Food For Thought: What Are Stock? Part 2: What Are Stock Exchanges?

As with all my posts, this is unedited, stream of consciousness stuff that lacks citation. I welcome corrections in the comments.

The last post on stock was on corporations. This time, I’ll go into what the stock market is. When people talk about the stock market, they either generally refer to the stock market as in the global market of people who buy and sell stock or specific stock exchanges where transaction happen and have specific times in which you can buy or sell stock. Usually, it’s a reference towards a specific stock exchange. In order to get a relatively full grasp on what the stock market is, we’re going to have to go back in time a little bit.

Continue reading “Food For Thought: What Are Stock? Part 2: What Are Stock Exchanges?”

Food For Thought: What Are Stock? Part 1: What Is A Corporation?

So after talking about a number of issues with friends, the topic of investing came up. Unfortunately, not only do I not know everything about investing, people spend years studying the subject. Instead of talking about that subject, I’ll just go into stock a bit.

I’m not going to go into everything because I don’t know everything. Most people don’t. However, I will go into some basics and try to shed some light on the subject. I’m sure most people have some grasp of what stock are. Hopefully, my posts on the subject will fill in some gaps in your knowledge and make stocks a little easier to understand for those who have no grasp on the subject. I plan on writing some posts on what stock are and related information. After doing so, I’ll write a post or two about issues related to stock and my opinions on those issues. Right now, the two main issues on my mind are the use of insider information by government officials and high frequency trading. Additionally, most of this will be told from an American perspective because I am an American.

Also worth mentioning is that, like all of my posts, this is stream of consciousness stuff I’m writing off the top of my head. Errors may abound and I’d be happy to hear them in the comments section and make corrections.

What is a corporation?

A discussion on stock cannot be done without a basic grasp of what a corporation is. Stock come from corporations after all.

A corporation is a business organization. It’s a business. What is a business? I think most people would say it’s one or more persons working together to make money. While that may be true, that explanation ignores a great deal of the laws relating to corporations, the powers possessed by corporations, and the reasons why corporations legally exist.

Corporations are legal constructions. They are creations of law in order to make the doing of business easier for people. You generally have to apply to the government to form a corporation. There’s a whole process involving articles of incorporation, corporate officers, etc.

A corporation, as far as the law is concerned, is a legal person. A corporation has a lot of same rights a person has with some exceptions, such as the right to vote for the president of the United States. A corporation can own property, employ people, participate in contracts, sue other persons/corporations, etc. Also unlike a real person, people can own a corporation/company. I’ll go into this a little more later.

But why do all this? Why not just start a business in your own name rather than in the name of an artificial person and skip the hassle of forming an official, legal corporation and doing all that paperwork?

Why form a corporation?

There are primarily two reasons for jumping through all the hoops established by the law in order to create and operate an official corporation: taxes and lawsuits. Corporations are taxed differently than individuals, generally in a more beneficial way. I don’t know how old any of you readers are, but avoiding taxes is the reason behind many of the decisions made in this country.

The other reason is that they can protect the owners of the corporation from liability. In the United States, anyone can sue anyone at anytime for anything. Maybe that lawsuit has a chance of winning, maybe it doesn’t. We won’t know for sure unless we go to court and spend money on legal fees. And if the lawsuit has merit, then you may even have to go to trial, which costs more money. And then, if you lose, you may lose everything you’ve ever owned depending on what you’re being sued for. Hell, you could lose everything you’ve ever owned just paying the legal fees during the process. Lawsuits are extremely dangerous and can ruin lives at any moment.

Corporations exist to deflect that risk. When you sue a corporation, the most you can obtain through that lawsuit is whatever the company owns, not whatever the owners of the corporation own. There are rules on intermingling of funds/assets to the point where you can go after the owners’ money/assets, but generally speaking, you can’t go after the owners of a corporation, only the corporation. The assets/money of the owners of a corporation and the corporation itself are separate.

This is true regardless of how many people own a company. It may be a suspicious argument that a company owned by a single person and where all decisions made by that company are dictated by a single person can be considered separate from that single person, but that is exactly what the law tells us. Unless he mixes his money with the company in some prohibited way, you can’t sue the company and hope to get at the owners money, only the money/assets that are owned under the company.

