If you’re willing to buy or own equity in some particular company, your demand is driving up the price for that company’s equity. That company may own some of its own equity, or can issue new equity, and can then sell it at a higher price, or use it to pay for things (e.g. employee compensation, deals with third parties) directly. As a result, they can acquire capital to do whatever kind of presumably-profitable endeavor they can think of, presumably creating real economic value (or else it shouldn’t be making a profit.) Your trade returns and dividends are a portion of that value. At least, you know, in theory.
If you’re willing to buy or own equity in some particular company, your demand is driving up the price for that company’s equity… As a result, they can acquire capital to do whatever kind of presumably-profitable endeavor they can think of, presumably creating real economic value...
I think Tesla is a good example of this.
They’re not profitable, and haven’t been since inception (aside from a couple of unusual quarters here and there). But the money wasn’t lost so much as spent on increasing capacity each year. And that spending has been working—their revenue has grown on average 55% per year since 2013, the first full year of Model S production. (That’s a lot!)
They’ve had the cash to spend more than they made in part by selling additional equity every year or two. (They’ve also taken out loans.) For example, last March, Tesla raised over a billion dollars by selling stock and convertible notes.
They’re able to do that only because investors like me believe in the long-term vision, expect the company to eventually be profitable, and are willing to buy and hold the stock in the meantime.
1. If I understand right, according to this model if the company doesn’t own any of its own equity and doesn’t plan on issuing new equity, then the value is lost?
2. It sounds like I can paraphrase the argument as saying that it is better for companies to have resources than individuals, because they will use them to produce more resources whereas individuals will not. Is that right?
If you’re willing to buy or own equity in some particular company, your demand is driving up the price for that company’s equity. That company may own some of its own equity, or can issue new equity, and can then sell it at a higher price, or use it to pay for things (e.g. employee compensation, deals with third parties) directly. As a result, they can acquire capital to do whatever kind of presumably-profitable endeavor they can think of, presumably creating real economic value (or else it shouldn’t be making a profit.) Your trade returns and dividends are a portion of that value. At least, you know, in theory.
I think Tesla is a good example of this.
They’re not profitable, and haven’t been since inception (aside from a couple of unusual quarters here and there). But the money wasn’t lost so much as spent on increasing capacity each year. And that spending has been working—their revenue has grown on average 55% per year since 2013, the first full year of Model S production. (That’s a lot!)
They’ve had the cash to spend more than they made in part by selling additional equity every year or two. (They’ve also taken out loans.) For example, last March, Tesla raised over a billion dollars by selling stock and convertible notes.
They’re able to do that only because investors like me believe in the long-term vision, expect the company to eventually be profitable, and are willing to buy and hold the stock in the meantime.
1. If I understand right, according to this model if the company doesn’t own any of its own equity and doesn’t plan on issuing new equity, then the value is lost?
2. It sounds like I can paraphrase the argument as saying that it is better for companies to have resources than individuals, because they will use them to produce more resources whereas individuals will not. Is that right?