Does Buying A Stock Mean You Support That Company?
A common misconception I hear from people getting into the world of investing is that they will only buy stock in companies they are personally fond of and want to support. The fallacy is thinking that buying stock in a particular company means that you support that company.
You are not “helping” the company in the comparable sense of donating money to a non-profit. Your money invested is not a donation to the company. It does not go towards funding the company’s operations (there is only one time this happens, which I’ll discuss later).
How Much Control Do You Have?
This misconception generally stems from a lack of understanding about the amount of ownership that each stock represents.
For example – Apple’s market capitalization at the time of writing is $2.07T. A purchase of 1,000 shares of Apple stock ($124,000 investment) buys you 0.00000005% of Apple. Not enough to have any controlling interest in the company, you could say.Â
Socially Responsible Investing
That said, socially responsible investing is a thing. You don’t have to invest in companies if you feel morally opposed to the product or service they provide. (i.e., if owning stock in a tobacco company doesn’t sit right with you, don’t.) Some investors find it undesirable to invest in gambling, tobacco, alcohol, sex, prison, or defense industries.Â
Do taboo stocks get better returns? As the old saying goes, “what do you do to celebrate good times? Drink, smoke, gamble, or have sex. And what do you do during stressful times? Drink, smoke, gamble, and have sex.” Those companies exist because there is a market for them.Â
Socially responsible and ESG (“Environmental, Social, and Governance”) investing is a trend that is picking up momentum. Milton Friedman (a legendary Nobel-prize-winning economist known as the twentieth century’s most prominent advocate for free markets) would counter that the social responsibility of a business IS to increase profits. One of Friedman’s almost universally accepted contributions to the business world is the philosophy that a business’s primary motive should be to maximize shareholder wealth. I’ll digress – for now. Watch for a future post on ESG investing. Â
Would you only invest in companies for which you are a customer? The benefit to that is that you know their product and value proposition and understand their business model. The downside is that it is biased. You are likely missing large parts of the market and are underdiversified. For example, say a young person buys only companies they know (i.e., Starbucks and Forever21) and doesn’t buy companies they don’t know (such as dialysis companies and nursing homes, which are hugely profitable businesses supported by a very large demographic). If this is the case, they may be missing out on tremendous growth and returns.Â
Are You Missing Out On Returns?
“Unethical” investing is often an extremely profitable practice. Warren Buffett suggested the sale of tobacco generates extremely high-profit margins and provides firms with access to a vast and captive target market. Not investing in these companies may mean you miss out on stable investment returns. There are no easy answers to this; it’s a decision each investor has to make personally.
Where Does Your Money Go When You Buy A Stock?
Another misunderstanding that contributes to this misconception is thinking that the money you invested goes directly to the company when you buy a stock.
The only time invested money goes to the company is during its initial public offering (IPO) or any other time the public company issues new shares (known as a follow-on public offering). During an IPO, a private company becomes a public company by selling its shares publicly for the first time.
Retail investors are generally not able to invest directly in IPOs. The money raised in an IPO funds the company’s operations or growth initiatives and pays down debt.
So then, where does your money go when you buy a stock? Any other time when you buy a stock, your money goes to whoever previously owned the shares, which is another investor.
As investing goes, my personal preference would be to take a less emotionally-attached approach. Thinking of a company as “good” or “bad” implies an emotional attachment. To be a good investor, think about companies as being over-or under-valued. That’s a math problem, not an ethics problem.Â