Want to invest, but don’t know how to do it responsibly? Worried that you might accidentally buy stock in an evil company? And what happens if you do? ….Does that make you evil too?
It’s a great question, and the answer is… not straightforward. To understand it, let’s first back up a little and explain how exactly stocks work in general.
How stocks work
When a company is first created, the owner of the company owns 100% of it. But many companies get to a point where they want to grow, and need to raise some money, but either can’t or won’t take out a loan. So what they do is start selling stuff instead. They obviously can’t sell off the assets that they use to make money, such as their buildings or their trucks or whatever, because they’re trying to grow their business, not shrink it. But what they can sell… is the company itself.
Indeed, when a company starts selling stock, they are basically selling very small pieces of the company itself. Generally, when you buy shares of a company, that means you not only get to vote on what the company does, but you also get a share of the profits. For example, if you own 10% of a company, that means that get 10% of the profits, and it also means that you 10% of the power when it comes to voting on the decisions that the company makes.
Do I help a company by buying their stock?
The short answer: kinda, but just barely.
Let’s come back to fundraising for a moment. When the company first sells its stock, they are indeed making money from that sale—for every share that they sell for $5, they make about $5. So if you are buying shares directly from the company (like when it first starts selling shares, called an IPO), then you could see that as directly funding the company’s efforts*. You’re giving them $5. And if that company is evil, then that puts you on morally shaky ground.
But the thing with the stock market is that it’s actually not completely on you. If you don’t buy their stock for $5, then somebody else will for $4.99. That’s how supply and demand works—the less demand there is for something, the cheaper it usually gets (and vice versa). So even if you choose to not buy their stock, you are not preventing the company from receiving about $5**. Rather, you are reducing their stock price very slightly by reducing demand, which means that you are only preventing them from receiving 1 cent instead (or more likely, an extremely small fraction of a cent).
And that’s not even taking into account the fact that the vast majority of stock trades actually happen between different investors, and don’t involve the company directly. The company only makes money the first time a stock is sold, and then after that, the same share may be traded millions of times between other totally random people. The company receives literally nothing from any of these subsequent trades. It’s just like if you sell a baseball card: you only make money from the first sale. It doesn’t matter if the person who bought it from you goes and sells it to someone else later. You don’t see that money.
But wait, there more! This is not actually how IPOs usually work. As a member of the general public, you actually can’t buy shares directly from the company during an IPO. Rather, all of the initial shares are usually purchased wholesale by an investment bank which then immediately sells the stocks to the public. So even if you did nothing, the bank would still purchase all of the initial IPO shares.
However, that’s not to say that your decisions have zero effect. Companies can actually issue more shares at any time, and sell them at the stock’s current price. So if you made the stock price go up slightly by purchasing shares (and thereby increasing demand), then you are partly responsible (however small your part) for the extra money the company makes by selling shares at that ever-so-slightly-higher price. Again, this is probably only a cent or two at most—but for many, it’s principle of the matter.
If you didn’t get all that, then don’t worry. Just remember the short answer, which is that buying stock barely helps a company at all. It might matter if millions of people (or a few billionaires) do it, but on the individual level, it generally doesn’t. And on the flip side, that also means that divesting also doesn’t really hurt a company much—divestment is largely a symbolic gesture.
So then is it worth it?
Again, it depends. If you do nothing other than buy the stock and enjoy your profits, you are technically contributing to an evil system, even if your individual impact is very small. Some people may not be happy with that.
But remember that when you own the stock, you can make money off it it. You can receive some of the company’s profits, or sell the stock later at a higher price than you bought it at. You can often make an average of 7-8% profit every year doing this, while you only supported the evil company with a few cents at most. That means that by buying the company’s stock, you can actually make more money off of the company than the company makes off of you. In fact, that’s why people buy stock in the first place! And that means you can just take some of your profits and use them to directly counter the negative impact of that company.
For example, suppose you make $5000 off of oil company stock, but only caused that oil company to make an extra $1. That $1 went toward expanding their operation, leading to more pollution and more greenhouse gases that accelerate climate change. You can then donate a small portion (say, $1000) of your $5000 profit to an organization that promotes green energy and researches climate change mitigation strategies. You can cancel out the harm you did earlier (and more) while still ending up with a profit.
