Homework Help

How would the market be affected if corporations stop investing in securities? 

user profile pic

stavia03 | Student, Undergraduate | Honors

Posted August 25, 2012 at 2:56 AM via web

dislike 2 like

How would the market be affected if corporations stop investing in securities? 

2 Answers | Add Yours

user profile pic

Lorraine Caplan | College Teacher | (Level 2) Senior Educator

Posted August 25, 2012 at 3:19 PM (Answer #1)

dislike 1 like

The United States has as investors in securities business, government, households, and, what might be considered as a separate category, pensions and mutual funds and other institutional investors.  If corporations handling their own securities investments did not invest in securities, the stock market would not collapse since households have historically been the significant source of investment in the market, either directly or indirectly.  However, in times of recession, when households have less to invest, withdrawal of corporate investment would probably make the stock market far more sluggish. 

The flip side of this, of course, is what would happen to corporations if they did not invest in securities.  Corporations cannot afford to let money lay fallow, so it is interesting to speculate about what they would do if securities investment were not one of their choices.  They might do more capital investment, which could have a stimulative effect upon the economy.  Of course, capital investment is risky, so it's entirely possible that corporations would invest in bonds or hold their money in money markets, and there is some evidence to suggest that many corporations are, in fact, doing so now. 

Sources:

user profile pic

portd | (Level 3) Associate Educator

Posted September 1, 2012 at 1:20 AM (Answer #2)

dislike 1 like

If corporations stopped investing in securities it would have somewhat of an effect on the capital markets. However, as alluded to in Post #1 it would not have a disastrous effect on the stock market because of the significant investing done by governments of all levels, mutual funds, hedge funds, pension funds, groups of individuals (private investment clubs and such) and sole individual investors, who make up, combined, a big piece of the investor pie. According to a Gallup Poll survey published on April 11, 2011, 54 percent of Americans have investments in individual stocks. This picture changes significantly, though, if corporations handle their securities investments through management companies, pension funds, hedge funds and mutual funds.

That being said, corporations do make use of their cash reserves by investing in stocks so as to gain a good Return On Investment (ROI) as compared to letting their cash sit in the bank. In addition, they buy stock in companies that they deem of value and innovative, whereby they gain the benefit of ROI, without actually having any control of the business they invest in or any responsibilities as concerns their day-to-day operations. In essence, they are trying to take advantage of the crest of popularity (jumping on the bandwagon so-to-speak) that a particular company outside their industry may be experiencing. They are also looking for substantial long-term growth in many cases.

There is a third component though of corporations investing in the stock market. They may be engaging in a hostile takeover of a company, or a friendly takeover, through acquiring a majority of said company's shares. They're investing in the market and trying to take majority ownership at the same time. Therefore, they will have control and will make day-to-day operational decisions, or assign an entity to operate the "taken over" firm for them.

A minority of business investment in common stock is for gaining control of a company to realize the benefits of increased cash flow, profits, or any other benefits tangible and intangible. Most corporations invest in the common stock of other companies to gain value from stock price appreciation and dividends. In addition, there exist corporations whose sole business objective is to hold shares of companies listed on the equity markets.

Again, there will be some effect on the market if corporations withdraw their investing initiatives. For example, as shown on Bloomberg Businessweek: Markets $ Finance enterprises invest in other enterprises for a host of reasons. For example, they invest in companies that provide raw materials and other products to them. They are investing in their supply chain to keep it robust and flourishing. Therefore, this investing helps them keep the company that supplies them strong, and it still gives the investing company an ROI through the basic investing they are doing.

Recently, Time Warner's Turner Broadcasting division invested in (bought) the Bleacher Report website in order to boost their on-line sports coverage. Consequently, the markets in general, and specific companies in particular are affected when corporations do not undertake stock investing activities.

Sources:

Join to answer this question

Join a community of thousands of dedicated teachers and students.

Join eNotes