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1830: Railways & Robber Barons» Forums » General

Subject: Dividend payout increases stock price? rss

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Raymond Sun
Canada
Toronto
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Hey BGG,

I was wondering why the stock price increases when a company pays out dividends...

During school, they teach us that when dividends are paid, the stock price should decrease by the amount of the dividend/share.

Is there any specific reason why it is the opposite in the game? What would happen if we were to move the stock price down 1 slot when dividends were paid and up one slot when dividends are held?

Thanks!
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Steve Corby
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phisix wrote:
Hey BGG,

I was wondering why the stock price increases when a company pays out dividends...

During school, they teach us that when dividends are paid, the stock price should decrease by the amount of the dividend/share.

Is there any specific reason why it is the opposite in the game? What would happen if we were to move the stock price down 1 slot when dividends were paid and up one slot when dividends are held?

Thanks!


Because it is a game and not real life. It reflects that a railroad is doing well and that the owners of that railroad are also doing well. It is a mechanism to reward the owners and make it harder for others to jump on the bandwagon. Remember that in 1830 there are 10 shares of a company's stock, unlike real life companies totals. The winning conditions are total wealth and doing as you suggest make it much harder to separate the good players and their decisions from the bad.

If company A can pay dividends and still buy trains, etc. it should be thought of and valued more than company B that needs to save its money to do the same thing. Which company would you want to invest in?
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Eugene van der Pijll
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phisix wrote:
I was wondering why the stock price increases when a company pays out dividends...

Thematically, you could justify it by looking at the long term. Every round in 1830 is the equivalent of several years real time.

When dividends are paid, the stock price would fall temporarily, but it makes the stock more attractive for buyers, and therefore the stock will be more in demand in future.
Remember that this game is set in the 19th century, when (I'm told) the stock market worked differently. For example, there probably was little public information on the performance of companies, except for how much dividend it paid, and so that became the measure of success (and not the size of the treasury or the number and quality of the trains, which would be a much better indicator of future performance).


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Is there any specific reason why it is the opposite in the game? What would happen if we were to move the stock price down 1 slot when dividends were paid and up one slot when dividends are held?

It completely changes the balance of the game. Currently, withholding dividends is something you want to do rarely. If withholding raises the stock price, it will be much more common, and so there will be much more money in the companies, speeding up the train rush. It probably would require a lot of adjustments of the game to corerct for this.

Rolling Stock has a stock market that works as you expect; take a look! But it's quite a different game from 1830.
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Blorb Plorbst
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I think we're all bozos on this bus.
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And historically, good performing companies were expected to pay out dividends. Some paid out as much as 20%! People invested and wanted their returns quickly. Companies that could generate a large return were highly valued and so it made sense to see stock prices increase.
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Lawcomic
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I think what the others are saying is correct.

1. It is a game, not a simulation. If share prices were to fall instead of rise on dividend payouts, the game simply wouldn't work.

2. If you want to look at it in real life terms, I think the concept that a brief price fall on dividend payout tends to reverse as demand for a dividend yielding stock rises.
 
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Breno K.
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What really irks me about people looking for total realism in games is how they overlook very basic things present in almost all games like

1) Every player starts with the same resources (or in some cases a few more resources so that it's balanced)
1.1) It is balanced and fair.

2) There are turns. There is TURN ORDER.

3) It has a definite beggining and end, and the goal is clear.

No game is ever close to a simulation. Ever.
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Mike Hoyt

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The idea that a company that pays dividends is more attractive and therefore it's stock price goes up is common in these games. See Bullfrog Goldfield for another excellent RR/Mining/Stock game with this mechanism.

Be careful about school One model of a companies worth that used to be very popular was the simple sum of it's assets minus liabilities, you were literally buying the companies net worth and it was sometimes possible to even do so at a discount. Under that model, yes a dividend reduces the net worth and therefore the stock price.

A more common model these days is that the company is valued on the net present value of all expected future payouts, including a final liquidation. In that case a payment today is worth more than one in the future, and the fact of a payment today is an encouraging sign that there will be more in the future.

The fact that there are different models should give you pause and realize that valuing a stock,or the impact of a dividend, is not an exact science. Good luck!
 
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Dave Berry
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phisix wrote:
During school, they teach us that when dividends are paid, the stock price should decrease by the amount of the dividend/share.


Are they teaching you about the behaviour of the 19th-century stock market or the 21st-century stock market?

(If you're still at school, an examination of the difference might make an interesting topic for a project).
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John Desmond
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Salutations, gentlefolk,

As others have said here, we're 'simulating' a 19th-century stock market with 19th century accounting. And sometime I want to read a good 'history of accounting practices' - when, for example, did 'depreciation' of capital equipment become accepted as a charge against 'earnings'.

The best discussion of this I know of is in John Stover's _History of the Baltimore & Ohio RR_, IMHO a very good book.

But, basically...

First, the 18xx games show the long-term 'virtuous circle' of the modern economy - investment > technological improvement > econocmic development > returns > investment ...

Second, it's a game. "Pass GO and collect $200"... Enjoy it.

Yours, John
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Lawcomic
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I'm unclear why some of you seem irritated or mad at the original question. It wasn't a trollish enquiry.
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John Desmond
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Salutations, Mr. Hack!

Maybe we're just all having a rotten day ;-)

IIRC, this question has been thrashed out before, either on BGG or on the 18xx Yahoogroup. Oneovdezedaze somebody (why you lookin' at me ?? ) ought to write a FAQ on the history behind the game, because it's set in a world where the assumptions behind and definitions of 'business' and 'corporation' and 'stock' are _different_.

There's a friend of mine who achieved an MBA from Wharton, about ten years ago, who'd never heard of National Student Marketing or Equity Funding Life Insurance Company. While the accounting knowledge to comb the fine print in WorldCom or Enron's financial statements might have kept you wealthier, the knowledge of historical characteristics of swindles might have protected you just as well.

We're in a world where the lessons of the Great Depression are having to be relearned, where the arguments that Orwell skewered in 1937, in _The Road to Wigan Pier_, are dragged out again.

Some of us 'justify' the time we spend playing games because they're a way of gaining 'historical awareness', of putting ourselves into the shoes of actors in a different age, with different preconceptions, where Welington doesn't have radios and Lee doesn't have attack helicopters, and Jay Gould's stockholders know the only worthwhile financial statement is 'a dividend check that doesn't bounce'.

So, having used your question as an excuse to get this 'off my chest', may I beg your indulgence, and wish you many happy games in the future.

Yours, John Desmond

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Agent J
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Well, now that this question is answered, I think I can finally play 1830 happily.
 
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