Reinvesting earnings increases the book value of equity?
The book value is Total Assets minus Total Liabilities and so if you increase the Total Assets without changing the Total Liabilities the difference gets bigger and thus higher. Consider if a company had total assets of $4 and total liabilities of $3 so the book value is $1. Now, if the company adds $2 to the assets, then the difference would be 4+2-3=6-3=3 and last time I checked 3 is greater than 1. On definitions, here are a couple of links to clarify that side of things. From Investopedia: Equity = Assets - Liabilities From Ready Ratios: Shareholders Equity = Total Assets – Total Liabilities OR Shareholders Equity = Share Capital + Retained Earnings – Treasury   Shares Depending on what the reinvestment bought, there could be several possible outcomes. If the company bought assets that appreciated in value then that would increase the equity. If the company used that money to increase sales by expanding the marketing department then the future calculations could be a bit trickier and depend on what assumptions one wants to make really. If you need an example of the latter, imagine playing a game where I get to make up the rules and change them at will. Do you think you'd win at some point? It would depend on how I want the game to go and thus isn't something that you could definitively say one way or the other.
"Lots of questions: In general, no. Market Capitalization and Equity represent 2 different things.  Equity first, the equity of a firm is the value of the assets (what it owns) less its liabilities (what it owes) and consists (broadly) of two components - share capital (what the firm gets when it sells to investors as part of an IPO or subsequent share issue) and retained earnings (what the firm has as a result of making profits and not paying them out as dividends). This is the theoretical liquidation value of the firm - what it is worth if it stops trading, sells all its assets and pays all its debts. Market Capitalization is the current value of the future cash flow of the firm as perceived by the market - the value today of all the dividends that the firm will pay in the future for as long as it exists. This is the theoretical going concern value of the firm - what it is worth as a functioning business. In general, Market Capitalization is bigger than Equity - if it isn't the firm is worth more as scrap than as an operating business. Um ... no. If you don't have any shares then you are by definition not an owner. Having shares is what makes you an owner. What I think you mean is, is it possible for the owner(s) of a private company to sell all of its shares when it goes public? The answer is yes. It is uncommon for a start-up owner to do this but it is standard practice for ""corporate raiders"" who buy failing companies, take them private, restructure them and then take them public again - they have done their job and they are not interested in maintaining an ownership stake. Nope. See above and below. Not at all, equity is an accounting construct and market capitalization is about market sentiment. Consider the following hypothetical firm: It has $1m in equity, it makes $4m in profit and will do for the foreseeable future, it pays all of that $4m out as dividends - if we work on a simple ROI of 10% then this firm is worth $40m dollars - way more than its equity." "20-year Treasury Bonds are not equivalent to cash, not even close.  Even though the bonds are backed by the full faith and credit of the U.S. Government, they are long-term debt and therefore their principal value will fluctuate considerably as market interest rates change. When interest rates rise, the market value of 20-year bonds will drop, and drop more than shorter-term bonds would.  Your principal is not protected in the short term.  Principal is only guaranteed returned at the 20-year maturity of those bonds.  But, oops, there is no maturity on the 20-year bond ETFs because every year the ETF rolls the 19-year positions into new 20-year positions! ;-) For an ""equivalent to cash"" piece of a portfolio, I'd want my principal to be intact over the short term, and continually reinvested at the higher short-term rates as rates are rising.  Reinvesting at short-term rates can be an inflation-hedge.  But, money locked in for 20-years is a sitting duck for inflation. Still, inflation aside, why do we want our ""equivalent to cash"" position to be relatively liquid and principal-protected? When it comes time to rebalance your portfolio after disastrous equity and/or bond returns, you've got in your cash component some excess weighting since it was unaffected by the disastrous performance. That excess cash is ready to be deployed to purchase equities and/or bonds at the lower current prices.  Rebalancing from cash can add a bonus to your returns and smooth volatility.  If you have no cash component and only equities and bonds, you have no money to deploy when both equities and bonds are depressed.  You didn't keep any powder dry.  