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1830: Railways & Robber Barons» Forums » General

Subject: Probably a stupid question on stock prices... rss

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tibbles von tibbleton
United States
Oregon
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I'm reading the AH rules pdf now and I'm trying to wrap my head around the stock pricing. Why does the value go up when it pays a dividend and down when it retains money? Present day stocks usually do the opposite and go down on exdiv and up if the company retains operating cash. Is this just an abstraction to make it more likely people chose to pay dividends or am I missing something basic to the game model?
 
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Mikko Saari
Finland
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These are not present day stocks. Back in the day, dividends were more highly valued and paying dividends was a good thing. So yeah, it's a fairly accurate depiction of the 19th century stock market.
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Pas L
Australia
Melbourne
Victoria
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No good will come of this, mark my words!
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Exdiv isn't the same thing as a company choosing to pay a dividend. Stocks drop exdiv because if you buy it you won't get the dividend anymore, not because the company paid a dividend.

Consider it more of an approximation of a company saying "we're doing well" or "oh shit". Companies still do tend to rise/fall on good/poor earnings, etc. Even in today's market it makes more sense this way than the other.
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tibbles von tibbleton
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Sure, I'll buy that paying dividends is a good way to say we're doing well and prices go up due to sentiment. (Though I've skimmed enough stock articles to tell you there's a whole school of thought on why dividends are irrelevant to stock prices.) Cause either way their earnings were the same that prior round so the gain there should be the same, but going forwards hypothetically keeping money to buy more trains would be growing the company earnings faster...

But I'll stop trying to overthink it.

 
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Ben Draper
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You're applying modern day economic theory to a stock market that was in its infancy. Such considerations were not important to the vast majority of investors at the time this game takes place.
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tibbles von tibbleton
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Fair enough, if that's how it went back then. I figured it'd be a stupid question since it's been done that way in these games for so many years, just didn't get why.
 
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Roel van der Hoorn
Netherlands
Enschede
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tibbles wrote:
I'm reading the AH rules pdf now and I'm trying to wrap my head around the stock pricing. Why does the value go up when it pays a dividend and down when it retains money? Present day stocks usually do the opposite and go down on exdiv and up if the company retains operating cash. Is this just an abstraction to make it more likely people chose to pay dividends or am I missing something basic to the game model?


Because an Operating Round encompasses ~ a decade. So if you pay out dividends that means you regularly paid out dividends during that decade. The increase in share price reflects that.

You also don't have just one "2-train". You have a complete fleet of "2-trains" or whatever trains they would represent. And if they rust it doesn't mean they really rust. It just means those trains are considered obsolete: they are too slow, cost too much, etc.
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Eric Brosius
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Remember that in 1830 there was no SEC and no particular disclosure requirements that companes were obliged to make to stockholders. So the dividend, or lack of one, was one of the only signals available about how the company was doing.
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J C Lawrence
United States
Campbell
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The first real legislation in the area for America (not that the rest of the world was much different) came about with the Blue Sky Laws in Kansas in 1911. The Blue Sky Laws were designed to protect investors from securities fraud by requiring sellers of new issues to register their offerings and to provide a prospectus in which the promoters (sellers/issuers) stated how much interest they had in the issue and why. Most notably the Blue sky Laws were weak, did not cover trades by mail, and did not restrict issuers from selling a security with unfair terms as long as they "informed" potential investors about it (the fine print: we plan to steal your money). Other states quickly followed suit with Blue Sky Laws -- but this was a state-by-state thing, not at the federal level and there remains little coordination between states in this area (eg for tracking intra-state offences). And this happened was in 1911...almost 100 years later.

It wasn't until the Securities Act of 1933 (which attempted to regulate the issuing of new securities to the market), and then the Securities and Exchange Act of 1934 (which attempted to regulate the subsequent operation of the market and securities trading) -- the first significant legislation in the area at the Federal level -- that the legal landscape started to resemble what we rotely assume now.
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Erwin Lau
Hong Kong
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I always think of the game's stock market in this way:

1. All 10 shares in the game combined are actually 70% of the company. The other 30% are sold to the meeples.

2. When the president decides that dividend is paid. The meeples get excited and pump up the price by trading their 30% ferociously.

Does it make sense?


 
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Charlie Wilson
England
DARLINGTON
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Your question is not stupid when you try and relate it to the real world.
I would just say that 1829 and the myriad of 18XXs that it spawned (1830 being but one of those 'children' ) are games not simulations.
 
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