Xan wrote: ↑Mon Feb 17, 2020 1:07 pm
May I just say that I really appreciate Vinny asking for clarification on a point, as opposed to Mathjak just saying it's silly and then going off on yet another non-sequitur.
Vinny, I tried to illustrate this point in an earlier post.
viewtopic.php?f=2&t=10382&start=72#p185948
I'll put a brief excerpt here.
In 1950, a company that Investor A founded goes public, and A divests himself. B and C buy the shares. In 1960, B "makes his own dividend" and sells half of his interest to C.
The point is that the bottom-right cell, the all-time total gain for all investors, never budges. Investors swapping shares between each other is a complete non-event from the perspective of realized dollars. It's zero-sum. B got some cash, only because that cash came from D, not from the company.
That bottom-right cell only changes when the company pays a dividend. That's when investors as a whole, or maybe I should say as a group or as a class, get any reward at all from holding the company.
1950. Company valued at $100,000. Company has $0 in retained earnings/savings.
Investor |
Shares owned |
Amount spent on stock |
Amount earned from stock |
All-time total gain |
A |
0 |
$50,000 |
$100,000 |
$50,000 |
B |
5,000 |
$50,000 |
$0 |
$-50,000 |
C |
5,000 |
$50,000 |
$0 |
$-50,000 |
Totals |
10,000 |
$150,000 |
$100,000 |
$-50,000 |
1960. Company valued at $350,000. Company has $250,000 in retained earnings/savings.
Investor |
Shares owned |
Amount spent on stock |
Amount earned from stock |
All-time total gain |
A |
0 |
$50,000 |
$100,000 |
$50,000 |
B |
2,500 |
$50,000 |
$87,500 |
$37,500 |
C |
5,000 |
$50,000 |
$0 |
$-50,000 |
D |
2,500 |
$87,500 |
$0 |
$-87,500 |
Totals |
10,000 |
$237,500 |
$187,500 |
$-50,000 |
The bottom right cell is always the total amount the company has distributed in dividends, minus the initial startup cost. Which makes sense. That's exactly how a sole proprietorship would clearly work, and it makes sense that swapping shares around between people wouldn't change that, no matter what their value at the time of the swap.
Any individual investor, like our resident hotshot investor, may be up. But if he is, it's because someone else is down.
Every investor is either hoping for a dividend, or is hoping to sell to someone who's hoping for a dividend. Or hoping to sell to someone who's hoping to sell to someone who's hoping for a dividend. Etc. At the bottom is always the dividend.
This one took much less time to analyze. Did not put the time in to properly analyze the much longer one you originally created.
However, shouldn't your column entitled "Amount Spent on Stock" be more properly labeled "Net Amount Spent on Stock" and reflect the amount from the column "Amount Earned from Stock"? And, that column should be really split into two columns - "Return of original basis" and "Gain (loss) from original basis".
Then the "New Amount Spent on Stock" (for the 1950 transaction) would be reduced by $50,000, retaining the original $100,000 investment.
Continuing to just focus on the 1950 example (as it's always amazing to me how complicated the analysis can get for even the most simplest of transactions) I'm seeing the following personal financial statements for all involved from strictly the one transaction you have here.
1) A - Cash of $100,000 and Equity of $100,000. The Cash came from his original $50,000 plus the $50,000 appreciation of the stock. The Equity came from having an initial $50,000 Equity to make the investment which then gets increased by the $50,000 gain on the sale.
2) B & C - Before the sale they each had $50,000 of Cash and $50,000 of Equity. They now jointly give up $100,000 in Cash to transform that $100,000 of Cash into another Asset (their investment in this company). At this point their total Assets remain unchanged. As does their Equity remain unchanged at $100,000. They've just jointly decided to deploy their Equities into a different form of asset.
As an accountant the only way I can analyze certain things is through the basic Accounting Equation -- Assets = Liabilities + Equity
For all three investors I'm seeing the following:
ASSETS
Cash: +$50,000 (A1) - $50,000 (A2) + $100,000 (A3) - $50,000 (B) - $50,000 (B) = -$0
Company Value -- +$50,000 (A2) + $50,000 (A3) - $100,000 (A3) + $100,000 (B&C) = $100,000
EQUITY
Equity -- +$50,000 (A1) + $50,000 (A3) - $100,000 (A3) + $50,000 (B) + $50,000 (C) = $100,000
I've never done an analysis like this but I think my intuition (and what Mathjak has been adhering to) is represented by what I state above.
Vinny