But why not just buy non-evil stock in the first place?
An excellent question. Suppose you just wanted to buy stock in a “good” company directly. Perhaps a green energy company or something. It sounds great, right? You’re helping them raise money, and you won’t have any evil to “cancel out” later. But remember, the impact of your donations will generally outweigh the impact of buying stock in a good company—by a lot. Donating thousands of dollars to a cause (or even just that same company) is way more impactful than helping that company raise 3 cents. And the best way to donate thousands of dollars is to first make thousands of dollars. So in this case, maximizing profits above all else is actually the right thing to do. Huh.
The average investor should just buy an S&P 500 index fund, make lots of profit, assume that a large portion of the companies are evil, and then donate a share of the profits accordingly.
Now to be clear, if you can find a company to invest in that’s both good and profitable, by all means, do that! The rub is that it’s hard to do.
As most stock market investors will know, picking and choosing individual companies to invest in is not only extremely difficult, but also extremely risky. Understanding the ins and outs of a single company (let alone multiple) takes large amounts of time, passion, and skills, and even then, it doesn’t always work out. If you choose poorly and end up making less money—or even losing money—then that means you can’t donate as much. In other words, if you regularly donate a large portion of your money to good causes, then the world might be better off if you invest in profitable companies, even if that includes evil ones. The good outweighs the bad.
The same logic could be applied to boycotts. Rather than spending countless hours researching all of the companies and subsidiaries that you shouldn’t buy stuff from, it’s probably a better use of your time to just buy what you want—then cancel out the bad with some donations.
Oh, and if you do happen to be one of the rare lucky folks that does have the time, passion, and skills to be an active investor… well it might actually still be better to buy the evil company’s stock. Remember when we said that shareholders get votes? You can see where this is going: if you have stock in an evil company, you can try to change it from the inside. Yes, a casual investor who doesn’t join shareholder meetings or vote on company practices probably won’t have much effect. But what if you’re one of the savvy ones—an activist investor? You can not only vote, but also create or join coalitions between shareholders to try and gain bargaining power, and whip up votes among other investors for whatever you want, just like a political activist might. And indeed, this is a thing that actually happens.
Anyway, the bottom line is that the average investor would be better off just not worrying about what companies they invest in. They could just buy an S&P 500 stock index fund, make lots of profit, assume that a large portion of the companies are evil, and then donate a percentage of the profits accordingly.
A quick note about bonds
This article focuses on buying a company’s stock. But remember earlier when I mentioned that companies can also raise money by taking out loans? That’s basically what a bond is—a loan, but from the general public instead of from a bank. For example, suppose a company is selling a 1-year $100 bond at a 2% interest rate. If I buy that bond, then I am loaning that company $100 for a year. And in exchange, they will pay me 2% interest, which means that after a year, they will give me about $102.
So when you buy bonds from a company, you actually are directly supporting the company dollar-for-dollar, unlike stocks. Just like how you can buy stock market index funds that contain shares of hundreds of companies, you can also buy similar bond funds, and I do recommend that you avoid ones that contain bonds from lots of evil companies. Maybe consider government bonds instead.
But what if I still don’t want to invest in evil companies?
Perhaps you believe that the ends do not justify the means, and you never want to invest in an evil company under any circumstances. Maybe you don’t like the idea of profiting from someone else’s suffering. This is an admirable viewpoint, but unfortunately, that means more work for you as you try to figure out how to invest responsibly (if you even decide to invest at all). But luckily, we’re here for you—in our next article, we’ll talk about how to invest responsibly without relying on any evil companies. So stay tuned!
* Earlier, I said that you are directly purchasing shares from a company if you buy shares when they IPO, but this technically isn’t true in most cases. Often, a financial institution will buy all IPO shares, and then immediately sell them to investors.
** Earlier, I said that even if you choose to not buy a company’s stock for $5, you are not preventing the company from receiving $5, because someone else will buy the stock instead. This is generally the case with most public companies (i.e. ones that have IPOd), but is not necessarily true if you are one of a company’s early investors—like an angel investor—where there may not be other people lining up to invest. In this case, investing $5 in the company is literally just giving them $5, which is obviously a lot worse than slightly reducing their stock price.
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