The Robinhood app’s lofty goal is to democratize stock trading, and they’ve done a remarkably good job at that. The barrier to entry for stock trading has been effectively removed, and while other brokerages also offer zero-commission trading, Robinhood stands out as the one that’s pleasant to use and even makes things a little bit “fun”.
On the other hand, after talking to several friends who had recently opened accounts and started trading, I realized that they didn’t actually know what they were purchasing. I can only assume that this phenomenon is fairly widespread among users, so I want to highlight two fundamental errors regarding the two most important features of stocks that people appear to be getting wrong.
Specifically: what is a share of a publicly-traded company, and what are shareholder rights and responsibilities?
All of the people I spoke to — and these are pretty well-educated people — had the confounding idea that shares are something like a cryptocurrency token. When a business decides that they want to become traded on a stock exchange they mint a bunch of tokens (shares) and sell them to the public. Those tokens track the presumed value of the underlying business, so if you think that it’s going to be worth more tomorrow you buy and if you think it’s going to be worth less, you sell.
This is a harmful way to think about investing because not only is it untrue, it’s focusing on the wrong aspects of share prices by making a fundamental error.
What I mean is that a share of a company’s stock is not a token that the company produces and sells. It does not track the value of the underlying company in the same way that a crypto-asset bills itself as being tethered to a US Dollar or some other arbitrary value. Shares are much more valuable than that.
A share is an actual right to ownership of a company; it is not a separate entity.
When you purchase a share of Disney, you are not purchasing a token that represents the value of Disney’s business, you are purchasing a part of Disney’s business. The value of that share is supposed to track the underlying value of Disney, but it has been abstracted so that it can be traded on the exchanges.
That distinction is crucial because it makes all the difference in how you should be assessing the value of a share you own or are thinking about purchasing. If you take the view that a share is a token rather than a chunk of the actual company, you are overlooking the fundamental value of the share and instead focusing on what you think other people will think the value of the share is. It becomes a game of psychology and guessing, and while those are elements of the price of the share itself, they are not necessarily elements of the underlying business.
Think of it this way: trading cards are sometimes used for investment purposes and broadly speaking, there’s really no way to predict which cards are going to be valuable and which ones are not. The reason for that is that the actual value of the card is essentially whatever people would be willing to pay you for the time and resources needed to produce and distribute it; it’s the value of the physical card itself.
The price of a trading card, however, is based on a variety of other factors: how rare is it, what is the condition, who or what is on it. The price of a baseball card can skyrocket because a player becomes popular, but it would be folly to imagine that one can predict how well a player will perform in any season; if people could do that there would be no more sports, they’d just print out the seasons and never have to play a game. In essence, the price of a baseball card can be justified ex post facto, but there’s no system available to predict it with accuracy, and the fundamental value of the card remains whatever the resources needed to make it are. That is why many people wind up finding old card collections and liquidating them for pennies apiece when they fail to become valuable.
Shares of a company are essentially the same. There is the value of the share, which is simply whatever the value of the underlying business is, divided by the number of shares outstanding, and the price of the share is supposed to reflect the value, but is often influenced heavily by investors’ opinions and scarcity. There are only so many Tesla shares, so people who desperately want in on that action are willing to pay more than they might otherwise find the value of the underlying chunk of the company to be.
Relying on what you think the price of a share is going to be as the assessment of the price you’re willing to pay for one is certainly a way that you could choose to invest. It’s more or less gambling, though, and public opinion is a fickle thing. It’s much more worthwhile to consider the strength of the underlying business.
This is a direct result of realizing that owning a share is owning an actual part of the company itself, rather than owning a token which represents the company. Don’t think of shares as trading cards, think of them as … well, as investments.
The other important conclusion that ought to come from thinking about owning a share in a company is that it makes you a partial owner. That should lead to the conclusion that you ought to have at least a little bit of a say in how things are done, or at very least that you should like the way the business is operating.
