Why do you think investors invest in stocks that pay no dividend? Support your reasoning with...

Why do you think investors invest in stocks that pay no dividend? Support your reasoning with a specific example of a firm that pays no dividend.

Expert Solution

When you own stock, you own a part of the company. There are no guarantees of profits, or even that you will get your original investment back, but you might make money in two ways: -

--> First, the price of the stock can rise if the company does well and other investors want to buy the stock. If a stock’s price rises from $10 to $12, the $2 increase is called a capital gain or appreciation.
--> Second, a company sometimes pays out a part of its profits to stockholders which that’s called a dividend.

Some companies pay dividends while some companies do not pay any dividends.

Reasoning - As a investor if you believe that the company which do not pay dividends can re-invest their profits into their companies growth and can result in appreciation of the stock price there is no problem in investing in that company.
This increase in the stock price can result in increase in the profits of the investor through capital gain which has been mentioned before.

Example - Adobe Systems Inc company does not pay any dividend to their investors. But the share price of the stock increased from 61 USD to 270 USD in past 5 years which is a huge return for a long term investor in this company during this period.

Thus investors show interest to invest in companies which do not pay dividends if they believe in the growth of the company.

jeff jeffy answered 1 year ago

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