Dividends, stocks, and capital gains / by kevin murray

The stock market is very big business, in which barrons.com states, that the United States stock market capitalization is worth about $30 trillion.  That market capitalization equates to the value of the shares of stock of all publically held companies at their current share price.  For many investors, there is a belief that the current price of a given stock multiplied by the number of shares held represents a financial asset which would be the basic equivalency as if that money was held in a bank or in any sort of cash instrument, but this belief is most definitely, a fallacy.


One thing that investors have a strong tendency to forgot, perhaps based upon all the financial articles written and pundit words spoken, is that the stock price of any given stock, is what the market will bear at that time and moment, of which, there is a general belief that the price of that stock, is somehow correlated to fundamentals such as earnings per share, growth rate, future projections, sales, and so on and so forth.  To a certain extent, there is truth in that, but to a large extent, the price of any given stock at any given time really amounts to speculation and is a zero-sum game, for every stock traded has a seller as well as a buyer, and each of those investors, believes that they are on the right side of that trade.


Dividends, on the other hand, are payments made from the publically held company to the holders of that stock, typically done at scheduled times throughout the year, such as quarterly, in which real cash leaves the company paying that dividend and goes into the hands of the owners of those shares. This payment is a payment that once made cannot be taken back, so that, for long term investors in a given stock, they could easily have received over the years more money in dividends accumulated then the actual price of the stock when they first purchased it.  This also represents a payment from the profits of that corporation which is the only guaranteed return on investment that an investor will ever get.


For most people, especially when the market is going up, most of the money gained from their investments, actually comes from the price of that stock investment going up, which should be seen for what it is, a profitable gain on paper.  Additionally, while there may be many good reasons why a given stock goes up, in regards to earnings, sales, and growth rate, primarily, the price of the stock goes up because other investors or speculators believe that the shares are worth buying at an increasingly higher price point. This means, in a nutshell that all gains that investors make, with the exception of dividends paid out, come from other investors that are willing to pay a higher price for the shares then what was paid by the previous investor, no matter the time period. 


So then, capital gains, occur only when additional investors believe that the underlying price of the stock deserves to be higher than what it once was, whether or not the fundamentals of that stock or the conditions of the economy support such, and further to the point, capital gains come exclusively from other investors, and should and when other investors lose confidence in such a belief, stock prices collapse, sometimes very rapidly.