Took feedback

Author: manforowicz

drafts/stock_price.md

@@ -8,88 +8,102 @@ As someone with no education in finance, I've been trying to find an answer to t
 I think I finally acquired a good understanding.
 But first, let's look at some answers I've found unsatisfying.
 
+## Unsatisfying answers
 
-## Unsatisfying answer 1: "ownership"
+One unsatisfying answer goes something like this:
 
 > A share (also known as a stock) represents ownership of a piece of a company.
 > For example, if you own 50% of a company's shares, you own 50% of the company.
 > When the company makes a profit, more people want to own it, so they buy its shares, which causes their price to rise.
 
-Sure, if I own a physical lemonade stand, I can sell lemonade and make money.
+Sure, if I own a physical bakery, I can sell bread and make money.
 But a share just feels like a piece of paper with the company's logo on it. How can I use it to make money? I don't feel like a real owner of the company.
 Why should its profits affect the value of my piece of paper?
 
-## Unsatisfying answer 2: "self-fulfilling prophecy"
+Another unsatisfying answer goes something like this:
 
 > Pieces of paper, like Dogecoin, can have a price.
 > When people believe its price will rise, they buy, hoping to sell later.
 > But the wave of people buying _is_ what makes the price rise (by increasing demand and reducing supply).
 >
 > This self-fulfilling prophecy is one mechanism that links share price to company performance.
-> The company does well, so due to past experience people believe its share price will rise, so they all buy it, which causes the share price to rise, reinforcing their belief.
+> The company does well, so people believe its share price will rise, due to past experience. Therefore, they all buy it, which causes the price to actually rise, reinforcing their belief.
 
 Sure, I can see self-fulfilling prophecies influcencing a share's price, but I doubt that's the only mechanism at play.
 
-If shares are just pieces of paper, why are all company executives so obsessed about them?
+Why are company executives so obsessed about their company's shares, rather than shares of other companies?
 Why don't any companies go about their business, completely ignoring the existence of their shares?
 
-## Analysis
+
+## What makes shares more than pieces of paper
 
 The first question we should ask is what do shares have that pieces of paper don't? These things:
 
-- **Dividends**. If a company decides on a dividend of $10, that means it will pay shareholders $10 per year for each share they hold. So if you hold 15 shares, the company will pay you $150 a year.
+- **Dividends**. Dividends are payments made by a company to its shareholders.
+If a company decides on a dividend of $10 and you hold 15 shares, the company will pay you $150 a year. 
 
-- **Share buybacks**. A company can decide to buy its own shares back from the open market, making them essentially disappear.
+- **Share buybacks**. That's when a company decides to buy its own shares back from the open market, making them essentially disappear.
 
-- **IPOs (initial public offerings)**. A company can decide to create new shares out of thin air and sell them.
+- **IPOs (initial public offerings)**. That's when a company decides to create new shares out of thin air and sell them.
 
-- **Voting rights**. For each share you own, you get one vote on shareholder matters. You can elect board members. Board members are the people who control when the company does dividends, share buybacks, and IPOs. Board members also hire executives to run the company.
+- **Voting rights**. For each share you own, you get one vote on shareholder matters. Notably, you can elect board members. Board members are the people who control when the company does dividends, share buybacks, and IPOs. Board members also hire executives to run the company.
 
 So how do these things affect share price?
 
-## My understanding
+
+## Majority shareholder incentives
 
 Imagine you own 51% of a company's shares.
 As a greedy human, how can you use this to make money?
 Well, you have 51% of the vote, so you can control the board of directors by electing members that will do what you want.
 
-You could tell the board members to give you a high salary using  company revenue.
-But high salaries are heavily taxed.
+You could tell the board to make the company give you a salary.
+But high salaries are heavily taxed and regulated.
 
