Even after studying some finance and economics subjects I still have no idea how share prices work.

According to what I studied in finance, we can consider a non-dividend paying shared as equivalent to one which pays dividends. For this piece, I will use them to simplify my argument. Additionally, share holders of such shares only realise any gain on selling the shares, or when the company ceases to exist, in which case they get a proportional share of the assets after all other stakeholders have been paid.

Considering all of this, I can’t understand why the share market is so volatile and inflated. If we were to consider a non-dividend paying share in a large, well established company without risk of closing, why is the share price affected by the company’s actions? Given that the company will not close soon, the investor will not see a return on investment from the company, leaving only the market as their source of return. Here we see that the speculation about a share’s value determines its price, as opposed to the company’s behaviour. Given this, why is there movement when a company announces something?

The best answer I can think of is that it is due to other investors believing that there is some connection, thus influencing their behaviour and making their predictions come true. In this case it exists as a self-fulfilling prophecy that is exacerbated by the share being effectively its own good fuelled purely by speculation.

The reason I have separated a non-dividend paying share from a dividend paying one is that a dividend is comprised of the profits of a company, and thus has more of a connection to the activities of a company. This substitution should be acceptable under the assumption of an efficient market according to the Modigliani–Miller theorem. Yet I hope to show that there is some problem in tying a share’s value to its underlying company if the share will never be realised.

Hopefully someone will be able to clarify this for me, or who knows, maybe I’ll influence some others.