If you’re just purchasing a token of a company, you’re not terribly interested in the underlying operational details or performance of it, you’re interested in hoping that the price goes up so that you make some money. The thing is, the price is more likely to go up if the company is performing well, rather than just because it becomes a popular company for a bit.
As a partial owner of the company, you as a shareholder have the right to make decisions about how the business is run.
This statement startled all the people I talked to because they had been deleting their proxy emails from Robinhood without even bothering to read them. Those emails are sent because the company is reaching out to you — one of the owners — and asking you to vote on things the company wants to do. In a sense, they’re asking you to do your job, which is something you signed up for when you became an investor.
Proxy votes are how publicly-traded companies ask their owners how they want the company to run; although it’s frequently broad and relatively unimportant stuff, it’s still worth casting your vote because it’s your company.
To put it another way, the CEO isn’t the owner; they’re your employee. They’ve been hired to run the company, along with the board of directors, because you’re busy with other stuff. The CEO and the board is the top level of management but you’re still the owner. Their job is to appease you and the other owners, rather than to be given carte-blanche.
Finally, as a shareholder, you also have the right to put things forward for a vote. No, seriously, you can make the business you own shares in ask everyone else who owns shares to vote on a proposal that you’ve put forward, and although there are a billion and five different ways the board can disobey shareholders’ wishes, they’re still in a real sense obligated to honor that proposal if enough of the other shareholders agree.
If this sounds ridiculous, it’s not. Here’s one person who owned only 12 shares of Tesla and was able to put forward a shareholder proposal to replace Elon Musk as the chairman of the board (he’d still have been the CEO).
While the proposal failed when it came to the vote, it does show that as a shareholder, you have power over the companies which you own. That’s really the entire basis of publicly-traded companies.
When a company goes public, it relinquishes its ownership by the people who started it, and replaces it with shares. Whoever owns a share owns a piece of the company. Usually the people who founded the company own a majority of the shares so that they can continue to run things, but they can only continue to do that for as long as they hold the majority of the votes.
There is a small hiccough here, and that is that not all stock offers the right to vote. It’s becoming more popular for businesses to offer classes of stock which don’t have voting rights, so it’s important to check before investing if this is something that you are interested in or care about.
So there you have it — a new philosophy for how to look at those shares you’ve been buying and selling like a maniac. It’s important to remember that they’re more than just playing cards; they are actual proportional ownership of a company, so how you think about them ought to derive from what you perceive as the true value of the company itself, not just what you think other people would be willing to pay.
It’s also important to remember that as an owner, you have a say in how things work. If you want to put forward a proposal to other shareholders about how to run the business, look up how the company goes about doing that, and buy some shares. If you’re not interested in active governance, you should still pay attention to the emails from your brokerage, because some of them are going to be proxy documents and links to where you can vote your shares on proposals that other shareholders have put forth.
If you think that this is boring and tedious, remember that the decisions made in those shareholder votes have an impact on how the business is run, and those impacts will have an effect on the value of the business, which in turn will have an effect on the price of the stock. If you’re interested in a low-effort way of attempting to keep the value of your investment increasing, then spending a little bit of time considering the proposals and voting is a way to contribute to that.
Overall, the key takeaway here is to remember that you’re not just dealing with trading economics when you’re investing in stocks; you’re purchasing proportional ownership of a business. That’s pretty neat, if you think about it.
n.b. — Nothing in this article should be interpreted as investing advice! Additionally, this article contains quite a few simplifications, glances over a lot of very fine details about certain aspects of shareholder rights and activism, and does a bit of handwaving in not explicitly going into every minute detail of the differences between what we normally think of as ownership and what proportional ownership entails. Look, I get it, but if you came away from the article thinking that you could immediately start running publicly-traded companies simply by purchasing a share or two and then waging proxy fights then I dunno, that doesn’t seem like a reasonable conclusion to anything I wrote, but have fun trying. The point is to introduce readers to these concepts so that they can go out and learn more if they’re interested.