There are a number of mutual funds available that limit all or part of their portfolio to eco-friendly companies. The intent of course is to allow the Mother Jones crowd to participate in capitalism without compromising their moral values. Neat idea.
If I recall correctly, stock is issued by a corporation as a one-time event to gain operating capital. Folks who buy from the IPO of a corporation contribute directly to the financial welfare of the company in exchange for the opportunity to gain dividend payments later on as the company florishes and prospers and grows into a huge multinational conglomerate…or lose their investment when the company fails. Once I’ve made this exchange with the corporation I can subsequently sell my stock shares (because it pleases me to do so) to some schlub who sees an attractive potential for dividends (or as is more often the case, an opportunity to sell them to yet another schlub for even more money). But the corporation is not directly affected by these transactions is it?
In what way am I contributing to the welfare of SaveTheAmazonRainForest, Inc (STAF) by buying shares of STAF from Joe Shlubatto, or by having my mutual fund manager do the same?
IANAFM but would think that transactions between you and Joe Shlubatto and/or others that cause the stock price to rise and fall will have some effect on the worth of the shares the company continues to hold.
I don’t think it’s so much a case of contributing to the welfare of STAF as not wanting to reap benefits from companies you DON’T want to do business with. I could see people not wanting to buy a mutual fund that had shares in, say Phillip-Morris, because they consider PM to be a company that does business in a “bad” manner by selling cigarettes.
Lieu, yeah, but the value of those shares don’t do the company any good until they sell them, which they ought not do if they want to retain control of their company. Probably a valid point nonetheless.
Turek, but if buying STAF doesn’t benefit the company, would buying shares of…the evil ones…benefit them? Are investors being misled as to the intent and effect of their purchases?
Again I’m just guessing but there may be many indirect ways the company could benefit from a higher stock value without having to sell any shares, such as obtaining debt easier, having a better credit rating, becoming more attractive to a higher quality candidate for employement, etc.
There are a lot of ways that share prices affect the performance of a company and vice versa, and frankly, it’s been a LONG time since Economics 102 so I don’t remember all of them, but let’s use a simple example that demonstrates what my point was.
Say, Cancer-Causing Cigarette Company (CCCC), issues stocks in an IPO that are bought up by investors, one of which is the mutual fund Death to the Earth (DttE). CCCC then goes on to make a profit of $1 per share of outstanding stock, that they then distribute to shareholders as dividends. The dividends received by DttE (as shareholders of CCCC) are then redistributed to the shareholders of DttE.
A person who invested in DttE would then be benefitting from what they might see as the cancer-causing behavior and business practices of CCCC. It’s a “fruit of the poisoned tree” example. CCCC is “bad” therefore their profits are tainted, and any investors who receive those profits are “bad.”
Companies WANT their stocks to be valued highly. Stock prices are very closely tied to either the expectation of dividends being paid or the expectation that the company will reinvest their profits in the company, thereby growing the company and (eventually) paying dividends. If people expect a company to grow, more people will want that stock. If more people want to buy to buy the stock then want to sell it, the price will go up. If the price is going up, the company must be doing there right thing.
Refusing to invest in “bad” companies limits the demand for a stock, therefore (theoretically) driving the price down, which then causes the company to re-think their policies.
I don’t mean to be a bonehead about this, but let’s just say that Chevrolet produced the Corvette for one year only, and sold 5,000 vehicles. Once those cars are all bought up, Chevrolet couldn’t care less what their value is in resale amongst the peoples because they don’t get a cut of any of those transactions.
A mutual fund is buying stocks from the marketplace that have already been sold to the peoples. The issuing company has already gotten their money and have no involvement/profit or loss in those transactions. As has been alluded to, there may be incedental perks: a high-priced stock may make future issuances more attractive to fools, but it’s no guarantee that the company’s actual financial situation will convince volume buyers; stuff like that.
Mutual funds may participate in IPOs. Knowing of their demand, shares can be priced higher, delivering more money to the actual company.
Companies can issue secondary offerings. The pricing of these will be to some degree tied to their current market value, delivering more money to the actual company.
Insiders own stock. The more it’s worth, the more they like it. Buying the stock helps those employees. (If the stock options are worth enough, then the company may be able to reduce actual salaries, keeping more money to reinvest and do good things with.)
If a companies stock price continues to move higher, there will be less pressure to issue dividends (since stockholders have been rewarded already). That money can then be reinvested in the company.
Companies exist to provide their shareholders value. If a company’s actions incerease its stock price, its shareholders are happy, which is the company’s goal. Q.e.d.
I don’t think you’re looking at this in the right perpective. “Socially responsible” mutual funds don’t really help good companies or hurt evil ones. The point is to let an investor make money without profiting from vile practices. An investor might feel guilty if he made money from polluting the air, raping the rain forest, or running sweatshops in Nicaragua. The tobacco mills and the strip miners will still have plenty of willing investors without your money. You can’t hurt 'em. The “green” companies would do just fine without the socially responsible mutual funds. The only benefit is for the investor’s conscience.
If you’d feel better knowing you have no ill-gotten gains, maybe the SR funds are for you.
You’re right that a company doesn’t see a direct benefit when a mutual fund (or whoever) buys “used” stock, for lack of a better term. They don’t get a cut of each transaction or anything.
But for many companies, issuing stock is not a one-shot deal. They’ll issue stock whenever they want to fund their growth in excess of their internally generated funds and debt capacity. In such a case, a higher stock price is obviously a benefit because they can raise their targeted amount with less dilution to current stockholders.
Also, often a company uses its currency directly when it makes an acquisition. If Amalgamated Widget wants to buy National Widget for, say, $300 MM, they can do it with a stock for stock merger. If Amalgamated’s stock trades such that the company is worth a billion they can issue fewer shares in the merger than if the company’s stock is only worth $750 MM. Again, dilution.
Finally, many companies like to incentivize their workers with stock or options. It’s not much of an incentive if the stock goes down. A rising stock allows companies to keep their employees happier with less direct cash outlay (though at the expense of that same dilution, of course).
But as others have discussed, the main reason to buy a stock is not to benefit the company but because you want the company to benefit you – specifically, by making you richer. A “green” mutual fund or other socially-oriented fund is intended to give its owners the opportunity to benefit from companies they like and to not benefit from companies which they don’t like.