There is lot’s of discussions about whether investing in a company does anything to support it, hence whether purchasing shares of a company puts you in a position of responsibility for what the company stands for and for what it does. Let me address this today and tell you my point of view on this highly debated topic.
If you buy stock in a company you become, to a tiny part, owner of that company. As a co-owner of a business, you obviously take on some responsibilities of that business.
The most obvious one is that you receive votes to influence major company decisions, which you can exercise once a year at the annual general meeting of shareholders. The other responsibility you take on is the financial responsibility in relation to the share price. If the company goes bust, your money will be gone. However, should the company keep succeeding, you are entitled to participate in that success through a rising share price and/or dividends.
Does your investment have an effect on the share price?
Your purchase may increases the share price, or support in stabilizing it. The effect that you as an individual with only limited purchasing power might have on the share price will be very small in most cases. Some might say it’s negligible. But, there is certainly an effect.
If you purchase shares which are rising in value, you support the move up by showing confidence in the company through your willingness to pay more for it. When the share price is falling, your purchase also supports the company. This is due to a stabilizing effect that it will have on the sellers. If you wouldn’t buy the shares at the lower price, then the seller would have had to lower the price further, thus increasing the down-turn for the shares price of the company.
So whenever you buy shares, to a tiny amount you either contribute to pushing the share price higher, or help stabilising it on it’s way down at a certain level.
How does that influence the company?
The share price of a company determines the companies value. Based on the value, the company receives a range of financial options, including loans, debt issuance, credit lines and guarantees to grow or improve its operations.
Furthermore, as mentioned above, your voting rights are a benefit and a responsibility you have as an investor.
Admittedly, with only these two main points, your influence is an individual investor is very small. With limited purchasing power and therefore a small amount of shares you might purchase, your voice doesn’t get too loud. But it doesn’t mean it isn’t there.
Your part is comparable with let’s say a presidential election. Your vote alone might not appear strong, but the more people follow those same ideas and convictions you hold and exercise their rights, the more of an impact it will have on the company.
You get a voice
Looking at the points above, the process of becoming an investor is another version of a democratic system on an enterprise level. You get actively involved in it by purchasing shares of a company, and to a tiny amount, you do influence the company by purchasing shares.
Once invested, it will be up to you whether you continue holding the shares, thus contributing in keeping the share price stable. And whether you will exercise your voting rights, thus contributing to steering the company in the direction you believe to be the right one.
Do the right thing
In my opinion, investing is the only way to get a voice and a say with even large companies. For many it doesn’t sound like much, but I see it otherwise. It’s a great opportunity to have influence beyond the small bubbles of our own lives.
For example: Just imagine, if all members of an environmental NGO would unite and purchase shares of a company which is responsible for environmental pollution.
With enough shares and votes on hand, they would very likely receive the opportunity to change the direction of a company. They would receive the rights to support or to reject decisions on who runs the company, where money is being invested, and which policies are being drawn going forward. With only as little as 10% ownership they already could assemble veto rights, and insights into the companies internal processes and decisions which they won’t get in any other (legal) way.
So, if you want to help others doing the right thing. Invest. Invest consciously in good companies to continue supporting them in doing the right thing. And if you want to contribute in bad companies becoming better (or less bad), purchase shares of bad companies and exercise your voting rights, to help the company doing the right thing.