on the money that I lent, as well as receive my principal back after the maturity period.

However, the stocks that we invest in, don’t seem to have any intrinsic value attached to it. The company doesn’t pay me the principal that I invested in, the paper value of my principal just increases or decreases depending on how well the company is doing in the market scenario. It doesn’t hold a physical value. And the paper value of my investment will mean nothing until someone else decides to buy it.

The company might pay me the profit that they earned in terms of cash dividends but will never pay me back my principal ever. And when I am buying stock from someone, how is the paper value of that stock calculated in terms of real/ tangible money that I need to pay to buy it? And what motivates people to invest in something that doesn’t even have a physical presence and only exists abstractly?

Grade 'Eh' Bacon
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Subodh Bastola
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2 Answers2

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Your stocks are ultimately backed by the assets of the company — you own a share of the company, so you own a share of its assets.

And the price is set by the market, not by any kind of sophisticated calculation or algorithm. If you are buying or selling shares, you can only do so at a price at which someone else is willing to sell or buy them.

Mike Scott
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You ask about non-dividend-paying stock...

And what motivates people to invest in something that doesn’t even have a physical presence and only exists abstractly?

There are two reasons,

In almost all cases numerically the literal reason that person X buys a stock certificate of company Y on the stock markets, is, they are almost-certain that someone else will buy it back from them in the future. (Ideally at a higher price.)

In numerically very rare cases there is a second reason that someone (let us say, company Z) will buy stocks in company Y: because Z wants to "take over" company Y (essentially: get seats on the board). To "take over" company Y you need to buy a certain percentage of the stock.

These are the only two reasons anyone buys stock.

Finally...

In the exceptional case that company Y goes bankrupt, in theory those who own stock, may get a few pennies from the bankruptcy court, when they sell the desks and so on. So I suppose, in the abstract, you could buy stock in Y for that reason.

One point,

And what motivates people to invest in something that doesn’t even have a physical presence and only exists abstractly?

it's worth recalling that money (!) for goodness sake, is totally, completely abstract. "Fiat" currencies (USD, EUR, INR etc) are only currency (means: generally accepted at shops) because we "believe they are" and because "government says so". (It is true that the USD is asserted by the US tax authorities as payment for taxes, which some thinkers about fiat currencies suggest may be considered the intrinsic value, but again in the spirit of your question "what motivates people to purchase abstractions", it's worth remembering money today is utterly, totally abstract!)

Fattie
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