From my limited understanding, ICOs are more or less a tax on being stupid, as (relatively) intelligent individuals ride the cryptocurrency wave, profiting off the naive greed of the dumb. In other words, money made off cryptocurrencies are zero sum. Similar to how money made from stocks are zero sum (for every buyer their must be a seller and if one made money the other must have lost for the buyer to have gained, yadda yadda) if you ignore dividends.
Any truth to this statement? I've tried to gather some more information but I still fail to see the advantage of any cryptocurrency for the average person conducting an average, typical transaction. I don't see how everyone investing in crytocurrencies can make money.
EDIT: It seems this comment has riled a few people up. Basically, all I was trying to say is that the simplistic stock market (one without dividends) and bitcoins are very similar as they seem to be built on irrationality.
People taking advantage of this irrationality in my view is how "dumb" people end up broke and the ICO sponsors or what have you run away with the dumb people's money.
Ignoring dividends, what intrinsic value do stocks have? I'd be curious to know how the stock market, ignoring dividends, is not a zero sum game. Maybe my understanding of "zero sum" is incorrect.
This is like saying "ignoring calories, what intrinsic value does food have?"
The whole point of stocks is that they pay dividends, or in the case of some high-growth tech companies, they have some probability of paying dividends in the future.
Hmm. I only invest passively so I can't say I'm super knowledgeable about this. My understanding is that stocks do not inherently give you dividends. Food inherently has caloric value, so I'd say that's the difference. Also, I thought the whole point is that stocks are tied to the (expected) performance of the company itself, and the value is that when you sell if you basically made a return on betting on the company before it appreciated.
Finally, even if there are dividends wouldn't that affect the stock price and therefore be irrelevant (as the stock itself already accounts for it)? Are you suggesting that without dividends the stock market would not function?
Stocks are set up to have some sort of inherent value tied to the company, or nobody would buy them. The typical ways are dividends paid out of profits, company buyouts, and the on hand assets of the company that can be sold. The market is just a pricing mechanism around all that.
I disagree with the premise. I guess the point I'm trying to make is that stocks would be purchased even if there were no dividends. Case and point, (and to remain on-topic): cryptocurrencies.
False. It is not a matter of a disagreement, it is one of fact. Companies like Amazon have nonzero stock price while paying no dividends only because there is a market expectation that eventually a company in the future will pay dividends to shareholders.
Also, you are begging the question compared to your remark about how ICOs and stocks are similar in your top level post.
I'm not sure what you're stating to be "False." That stocks would be purchased without dividends? That's obviously true. Stocks need not have dividends to be valuable, only just have someone else willing to pay more than what you did.
Which brings me to the next point: this expectation you speak of is part of the irrationality. Suppose there was a company that publicly stated that it would never give out dividends, but it was making bank. People like yourself would assume at some point in the future dividends would be paid out and therefore what you stated would apply, even if no dividends were never paid out (assuming the company's trajectory and what not stayed the same).
You also seem to imply the "expectation" of the market is always correct or rational. We both know that's not true, either.
> Suppose there was a company that publicly stated that it would never give out dividends, but it was making bank. People like yourself would assume at some point in the future dividends would be paid out
Because there's uncertainty in the world. People lie, the world changes, etc. Company A says no dividends ever, while maintaining soaring stock prices. Company A fires its CEO and Company A gets a new CEO. The new CEO doesn't say there will be dividends, but you assume they'll turn around so you buy, etc.
Well then the value of that stock reflects the future dividends of that stock in that scenario, weighted by how likely that scenario is to happen. Not sure what your point is then.
Australia has a system called "imputation credits" or "franking credits".
Say a company BigCo makes an operating profit of $100. They decide to pay that out as a divident to shareholder Mary. Australia's company tax rate is 30%, so BigCo sends $30 to the tax department, and the remaining $70 to Mary.
Say Mary's personal tax rate is 50%. On the face of it, Mary would pay 50% of the $70 (ie. $35) to the tax department, leaving $35 in her own pocket. However, this would mean that the original $100 profit had been taxed at 65% ($30 + $35)! This is seen to be inequitable, and a disincentive to owning shares.
So instead what happens is this, Mary gets a "franking credit" of $30 along with the $70 dividend. The franking credit is just a book-keeping entry to record the amount of tax that BigCo paid on its original $100 profit.
