When you buy or sell shares of a public company, your actions are almost certainly based on self-interest.
You want to buy a company at a good price. And you want to sell it at an even better price.
Yet many shareholders – perhaps most – don’t realize that they are actively promoting the public good when they act for personal financial gain.
Here’s how…
In a free enterprise system like ours, every transaction is based on mutually beneficial exchange.
The only way a business attracts customers – and makes money – is by enticing them to buy its products and services.
If they sell those products and services for more than they cost, they earn a profit.
And if they can’t, they don’t.
Not making a profit is more common than non-entrepreneurs realize. Most businesses close within five years of opening.
A profitable firm is the exception, not the rule. (Especially in the world of start-ups.)
Business owners – shareholders – eat the losses. They are also entitled to the profits if there are any.
Capitalism is not a zero-sum game where businesses gain at everyone else’s expense.
If you don’t want to work for a company, buy from a company, sell to a company or own its shares, you won’t.
At a successful business, the incentives are aligned for everyone to benefit, not just the shareholders.
As I’ve written before, businesses focused solely on short-term profits don’t last long.
If they cut corners on quality, their customers will leave them.
If they bargain with your suppliers too hard, they won’t trade with them.
If they undervalue their employees, they will take their talents elsewhere.
It is in the best interests of business owners to make sure that all stakeholders – employees, suppliers, customers and communities – are satisfied.
Yet the business and its assets do not belong to the other stakeholders. They belong solely to the shareholders.
(Many people lost sight of this a few years ago, when some of the world’s largest asset managers pressured firms to pursue not sales and earnings but various social responsibility objectives. Better known as ESG… or Environmental, Social and Governance. Fortunately, the pendulum is swinging back the other way.)
The best companies seek to maximize long term gains not short term ones.
If this were not the case, they would not invest billions each year on equipment, factories, technology, research and development, marketing, employee benefits and so on.
Instead, they would distribute all that money to the shareholders, either in the form of dividends or share buybacks.
But they don’t. Because they expect their investments to pay off in even bigger profits down the road.
These investments require quite a bit of money, of course.
Every growing business is faced with essentially three choices: using their existing cash flow, borrowing or raising money in the equity markets.
Most young companies – and many fast-growing ones – don’t have enough excess cash flow to finance investments for future growth.
They can borrow, either from a bank or through a bond offering. But that means signing a contract to provide interest payments and a return of principal on specific dates.
If the business grows slower than expected, this can become a major problem, as more debt may need to be taken on or – in the worst case – the firm may have to be liquidated to satisfy creditors.
So many firms opt to raise money in the stock market instead.
The funds are raised in an initial public offering (IPO) or secondary offerings.
If you’re buying shares in the market, your money does not go to the company itself. Rather it goes to someone who is selling their shares.
You are not providing capital to the firm. You are providing liquidity to other shareholders, as you are again when you sell your shares.
Think about this for a moment…
Businesses provide us with virtually everything we want or need. They provide jobs and training for employees. They are sources of sales and profits for suppliers. And they pay billions each year in corporate taxes.
Who makes this possible?
You, the shareholder, who is willing to accept the risks and potential rewards of a business owner – and who provides liquidity for other investors.
So don’t buy into the mischaracterization that stock market investors are greedy and selfish. You’re a public benefactor!
Now… get out there and make some serious money.