And, BTW, I would personally keep a bit more than 3% of my powder dry. Consider a short-term cash deposit or good money-market fund for your ""equivalent to cash"" position." Your investment is probably in a Collective Investment Trust. These are not mutual funds, and are not publicly traded. I.e. they are private to plan participants in your company. Because of this, they are not required* to distribute dividends like mutual funds. Instead, they will reinvest dividends automatically, increasing the value of the fund, rather than number of shares, as with dividend reinvestment. Sine you mention the S&P 500 fund you have tracks closely to the S&P Index, keep in mind there's two indexes you could be looking at: Without any new contributions, your fund should closely track the Total Return version for periods 3 months or longer, minus the expense ratio. If you are adding contributions to the fund, you can't just look at the start and end balances. The comparison is trickier and you'll need to use the Internal Rate of Return (look into the XIRR function in Excel/Google Sheets). *MFs are not strictly required to pay dividends, but are strongly tax-incentivized to do so, and essentially all do. "When we talk about compounding, we usually think about interest payments. If you have a deposit in a savings account that is earning compound interest, then each time an interest payment is made to your account, your deposit gets larger, and the amount of your next interest payment is larger than the last. There are compound interest formulas that you can use to calculate your future earnings using the interest rate and the compounding interval.  However, your mutual fund is not earning interest, so you have to think of it differently. When you own a stock (and your mutual fund is simply a collection of stocks), the value of the stock (hopefully) grows. Let's say, for example, that you have $1000 invested, and the value goes up 10% the first year. The total value of your investment has increased by $100, and your total investment is worth $1100. If it grows by another 10% the following year, your investment is then $1210, having gained $110.  In this way, your investment grows in a similar way to compound interest. As your investment pays off, it causes the value of the investment to grow, allowing for even higher earnings in the future. So in that sense, it is compounding. However, because it is not earning a fixed, predictable amount of interest as a savings account would, you can't use the compound interest formula to calculate precisely how much you will have in the future, as there is no fixed compounding interval.  If you want to use the formula to estimate how much you might have in the future, you have to make an assumption on the growth of your investment, and that growth assumption will have a time period associated with it. For example, you might assume a growth rate of 10% per year. Or you might assume a growth rate of 1% per month. This is what you could use in a compound interest formula for your mutual fund investment.  By reinvesting your dividends and capital gains (and not taking them out in cash), you are maximizing your ""compounding"" by allowing those earnings to cause your investment to grow." "What benefit do I get from buying a share The value of any financial asset is its ability to generate cash in the future, and thus the ""value"" of a share is heavily influenced by the dividends it pays and the equity value.  The equity value can be calculated different ways. Two common ways are to just take ""book"" value, meaning assets - liabilities, or you can look at the projected free cash flows of the company discounted back to the present time. Voting rights don't typically influence a share price except in hostile takeover scenarios (meaning someone buys up a lot of shares to have more influence in company decisions)" Two of the main ways that investors benefit financially from a stock are dividends and increases in the price of the stock.  In the example as described, the benefits came primarily from dividends, leaving less benefits to be realized in terms of an increase in the value of the company. Another way to put that is that the company paid its profits to shareholders in the form of a dividend, instead of accumulating that as an increase in the value of the company.  The company could have chosen to take those profits and reinvest them in growing the business, which would lead to lower dividends but (hopefully) an increase in the valuation of the stock, but they chose to pay dividends instead.  