I think the general policy considerations under an idea like this are to ensure businesses exist. Generally, most people in government and society at large think businesses are good. They create jobs. Make money for people. Stimulate the economy and improve life for everyone involved. Successful business are kind of the hallmark of the United States of America. Ask any politician and they’ll say that we want more businesses.

Unfortunately, starting a business is risky. In general, it requires money/investment to start a business. That money usually comes from people who have lots of money. If corporations did not provide this kind of protection to investors, there would be little incentive for investors to start new businesses at all. The possibility of business failing is already high. If you add on the risk of some opportunist with a lawyer waiting in the winds to get at the owner’s money through a corporation, then no one would ever invest. No one would ever start a business. Rich people would just sit in their mansions with their money under their mattresses and live their lives in fear of someone inevitably coming by and taking it all away.

So there’s some of the reasons why we have corporations.

What exactly are the barriers that separate an owner/shareholder from a corporation?

There are generally three groups of people when talking about who controls a company: the owners/shareholders, the board of directors, and the corporate officers. The way it usually works is that the shareholders/owners get to decide who the board of the directors are. The board of directors then get to make big picture decisions and decide who the corporate officers are. The corporate officers facilitate those big picture decisions and do the day to day running of the company.

I think the idea was that by creating these levels of separation so that the shareholders don’t truly “control” the company, the shareholders cannot be reasonably held responsible for the actions of the company and should not be sued in case the company fucks up. In practice, things are more complicated. Often times, shareholders are on the board of directors and directors are corporate officers.

The bottom line is this: shareholders generally cannot be sued for the fuck ups of the company they own.

How do these ideas relate back to stock?

Stock is a portion of ownership of a company/corporation. Slavery was made illegal a while ago, but since corporations are not real/natural persons, they can be owned. In fact, many people can own many different percentages of the company. You can own 1%, 100%, or 43.78%. You can divide up the ownership of a company any way you want. Generally, when you buy stock/shares of a company, you’re purchasing a percentage of ownership of a company. However, what your percentage ownership of a company signifies in terms of controlling the company and being able to tell everyone at the company what to do depends on the terms upon which the corporation was created.

Remember a few paragraphs above where there are hoops to jump through in order to even create a corporation? One of those hoops is to create a charter of rules that govern that company. It’s kind of like the Constitution of the United States of America, but for companies. Whenever a company is created, you have to create this document for that company which is just a set of rules necessary for the operation of that company. It’s stuff that’s generally related to how decisions are made. Remember, corporations are not real people. People associated with or who own/run the company still have to make decision on how the business is run. The articles of incorporation help determine how those decisions are made.

Furthermore, it’s here that the terms regarding what percentage of shares that determines the owner/shareholder that gets to decide who gets to be on the board of directors, and by extension, who actually owns and controls the company. Generally and in the case of most companies, if you own over 50% of a company, you own the company and you get to do whatever you want with it. I think there are some companies that do things differently, but they are exceptions rather than the norm.

In addition to being able to control a corporation, owners of stock (or shareholders) are protected against lawsuits against the company. For example, suppose you were to go to your local stockbroker and buy 1% of ABC Company for $10.00. Later on, someone finds that ABC Company poisoned the local water supply and is responsible for the deaths and injuries of millions. ABC Company gets sued by everyone injured by the poisoned water supply and they want every last penny associated with ABC Company for compensation and to punish ABC Company. How much are you, a new owner of 1% of ABC Company, liable for to these people? The answer is $10.00.

In general, as a buyer and owner of a company’s stock, the most you can lose because of that stock is the amount of money you spent buying that stock. Barring some exceptions because there are always exceptions, you can’t be held financially responsible for the company’s fuck ups.

Conclusion

The point of everything written above was to convey two things. Firstly, a buyer and owner of stock is not responsible for the company’s fuck ups and that generally, the most anyone can lose after buying stock is the amount they paid for the stock. Secondly, owning stock means owning a percentage of a company. Own a big enough percentage of a company, and you control a company and get to tell it what to do.

Obviously there’s loads more to know and, admittedly, I don’t know everything. I’ll spend sometime thinking about what to write next, but I do want to write about the stock market and stock exchanges at some point and the reality of owning stock for most people versus people rich enough to buy out large, publicly traded companies.