Monthly Archive: September 2015

Stocks are not Shares

People think of stocks as all the same thing. But different stocks look very different. Suppose a company decides to issue a lot more shares. And with the proceeds of the shares, invest in bonds. If they do that really aggressively, what are you owning when you buy the stock? Well the original business was diluted down to – the share issuance is aggressive enough – to negligible proportions. That’s dilution. At the same time, the stock is now really represented by the bonds the company owns.

Or in reverse, a company can do the opposite of that. They can borrow money and buy back shares. And then that’s the opposite of dilution. Then the company becomes leveraged. And it becomes riskier than most stocks because it is kind of an amplified stock. What is the essence, what is this thing called stocks? They are an essential element of a modern capitalist economy for the functions they fulfill. Some people think they own a part of a company if they buy their shares. But it is not the case. The right of shareholders to contest the appropriation of the company’s assets – it was the key issue in a leading case in corporate law, Short Vs Treasury Commissioners, and the shareholders cost. Their Lordships went on to say, in unequivocal terms, ’shareholders are not, in the eyes of the law, part owners of the company’.”