This still rewards the investors, but  share prices stay low. "A share of stock is a share of the underlying business. If one believes the underlying business will grow in value, then one would expect the stock price to increase commensurately. Participants in the stock market, in theory, assign value based on some combination of factors like capital assets, cash on hand, revenue, cash flow, profits, dividends paid, and a bunch of other things, including ""intangibles"" like customer loyalty. A dividend stream may be more important to one investor than another. But, essentially, non-dividend paying companies (and, thus, their shares) are expected by their owners to become more valuable over time, at which point they may be sold for a profit. EDIT TO ADD: Let's take an extremely simple example of company valuation: book value, or the sum of assets (capital, cash, etc) and liabilities (debt, etc). Suppose our company has a book value of $1M today, and has 1 million shares outstanding, and so each share is priced at $1. Now, suppose the company, over the next year, puts another $1M in the bank through its profitable operation. Now, the book value is $2/share. Suppose further that the stock price did not go up, so the market capitalization is still $1M, but the underlying asset is worth $2M. Some extremely rational market participant should then immediately use his $1M to buy up all the shares of the company for $1M and sell the underlying assets for their $2M value, for an instant profit of 100%. But this rarely happens, because the existing shareholders are also rational, can read the balance sheet, and refuse to sell their shares unless they get something a lot closer to $2--likely even more if they expect the company to keep getting bigger. In reality, the valuation of shares is obviously much more complicated, but this is the essence of it. This is how one makes money from growth (as opposed to income) stocks. You are correct that you get no income stream while you hold the asset. But you do get money from selling, eventually." "From Wikipedia: Usage Because EV is a capital structure-neutral metric, it is useful when   comparing companies with diverse capital structures. Price/earnings   ratios, for example, will be significantly more volatile in companies   that are highly leveraged. Stock market investors use EV/EBITDA to compare returns between   equivalent companies on a risk-adjusted basis. They can then   superimpose their own choice of debt levels. In practice, equity   investors may have difficulty accurately assessing EV if they do not   have access to the market quotations of the company debt. It is not   sufficient to substitute the book value of the debt because a) the   market interest rates may have changed, and b) the market's perception   of the risk of the loan may have changed since the debt was issued.   Remember, the point of EV is to neutralize the different risks, and   costs of different capital structures. Buyers of controlling interests in a business use EV to compare   returns between businesses, as above. They also use the EV valuation   (or a debt free cash free valuation) to determine how much to pay for   the whole entity (not just the equity). They may want to change the   capital structure once in control. Technical considerations Data availability Unlike market capitalization, where both the market price and the   outstanding number of shares in issue are readily available and easy   to find, it is virtually impossible to calculate an EV without making   a number of adjustments to published data, including often subjective   estimations of value: In practice, EV calculations rely on reasonable estimates of the   market value of these components. For example, in many professional   valuations: Avoiding temporal mismatches When using valuation multiples such as EV/EBITDA and EV/EBIT, the   numerator should correspond to the denominator. The EV should,   therefore, correspond to the market value of the assets that were used   to generate the profits in question, excluding assets acquired (and   including assets disposed) during a different financial reporting   period. This requires restating EV for any mergers and acquisitions   (whether paid in cash or equity), significant capital investments or   significant changes in working capital occurring after or during the   reporting period being examined. Ideally, multiples should be   calculated using the market value of the weighted average capital   employed of the company during the comparable financial period. When calculating multiples over different time periods (e.g. historic   multiples vs forward multiples), EV should be adjusted to reflect the   weighted average invested capital of the company in each period. In your question, you stated: The Market Cap is driven by the share price and the share price is   determined by buyers and sellers who have access to data on cash and   debts and factor that into their decision to buy or sell. Note the first point under ""Technical Considerations"" there and you will see that the ""access to data on cash and debts"" isn't quite accurate here so that is worth noting. As for alternatives, there are many other price ratios one could use such as price/earnings, price/book value, price/sales and others depending on how one wants to model the company. The better question is what kind of investing strategy is one wanting to use where there are probably hundreds of strategies at least. Let's take Apple as an example. Back on April 23, 2014 they announced earnings through March 29, 2014 which is nearly a month old when it was announced. Now a month later, one would have to estimate what changes would be made to things there. Thus, getting accurate real-time values isn't realistic. Discounted Cash Flow is another approach one can take of valuing a company in terms of its future earnings computed back to a present day lump sum."