At tax time, Mary's accountant proceeds as follows. (1) Add the franking credid ($30) to the divident amount ($70), thus reverse-engineering BigCo's original profit ($100). (2) Apply Mary's personal tax rate (50%) to that whole profit, getting $50. (3) Ensure the tax department gets that $50, regardless of who and where it comes from!
In this case, BigCo has already paid $30 of the $50 total tax obligation on the original $100 profit, so Mary is only up for the remaining $20. By that means, BigCo's original profit of $100 is eventually taxed, in total, at Mary's personal tax rate of 50% - not at the double-taxed rate of 65%.
This might just seem like a whole lotta shakin' goin' on - but wait, there's more!
Say the dividend was paid to another company (SmallCo) instead of to Mary. SmallCo's tax rate is also 30%, so when you apply the franking credit, you'll find that SmallCo pays no tax on the $70 dividend.
Now say it was paid to a self-managed superannuation fund (SMSF) in so-called "transition to retirement" phase. These are only taxed at 17%. 17% of $100 is $17, so the total tax expected by the tax department, on the original $100 profit, has been overpaid by $13 ($30 - $17), and the tax department will refund that $13 to the SMSF! The SMSF gets the $70 dividend, and not only pays no tax on that, but also, gets a $13 refund cheque.
Then we get to the apogee of this process, the quintessence of financial wizardry, a situation so warming to the heart as to impose some risk of dangerous palpitations. Say the SMSF has gone into "pension mode". In that mode, it pays no tax. Thus, when the fund receives the $70 dividend, it also receives a full refund of the $30 tax originally paid by BigCo!
As I understand it, BigCo can actually choose to pay the full tax, part of the tax, or no tax, on its origial $100 profit. The dividend is correspondingly said to be "fully franked", "partly franked", or "unfranked". A dividend recipient ("X") might get a mixture of franked and unfranked dividends from various sources. "X" would add all franking credits to a notional "franking account", then use that account at tax time to offset their normal tax obligations.
The shareholders of any company can give themselves a dividend if a majority agree to it and the company has money to pay for the dividend. That is an inherent part of all stock in for-profit companies. So stocks don't inherently give you dividends, but they do inherently come with the possibility of dividends.
> Ignoring dividends, what intrinsic value do stocks have?
Voting rights, claim on corporate assets in the event of dissolution (coordinated use of the former can trigger the latter; though that's rare in practice because if you don't like the way the corporation is run, you usually just sell out.)
Dividends are, in effect, a periodic partial dissolution that a corporation has chosen to conduct.
> I'd be curious to know how the stock market, ignoring dividends, is not a zero sum game.
Er, because the sum of net returns is not fixed at zero, or fixed at all, so it's not a zero or even fixed sum game.
> Isn't the sum of net returns fixed to the total amount of stock multiplied by the purchase price?
(1) A value which continuously changes over time based on the decisions of participants in the market is not “fixed”, and
(2) that aside, no, the value you suggest is not the same as total net returns.
If you if ignore the claim on assets (which is the fundamental purpose of stock), then, the sum of all returns must be zero. But you can't meaningfully ignore that.
That's like saying “aren't all money-based markets zero sum, if you ignore the use-value of the goods/services sold”?
In regards to (1), I don't get it. Just because the value changes doesn't mean it's not fixed. A trivial example is 100 = XA + YB + ZC. Fixed, yet weights for each value can change. And with (2), what's the value then?
But the long and short of it is that stock is part ownership of a company. Companies are not zero sum, they create wealth through a process that Paul Graham explains in http://www.paulgraham.com/wealth.html. The trading of stock itself is a zero sum game - each time it happens someone is trading ownership worth a certain amount for the same value in money. But owning stock goes up and down with the prospects for the company.
Stocks that don't pay good dividends should be reinvesting that money in future growth. At some point in the future the company will then increase its dividends.
If stocks are a zero sum game then so is business in general. But business isn't just a giant casino. Useful stuff is produced.
Stocks are valued off of their discounted future cashflow, so ignoring dividends (and capital distributions) basically takes all of their value off the table.
Any truth to this statement? I've tried to gather some more information but I still fail to see the advantage of any cryptocurrency for the average person conducting an average, typical transaction. I don't see how everyone investing in crytocurrencies can make money.
EDIT: It seems this comment has riled a few people up. Basically, all I was trying to say is that the simplistic stock market (one without dividends) and bitcoins are very similar as they seem to be built on irrationality.
People taking advantage of this irrationality in my view is how "dumb" people end up broke and the ICO sponsors or what have you run away with the dumb people's money.