The Public's Influence on Stock Markets
An introduction to what the stock market is, and how you fit into the definition of 'the public'
It would be easy to make the throw-away comment that the disparate size and power of the stock markets and most of the companies which trade on them compared to individual members of the public means there is little chance of the latter influencing the former. However, as with life, first impressions are not always completely correct.
To get a fuller picture, we need to look at what a stock market is, who is included in the term 'public' and what constitutes influence between the two. These areas of investigation can also be coupled with technological innovation that suggests not all is as the traditional models would have us believe.
The statement above suggests 'stock markets' are single behemoth, whilst individuals are small islands with no connections or communications between them, neither picture is strictly true. For the stock markets, rather than being a single beast, a better analogy would be that they resemble a coral, with the different global stock markets equating to individual corals anchored to a bedrock of finance. Such corals, when placed in proximity to each other, cooperate to form a reef supporting its own ecosystem just as the stock markets support enterprise and investment.
When we watch David Attenborough’s Blue Planet and he is looking at individual corals, what we the viewers see as one entity is, in fact, colonies of individual entities which make up individual coral. This is also the case with stock markets where separate listed companies work in a framework to form a stock market. Some of the companies in the stock markets will be very large but not all. The individual coral (a stock market) and the reef (the finance industry with all its associated participants) are then open to influence by external factors just as a reef is. Such external factors for a stock market will include the public, with each stock market reacting to external factors according to its own circumstances and characteristics
If we now think about influence, we find the dictionary definition sheds some light on this idea, noting that influence includes having power, including moral power, over another. This power is perceptible only by its effects. What power could the public have which would influence companies on a stock market?
In a stock market, an effect a company is concerned about is the fall of its share price, which can be considered its life blood and is based on the supply and demand for its shares. The idea of a company being concerned about a fall in its share price can be confusing when initially studying the financial markets, as once the company has issued shares via a share issue into the primary market then it will physically receive no further direct cash from share price increases or be expected to give cash to investors where there are share price falls. Rather, those investors who first bought the shares or buy the shares on the secondary market will gain or lose from capital gains or losses as share prices move.
Why is the company concerned? Well going back to reef analogy, financiers and investors circle the companies (the corals) looking for investments which will bring them a financial gain from an increasing share price (capital gain) and/or dividends (income). No shareholder wants to invest in a company which will return a loss.
As well as leading to falling share prices, there will also be an effect on the company’s ability to raise more finance BY either equity (from existing shareholders) or debt as providers are likely to be concerned that falling share prices are a sign of deep-rooted problems which may result in insufficient cashflows being available to repay loans or provide income and capital gains. In fact, to be successful a company must show the market that it can produce ever higher future cashflows. This is because the value of shares is calculated by individual investors based on the value of future cashflows, which are then discounted to today's value based on the investors perception of risk in the investment. Once calculated, this gives the investor a maximum value they place on the share. If they can then buy the share below that figure or sell above that figure they will consider the transaction a success.
What investors are willing to pay for a share affects the supply and demand for the shares which in turn influences prices in the real world. Effectively, when we talk about influence we are talking about the ability to affect share prices and, in turn, the ability of the firm to continue to trade in the long term by attracting enough funding and producing positive cashflows.
In respect of the public or individual when you start to break down the use of the word, things become more interesting. Who or what is the 'public'? Dictionary definitions of the public talk about 'concerning the people as a whole', so can people or communities 'as a whole' affect stock markets? Bearing in mind the sheer numbers of individuals in the world shouldn't this be possible?
However, one of the fundamental problems we have alluded to is that individual members of the public are by their very nature individuals, and one individual pitting themselves against a large company appears very unlikely to succeed in influencing anything. However, this idea of David the individual shareholder battling the Company Goliath has become increasingly outdated due to several developments over the last three decades.
Increasing connectivity through communications technology
There has been an exponential rise in the level of communication and social media comment in the 21st century. Individual investors in Perth and Penzance can speak virtually in real time (Perth, Australia not Scotland) as we are working in a global context. So, if that level of communication and common interest is focused and structured around an aim or idea, what might it be possible to achieve?
Increase in the level of analysis available
Coupled with the increasing ease of global communication, we have seen a concurrent rise in the level of available analysis on individual companies, stock markets, stock trends, investing strategies – the list is endless. Individual investors now have far greater information than ever before, allowing them to make better decisions.
The rise of activist and institutional investors
Here we have seen several levels of activism, from the activist hedge funds run by investors such as Carl Ichan looking to make strategic changes to management and strategy, to individual or groups of investors looking to amend corporate pay. I can hear readers berating me as I type: 'These people aren’t the public; how can they be relevant'?
The investors often making the representations to companies may well be institutional investors representing their members. However, those members are the public, as the institutional investors are not only banks but also insurance companies, pension and mutual funds, to name a few. As individuals we are (or should) all be investing in such funds either through employer pension schemes, personal pension plans, insuring assets or planning for our future by using investments.
Due to sheer volume of investors, the individual choices we each make about where we invest could affect the stock market. If we decide we wish to invest in one company but not in another due to their investment strategies, then the major investors will look to change their investing strategy so that they do not lose business. What may be theoretically possible may not happen in practice. In fact, most indirect investors and even those who actively buy specific mutual funds will often not be aware of specifically where their money is invested.
There has, however, been a rise in ethical and green investing and also in Islamic finance where investment types are bound by pre-set rules, but on the whole, we have yet to see investors rising up to influence firms in mass activism.
The power of consumers
As VW found out following its emission scandal in 2015, the consumer can vote with their feet and whilst there has since the scandal been an increase in sales as memories fade, the initial effect on the share price was substantial.
Changes in director and management reward
The small number of people who have strategic and management power in listed companies are also members of the public, i.e. they are part of the community as well as doing their 'day job'. Historically, director and management rewards concentrated around cash. However, in a bid to decrease short-termism in decision making and agency problems, there has been a move to increase the use of rewards linked to share price through having partial payment in shares or share options. In this case, even where it is potential only for the period they work for the company, as individuals they watch and influence share prices.
Overall, despite the first thoughts about disparity in size, there are ways in which the public can influence the stock market. Such influence remains today in the hands of relatively few members of the public but, with increasing levels of communication, ever increasing levels of analysis available to investors, an increasing consumer awareness of ethical investing and corporate social responsibility and the ability to influence by the power of their invested funds, it is likely this influence will grow in the future.