-You can instead tell the board members to spend company revenue on dividends, which aren't taxed as heavily.
+You can instead tell the board to make the company spend revenue on dividends, which aren't taxed as heavily.
 Since you own 51% of the shares, you'll get 51% of the dividends.
 
-A method that's taxed even less is telling board members to spend company revenue on share buybacks. These decrease supply, causing share price to rise. This increases how much money you'll get when you finally decide to sell your shares.
+A method that's taxed even less is share buybacks. When the company buys its shares, that reduces supply, causing their price to rise. This increases how much money you'll get when you finally decide to sell your shares.
 
-The more profits the company generates, the more it can spend on dividends or buybacks, and the more people want to buy its shares.
-And that is why share price rises when a company makes a profit.
+You can also tell the board to hire executives that are obsessed with increasing profits to maximize how much can be spent on dividends and buybacks.
 
-You can also tell board members to only hire executives that are obsessed with increasing profits and share price.
 
+## Minority shareholder incentives
 
-## Counterargument 1
+If you own 1% of a company's shares, you get 1% of the benefit of dividends and buybacks.
+In a way, 1% of the majority shareholder's earnings are leaking to you.
 
-> But as of 2025, some profitable companies like Amazon have never paid a dividend, and didn't do significant buybacks. So why do people still hold their shares?
+To maximize your earnings, you try to buy shares from companies that are likely to do sustainable dividends or buybacks.
+The more profit the company generates, the more it can spend on dividends or buybacks.
+So people try to buy shares from profitable companies.
+That is why share price rises when a company makes a profit.
 
-Imagine again you're a majority shareholder. You can tell the board to not give dividends or buybacks, and instead reinvest profits into expanding business.
-This increases future profits, allowing even larger future dividends or buybacks.
 
-Investors look forward to this, so they buy shares, causing their price to rise.
-So the mere expectation of future dividends and buybacks is enough to raise share price.
+## What about companies without dividends or buybacks?
 
+As of 2025, some profitable companies like Amazon have never paid a dividend, and didn't do significant buybacks. So why do people still hold their shares?
+
+Well, imagine again you're a majority shareholder. You can tell the board to not give dividends or buybacks, and instead reinvest profits into expanding business.
+This increases future profits, allowing even larger future dividends or buybacks.
+So the mere expectation of future dividends and buybacks is enough to attract investors, raising share price.
 
-## Counterargument 2
+On the other hand, let's say you tell the board to direct all revenue towards unsustainable dividends or buybacks.
+This will prevent the company from expanding, and other companies will outcompete it.
+This is why investors are weary of companies that have an unsustainable level of dividends or buybacks.
 
-> Dividends and buybacks are leaky, meaning they give some money to non-majority shareholders. Are majority shareholders annoyed at this?
 
-Quite the opposite. When a company spends money on dividends or buybacks, more people want to buy shares, which drives up their price. This benefits the majority shareholder, on top of the benefits of dividends or buybacks themselves.
+## Influencing public beliefs
 
-My hypothesis is that the non-majority shareholders act like amplifiers of dividends and buybacks, which offsets their leakiness. But I'm not sure how much. 
+As a majority shareholder, in addition to dividends and buybacks, you have another mechanism to make money:
+convincing people to buy your company's shares, which raises their price.
+To do this, you can tell the company to brag about rising profits.
+You can also convince investors that dividend and buyback levels are sustainable in the long term.
 
 
 # Summary
 
-The majority shareholders can eventually force the board to spend profits on dividends and buybacks, which are mechanisms of giving money to shareholders.
+The majority shareholders can force the board to spend profits on dividends and buybacks, which are mechanisms of giving money to shareholders.
 The higher the profits, the more can be spent on future dividends or buybacks.
 This causes people to buy shares when they see profits rise, which drives up their price.
-But the price is also affected by social phenomena like self-fulfilling prophecies.
+However, if dividend or buyback levels are unsustainable, investors will be weary to buy shares.
+In addition price is also affected by social phenomena like self-fulfilling prophecies.