New Britain City Journal

New Britain's Weekly Online Newspaper

Commentary

Taking Stock of Stocks

We all know someone who knows someone who made a killing on the stock market. We all learn of the great stock market crash. Did you ever stop to wonder what a stock is and how it works?

There was a time in Western Civilization (that should probably be in quotation marks) when an employer owned the land he hired others to help him work. Then as manufacturing became the basis of the economy the employer owned the factory and hired others to help him create the product. There came a time, however, when creating the product became too expensive for one person to finance. That person then sold stock in the company to raise the capital to expand.

A stock is a piece of a company. The larger the number of stockholders, the smaller the piece will be. People who hold a lot of pieces, major shareholders, may acquire some say in the company. The person who owns the majority of shares always has a say.

Stocks can be bought and sold. The value per share of stock is figured, at its simplest, by considering how large a piece of the company that share represents and the value of the company as a whole. For a century, news sources have published the price per share of stocks in major companies.

From the beginning, companies enticed people to buy stock by agreeing to pay them “dividends” periodically. A dividend is a pay-out of the company profit, which is reflected in the increasing stock value during this period of time.

The assumption that stocks will, or should, increase in value is, I think, the fly in the ointment. For stocks to continually increase in value, the underlying business must continually increase in value by increasing its profits. It is not enough that the enterprise consistently produces a worthy product, at a reasonable price to the consumer, while providing workers with a living wage and good working conditions. This last would seem to me to be a sensible description of a successful business.

Stockholders expect and demand that the dividends and the value of their stock grow continuously. Isn’t that a little like expecting the balloon you are inflating to just keep on accepting air? At some point, most businesses must, by definition, reach the point at which they can no longer grow. The stocks cease to increase in value, and the company may stop paying dividends. The investor then has no incentive to stay and may sell his stock. Lack of investment may kill the company.

There is an inherent lack of logic in all this which worries me. Hedge funds and other high risk unregulated investments seem to me particularly distasteful and even un-American.