Don’t confuse buying shares with funding companies
As a CEO and a director, I work hard to maximise the value of my shareholders’ ownership in the businesses I lead. It’s a lot easier if you’ve got informed shareholders.
In a cafe recently, I overheard a woman loudly discussing the merits of the local share market:
‘I only buy shares in local companies listed on our share market. I don’t want my money going overseas. I want it used to grow local businesses.’
Putting aside the desire for local ownership (whether based on patriotism or a preference for businesses you can easily monitor), I think she’s confused owning shares with funding companies. The person who sold her those shares may use her money to repatriate funds offshore, or to invest in an offshore company, or maybe to reinvest locally. She has no way of knowing or influencing that.
Unless she buys shares in a new share offer, not one cent of her money will go to the company. The company got its money when it issued the shares to the person who bought them the first time. It gets nothing when someone else later buys those shares from the first or subsequent owners.
I mentioned this to my companion, who admitted that he thought of his investments in a similar way - ‘giving the company my money’ - when in reality he always bought shares in established listed companies, and so had given the company nothing.
Clearly, when you buy shares in a company, you buy a piece of the ownership of that company, and you rightly expect the company to look after your ownership stake. But unless you put in new money for new shares, all you’ve done is acquire someone else’s ownership stake - at whatever price you, not the company, decided - and you have not given the company any money to grow.
Trackback uri
August 20th, 2007 at 4:02 pm
It just goes to show the low level of financial literacy that, as a nation, we hold.
One would think that those investing on the sharemarket would have an innate undertanding of these things - sadly that’s not the case…..
August 25th, 2007 at 1:22 am
Jim,
I have a slightly different angle on this.
It is true unless equity is bought at an IPO - ie in the primary market - that an investor is not directly giving cash to a company.
However, all companies pay a great deal of attention to what their shares do thereafter in the secondary markets. Price levels there directly drive the level at which all subsequent primary offerings are made.
Thus your lady, when buying her NZ shares in the NZ stockmarket is directly assisting the funding capacity of her new company by adding to the demand for its equity. This directly impacts the price at which the next round(s) of primary offerings sell for; and I would suggest does imply she is a direct part of the funding process. And IPOs and placements are subcategories of this context and subjugate to it.
R