Are stockholders owners?

When Eastman Kodak Co. began its downsizing in 1982, the company initially offered extremely generous severance pay to those who voluntarily quit.  This prompted protests from stockholders and stock analysts. They said the stockholders are their owners of the company, and their interests should come ahead of mere employees.

Is this true? Are stockholders really owners? Much of my retirement savings are in stock mutual funds, and I never have felt I am the equivalent of the owners of my car dealership, my neighborhood restaurant or my favorite second-hand bookstore.  I never exercised any control over the businesses in which I owned stock, even when I owned individual stocks.

What does someone who buys stock on the open market contribute to a business?  He doesn’t provide capital to finance the business, because his payment simply goes to another passive stockholder.

As a passive stockholder, it seems to me that I contribute to the economy in three ways:

• I maintain the aftermarket that allows the original entrepreneur or venture capitalist to cash in his investment. When a company goes public – that is, offers its stock for sale on the open market – it provides a way for those who put up the money to start or finance the business to recoup their investment. This would be much harder otherwise.  And few people would buy the stock if there was no way to sell it. So it is the hope that there would be people like me in the future to buy the stock that enables the investment in the first place.

• By buying and selling stock, I help set a price on the value of the company.  The stock price of a company, as compared to similar companies, provides an impersonal, if not always correct, estimate as to how well the company is doing.

• By investing in stock, I refrain from current consumption, which frees up societal resources for other peoples’ use.  If the economy grows faster than the value of my investment, I will be less of a burden on society when I cash it in.

These contributions are not nothing, but they are minor in comparison to those who do the actual work of the firm.

What I get in return for buying stock is (1) limited liability and (2) potentially unlimited gains.  If a company in which I invest goes under, I can’t lose anything more than what I put into it.  All other loss has to be absorbed by the company’s suppliers, lenders and other creditors. But there is no upper limit on how much I get if the company does well.

That is a good deal.  I should be willing to take it.  I should be willing to take what is left over after the company gives employees reasonable pay, the suppliers a reasonable price, and customers a good quality product. It is they who create the value that supports my stock price and dividends.

But this is not how things work.

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One Response to “Are stockholders owners?”

  1. Anita Says:

    Excellent points! The essence of ownership is risk. If your risk is limited, so is your ownership.

    Like

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