The weird and wonderful world of corporate finance (by alaric)
Investing
ETFs and the other similar things (funds and unit trusts) are popular, because one of the main reasons to buy shares in companies is to "invest". Investment is the process of taking money you have "spare" (in that you don't need it right now) and finding the most efficient thing to do with it to make yourself more money (or some other thing of value to you, such as social progress) over time.
These investors typically don't want to be putting effort into managing their investments; they typically have either a lump sum they've lucked into, or a few hundred pounds a month spare from their wages, and want to put it aside over a period of years, to save towards some big future expense: buying a house, funding their kids through University, retiring.
You can put that money into a savings account, but the rate of interest you can get depends on the interest rates set by (here in the UK) the Bank of England, who adjust them in order to try and control the economy. For most of the past few years, those rates have been really low (fractions of a % per year), while all-world funds have often been providing double-digit percentage growth in value per year. However, when we have global economic crises and pandemics and so on, they can also shrink in value. At the time of writing (mid 2024) we have savings accounts offering over 5% interest easily available, and fears about the economic consequences of elections around the world, and possible escalation of current wars, all of which might hurt stock prices - we're in a situation where money we might want to use in the next couple of years would probably be better in a savings account where we can be pretty sure it won't go DOWN in value (well, apart from inflation...). But if you're saving for a retirement ten or more years away? Even the worst stock market slumps in recent history have been fully recovered from in a year or two, so you'd probably be better off investing in an ETF. Of course, if you had a way of seeing the future and could see exactly when share prices would fall and rise, you could sell your shares just before they fall, put the money in savings, then use it to buy shares again when the market slump hits its bottom. However, attempts to predict those high and low points in the market tend not to work very well, because those price shifts are controlled by the buying and selling activities of people trying to do exactly the same kind of prediction as you, so you need to be second-guessing them. But they're all trying to second-guess you, so you actually need to third-guess them.
Of course, the middle ground between a savings account and shares is bonds, with their lower return but lower risk; and ETFs that blend shares and bonds to create further middle grounds.
How to trade shares
Only large organisations get to create accounts on share markets and buy/sell shares there.
However, many of those organisations are brokers or investment platforms, who offer trading services to the general public. You can create an account with them, and through that account, transfer in money from your bank account, buy shares (which the broker buys and holds in your name), sell shares, and withdraw cash from your account.
Some also offer services like being able to buy with leverage, or to borrow shares so you can short-sell them, or to lend your shares to short sellers in exchange for a small interest payment.
Meme stonks
A new phenomenon over the past few years has been groups of people organising together on social media to save a failing company by investing in them.
This first hit the news when Gamestop, a US market-traded company with a chain of shops selling computer games and stuff (I gather something like the UK's old HMV or Virgin Megastores) was struggling already when COVID-19 hit and in-person shopping slowed to a crawl or stopped. Big investors sensed the death of GameStop was imminent, and so extensively shorted shares in the company. As noted above, when you short a share, others can borrow and sell the same share multiple times; around 1.4 times the total value of GameStop shares on the market were actually borrowed by short sellers.
Investor communities on social networks noticed this and, driven by a combination of sensing a profit opportunity and nostalgic affection for GameStop, bought large amounts of the dirt-cheap GameStop shares. This caused the value to rise, and also caused a short squeeze, pushing the prices even higher. Some people made a lot of money on this, but short sellers lost out.
Whether this was a good thing or a bad thing is, largely, a matter of perspective.
Ethics
Anecdotally, companies do a lot of evil things in the pursuit of profit. Why do they want profit? The profit goes to the shareholders, as dividends, if it's not reinvested in the company to grow the company; why do the employees and directors care?
Well, a lot of companies make their employees and directors into shareholders, by giving them share options. And because the employees are employed by the company (which is under control of the directors), and the directors are appointed by the shareholders, the employees and directors need to keep the shareholders happy or they'll lose their jobs. And the company as a whole might be wanting investment to grow and survive (so everyone can keep their jobs) and so wants to look good to potential shareholders (or bondholders) to attract investment without needing to sell too big a share of the company or offer too big a premium to sell bonds.
The separation between investors (providing the money required to do things, and demanding the most possible profits in return) and the people actually doing the thing creates great potential for evil. Few investors would, personally, pay to have indentured slaves assemble things from materials obtained by laying waste to ecosystems in order to earn an extra 5% when selling the products. But they'll happily look at the stock markets and invest their money in the company offering the most profits for their money, never having to look an indentured slave in the eye.
This is a problem, and we see the dire consequences of it on a daily basis.
On the other hand, public trading of companies on markets means that the general public get to buy a part of that company, and share in their profits or the growth in their value. And if enough small investors all work together, they can influence shareholder votes. This has the potential to turn the oligarchy into a democracy; the massive corporate profits we hear about in the news can be our profits, and we can force our companies to act in ethical ways rather than just maximising profit.
But currently, most people invest very indirectly and with little engagement. In the UK, employers must offer their employees a pension scheme. Generally, this means they end up investing in a unit trust chosen by the pension provider (often with rather unreasonable fees, lining the provider's pockets), with no real understanding of what companies are being invested in. If employees used their rights to take control of their pension investments, they could choose funds with much lower fees, or ethical funds; or even choose individual shares if they want to get really hands-on.
So I think the markets could be a lot more ethical, if people were more aware of the influence they had (and more of the profits could be diverted into their pensions, rather than the already well-lined pockets of fund managers). I encourage UK readers to learn more about pensions and investing from sites like MoneySavingExpert or YouTube channels like Damien Talks Money. Right now there's a new wave of companies offering share trading services, supporting tax-efficient wrappers such as SIPPs and ISAs, competing for your business with very low fees and lots of shiny services. Go for it!
And, as an engineer, I find the mechanisms of a market fascinating. Through regulations, a marketplace has been created where competing parties can, motivated purely by greed and without trusting each other, push money from people who have it spare to people who can do something with it. Market forces set an asset's price at this funky weighted average of its expected future value, in real time. Clever people and algorithms that spot assets whose price is wrong will buy under-priced things and sell or short over-priced things, pushing the prices back towards reality; and those who succeed in this earn a profit from it, creating evolutionary pressure for cleverer people and better algorithms to succeed. It's amazing when it works, but like all powerful technology, the consequences can be awesome or awful - when things like monopolies emerge, the mechanisms of the market break down. It's down to us, the humans partaking in the system, to form it to our will and make it have the outcomes we want.
I had hoped that, when cryptocurrency technology bloomed onto the scene a few years back, the fact it enabled computers to hold and transfer money easily would mean we'd see a wave of peer-to-peer trading systems, where we could sell spare bandwidth/storage space/computing power to each other on second-by-second bases, micropay content creators when we watched their videos, and so on. But, that world was taken over by the senselessly greedy, who used these new assets purely as a thing to speculate on the value of, pulling attention away from developing actual services to use them.
We can't make that mistake again; markets should be places where actual value changes hands, with money just being a unit of account and a tool to transact with.
Cryptocurrency, Society | alaric | 
Tue 8th Oct 2024 5:25 pm
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