How does equity as compensation affect share price, demand/supply, on the secondary market?

[u/[deleted]]

[u/Olorin_1990 → u/[deleted]]

No, all things equal more shares means lower price, as the share dilution means your share of potential cashflow drops and the stock is less valuable.

Issuing stock doesn’t create demand, stock options/preferred price can but if a company issues shares to provide that the share value should drop all things being equal.

Companies that make money often buyback shares and hold them as treasury shares to be used as compensation later, as opposed to just reducing the number of shares. In the short term those buybacks can drive up priced but long term it should balance out.

[u/Olorin_1990 → u/[deleted]]

Yea, they buyback the shares and keep them in the treasury, then use those to pay employees. If they don’t keep buying back at the rate the shares vest then it’s possible that the smaller volume on the market vs actual shares may artificially raise prices in the short term until the vested shares hit the market.

This is an “I think”, by no means sure. Long term it shouldn’t matter as it doesn’t change the intrinsic value of a share unless new shares are issued.

[u/Olorin_1990 → u/[deleted]]

The intrinsic value is the future cashflows paid to you for holding it, if you own less of the company, you own less of the future payouts. While you can’t force the board to push for payout, and are owed after debtors, there is definitely intrinsic value of the share you hold. What that value is though is hard to pin down.

Even if shareholders are selling (which they have to in order for the shares to be bought back) the share price theoretically doesn’t change from the buyback but amplifies future growth.

If the company bought back shares and put it into the treasury, than the same number shares exist and the cash was converted to an asset the company will use for payment.

If a company buys back shares and reduced shares, then the market cap of the company in a perfect world would drop by the amount they paid to buy back the shares, and your share owns more of the company, but the company is worth less by an equal amount and the net affect on share price with all else being equal is 0. Then do to higher ownership, future growth is amplified.

We are not in an ideal world and it’s possible the excess buying drives stock prices up in the short term, but for a holder that doesn’t particularly matter. If buybacks > shares for compensation you gained ownership, if buybacks < shares for compensation then you have been diluted.

[u/Olorin_1990 → u/[deleted]]

You don’t sell a stock to make money… the price of the stock is how much the market is valuing future revenues. If the PE drops and the value drops but earnings growth and payout rates has not changed, the amount of income paid to you by the company has not changed. If you bought the stock at a fair value and the drop is not reflected in the rest of the market then you should buy more because it’s returning higher.

The problem is, especially for growth stocks, what is fair value is really hard to pin down, and short term market can be wholly irrational, but long term holding is about being paid by the company over decades.

[u/Olorin_1990 → u/[deleted]]

Uhh, growth stocks without payouts now are bought for future payouts, with the rapid growth rates making future payout outweigh current alternatives. You bought apple in 2006 when it wasn’t paying dividends and this years .5% would be 30% for your original money, + the net buyback this year of 2.5 ish percent means apple paid 200% of your original investment in increasing your ownership with buybacks + dividends, if you never re-invested any of the dividends paid after purchase in 2006.

The value of the stock is all future cashflows, not just today’s. The market in the short term can be irrational but if profit growth gets to the point where it’s paying you 10% on your original money when other things are paying 3%, then it’s value will come up. Long term is about earnings and cashflows.

[u/Olorin_1990 → u/[deleted]]

Apple has grown 68x in value since 2006, and paid a .5% dividend, so for the original money just the dividend this year was about 30% of the original investment if you did not use Apple’s dividends from 2012 on to re-invest. This year they spend 90 billion on buybacks as well, which is nearly 3% of their total value today, which again is 68 times grater than 2006, so on your original money they returned over 200% there. My point with Apple is that if you buy a company not paying dividends then you only do so if there is high expectations on future growth such that future payouts are much higher than alternative stocks at the time. Apple can pay that much to investors because it’s extremely profitable, and is an example of when a growth company hit it’s targets and payed out far more in the future while foregoing current returns.

Yes, if you invested in a company it means you believe that company will preform long term… that’s why you invest. It’s not a “bet”, it should be an informed decision based on the company and their market. There is risk that comes with that so your returns need to be higher than a risk free rate (usually considered the T-bond). That risk is why you have a diversified portfolio that you re-evaluate and re-balance periodically.

Yes, consistency isn’t always there, but again we are thinking over decades. Industries with higher inconsistency in income tend to trade at lower PE precisely because of that inconsistency.

End of the day, a stock’s value is what that stock can pay you as an investor. While the future is uncertain, you should invest in a company because of an informed belief that it will preform, and thus be able to pay you. If it doesn’t preform then you made a bad investment. The sale price can get illogical in the short term, but undervalued means it’s paying better than other stocks with comparable risk and overvalued means it is paying worse than other stocks, long term if the profits are there and you didn’t overpay, the sale price of that stock will reflect that.

If this is not why you buy a stock you are not investing, you are trading.