How does owning a stock benefit someone?

Question

I wanted to ask a question that is very obvious for some people. However, some of the concepts in investing in stocks are not obvious for me as I am just getting started in investing. I want to know how owning a stock benefits me.

When I buy a stock of a company I partially become an owner of that company, a shareholder. Why/how would it benefit me if I am an owner of a company?

Assumption 1: The first thing that comes to my mind is that I can have a claim on the money that the company makes. To me this would be the only reason of owning a company, therefore buying company stocks: Having a share on their income, in simplest terms, a chunk of money that is paid to my bank account from the company's earnings. I understand that this is called dividend.

But this obvious information seems to be eluding me when I follow courses or read articles about basics of investing in stocks. Meaning that this information isn't explained explicitly neither by those courses nor the articles. The first problem that I am having is about "growth stocks". These stocks are explained as stocks that don't pay dividends. They use their income for the year for growing more, therefore they don't pay dividends frequently or no dividends at all for a long time. For example, the tech industry.

Why would someone want to buy a share of a company if they won't earn money from it, based on the Assumption 1? A company is founded by an owner in the first place so that the owner can literally earn money. If I am buying a piece of a public company, I become an owner. Therefore I want to make money using this company. Then why would I buy a company that doesn't pay me dividends and spends their yearly earnings to grow? What's the use of a giant company to an owner if the owner can't get paid by dividends? What's the hype about these "growth stocks"?

I gathered that the answer to this question is called capital appreciation. People buy stocks of these growth companies, then they sell them in the future when their prices increase. I am familiar with the dynamics of supply and demand. When something is in demand, its price is higher. If there is a lot of supply, the price is lower. If there is a lot of buyer for a stock its price will be higher, and vice versa. So, do these people rely on whether the demand might be higher in the future? If so, why would the demand be higher based on Assumption 1? These companies don't pay dividends. Buying a stock hoping that demand for it will be higher doesn't make sense to me, IF owners of the company doesn't earn money from it through dividends. I am definitely missing something crucial but I don't know what.

If a company doesn't pay dividends, owning a stock in that company feels like paying for a piece of paper. Like really a standard A4 size paper that is nothing written on it. Therefore, when people say "capital appreciation" about these growth stocks, I can only imagine bunch of people trading this piece of paper: a game, an illusion. Then, one hopes that others would play this game too, so that they can make money.

So, in essence, this is my question. What is the real benefit of owning a stock? Why/how would it benefit me when I own a company? What is the benefit of owning a growth stock compared to a stock that pays regular dividends?

Thank you very much for taking the time to read my question and helping me!

Answer 1

Answering some of the points that aren't addressed in the proposed duplicate question:

I can have a claim on the money that the company makes.

Not exactly. You have a claim on the assets of the company, not necessarily the income directly. However, you can't take that claim to the company and demand your share of the assets. The company has to either voluntarily give you (and all other owners) some of their assets via a dividend, or be forced to give you your share via an acquisition or liquidation (bankruptcy).

The company can instead choose to keep what it makes and use it to grow the company, meaning the value of the share of the assets you own gets larger (in theory).

[Growth] stocks are explained as stocks that don't pay dividends

"Growth" stocks and paying dividends are orthogonal concepts. "Growth" stocks are companies that are are focused on growing more than returning money to shareholders, so they often do not pay dividends, but that is not the "definition" of a growth stock. Companies can still focus on growth and pay a dividend, the dividend just reduces how much they can grow.

Why would someone want to buy a share of a company if they won't earn money from it, based on the Assumption 1?

This is answered by the marked "duplicate", but to reiterate...

It's the claim that has value. The assumption is that eventually the company will either be acquired or will start paying dividends. That is when the claim on assets via stock is realized; until then the claim is worth what someone else will pay for it (based on when they think the company will start paying out). As a company grows, if it does not pay dividends now, it will be able to pay more dividends later, which is why even the claim has value.

Like really a standard A4 size paper that is nothing written on it.

But it does have something written on it. Think about it like the title to your car. The piece of paper itself is worthless, but what is represents has value. Someone cannot (legally) take your car and use it - that have to pay you the value of the car in order to get the title to the car.

Answer 2

A factor you seem to be completely missing is that you are investing: putting in money NOW for a return in the FUTURE. People look at a company now, and estimate its value in the future. The future is uncertain, and reasonable people can disagree on how much a company will be worth in the future.

By a stroke of good fortune I was an early purchaser of Microsoft stock. Everybody was agreed that Microsoft was a healthy company with good prospects. It did not pay a dividend. The money that could have gone to dividends was plowed back into the company. Fast forward 40 years. Microsoft has tens of thousands of times more assets, and thousands of times more revenue. It turns out that even the folks who were optimistic hopelessly underestimated the value of Microsoft's business. Microsoft pays dividends every quarter and the stock sells for hundreds of times what I paid for it. I paid pennies on the dollar for that stream of cash compared to the folks buying the stock today. I just had to be willing to wait 20 years.

Contrawise consider Kodak. Once an amazing company that regularly paid out dividends and was one of the staples of blue chip stocks. Then they failed to make the transition to digital imaging and gradually went bankrupt (Chapter 11 - reorganization). They don't currently pay dividends, and the stock price is a fraction of what it was in 1984.

An additional factor you are missing is that when a money making company is not issuing dividends it's investing that money in assets: real estate, buildings, IT infrastructure, manufacturing equipment, goodwill, etc. If the company is well managed those assets will have significant long lasting value. If the company is sold, you as a stockholder have a legal claim on the revenue from that sale. You do have to be careful though. If like Kodak the company keeps beating a dead horse trying to revive itself it may fritter away all the value. Stockholders still have a claim on on assets sold in bankruptcy, it's just that they are last in line behind every other creditor.

Answer 3

This may already have been mentioned, but if the company is ever purchased by another, your shares will be worth a portion of that purchase cost. Whether you get money, shares in the new company, or a mixture depends on exactly how the purchase occurs.

Many startups live for the day when they will be taken over by somebody else for too much money and make their stockholders rich in the process, if that ever happens.

It really is exactly like owning a percentage interest in your local store. Either you get a share of the profit periodically, or you make a profit when you sell your share to someone who thinks it's worth more than you do, or a mixture of these. Assuming the company does well, of course.

For what it's worth, there used to be a lot more emphasis on dividends and "clipping coupons". When everybody and their cousin jumped into the stock market, people started looking at the difference in taxation between dividends and capital gains, and demanded that CEOs put more emphasis on the latter at the expense of the former. Personally, I consider that an unhealthy trend, since it causes management to optimize for the wrong things, but nobody asked me and I have to live with the market as it now exists.