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Until now I've avoided sin stock, such as tobacco, for the typical "moral reasons" (define those as you will), in particular in order to avoid raising their value as a company by creating demand (even if it is a drop in the ocean).

However, this article, in its 2nd point argues:

By refusing to buy a tobacco stock, you are theoretically lowering the price of the stock by decreasing the demand. If millions of Americans share your attitude, you can lower the price of the stock [...]

What happens then? Even if there were no hedge-fund that would buy the cheap stock, the article argues that the company itself can engage in better-value-for-money stock buyback.

So does it really matter to avoid (existing, already issued) sin stocks?

Edit: It is different from "Ethics and investment" question as that one is discussed broad investment strategies with ethics, however mine is "how exactly do I support unethical business by trading their shares and does it have any real impact?"

  • Possible duplicate of Ethics and investment – Nathan L Mar 29 '17 at 13:18
  • @Grade-eh-bacon 's answer implies he believes the question is different from the linked one. My gut was to agree with Nathan, but give some time to see if there was a twist that was different enough to support this as a new question. – JoeTaxpayer Mar 29 '17 at 14:13
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    If anything, I think that my question overlaps more with "why would a company care about the price of its own shares": money.stackexchange.com/questions/7800/… (but I still see it different enough) – Andrejs Mar 29 '17 at 19:46
  • "Does it make a difference?" Maybe not to anyone in the world but your own self. If you can't force them out of business, is the only alternative to go ahead and collect your share of their profit? Or is there in fact a whole different reason to divest. – Beanluc Mar 16 '18 at 21:26
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Yes, it does matter. You are right that lower demand for a stock will drive its price down. Lower stock prices can hurt the company. Take a look at Fixee's answer to this question:

a declining share price will make it hard to secure credit, attract further investors, build partnerships, etc. Also, employees are often holding options or in a stock purchase plan, so a declining share price can severely dampen morale.

In an extreme case, if share prices plummet too far, the company can be pressured to reverse-split the shares, and (eventually) take the company private. This recently happened to Playboy.

If you do not want to support a company, for whatever reason, then it is wise to avoid their stock.

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    I knew there was a catch! good answer! – Andrejs Mar 29 '17 at 12:14
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    @Andrey I'm glad you think so! if this was helpful to you, then you may wish to upvote Fixee's original answer – Nosrac Mar 29 '17 at 12:18
  • Also note there's a good number of "Socially Responsible Mutual Funds" available these days that avoid things like alcohol, tobacco, poor working conditions (sweatshops), etc. – Ogre Psalm33 Mar 29 '17 at 13:49
  • To be fair, not buying a stock would not affect the share price in the slightest, but you are right that buying stock does support the company, but only marginally. – D Stanley Mar 29 '17 at 13:49
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    @DStanley And conversely, from an individual's perspective, if I never hear of, buy, or sell a stock it's reasonable to think that I have no impact on it. – Nosrac Mar 29 '17 at 14:12
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This question drives at what value a shareholder actually provides to a corporation, and by extent, to the economy.

If you subscribe for new shares (like in an Initial Public Offering), it is very straightforward to say "I have provided capital to the corporation, which it is using to advance its business." If you buy shares that already exist (like in a typical share purchase on a public exchange), your money doesn't go to the company. Instead, it goes to someone who paid someone who paid someone who paid someone (etc.) who originally contributed money to the corporation.

In theory, the value of a share price does not directly impact the operation of the company itself, apart from what @DanielCarson aptly noted (employee stock options are affected by share price, impacting morale, etc.). This is because in theory, the true value of a company (and thus, the value of a share) is the present value of all future cashflows (dividends + final liquidation). This means that in a technical sense, a company's share price should result from the company's value. The company's true value does not result from the share price.

But what you are doing as a shareholder is impacting the liquidity available to other potential investors (also as mentioned by @DanielCarson, in reference to the desirability for future financing). The more people who invest their money in the stock market, the more liquid those stocks become. This is the true value you add to the economy by investing in stocks - you add liquidity to the market, decreasing the risk of capital investment generally.

The fewer people there are who are willing to invest in a particular company, the harder it is for an investor to buy or sell shares at will. If it is difficult to sell shares in a company, the risk of holding shares in that company is higher, because you can't "cash out" as easily. This increased risk then does change the value of the shares - because even though the corporation's internal value is the same, the projected cashflows of the shares themselves now has a question mark around the ability to sell when desired.

Whether this actually has an impact on anything depends on how many people join you in your declaration of ethical investing. Like many other forms of social activism, success relies on joint effort. This goes beyond the direct and indirect impacts mentioned above; if 'ethical investing' becomes more pronounced, it may begin to stigmatize the target companies (fewer people wanting to work for 'blacklist' corporations, fewer people buying their products, etc.).

  • Plot twist then: does it make "ethical sense" to buy & hold a sin stock (thus very passive as a liquidity provider) and then e.g. give away part of dividend to charity? Is it "better" than not buying at all? – Andrejs Mar 29 '17 at 19:36
  • @Andrey By buying a stock, you are adding liquidity to that stock, at a point in time. By committing to never buy it, you are reducing the pool of available investor capital for that company. By buying and holding it, you have still reduced that corporation's "need" for capital, by the amount that you are holding. Imagine a $1M company. You buy $100k of stock, meaning now the rest of the investing world only needs to cough up $900k to own it. You're left in a position where you profit off something you find unethical. It is the social aspect of blacklisting a company that has a bigger impact. – Grade 'Eh' Bacon Mar 29 '17 at 20:46
  • does this apply to ipo or to existing shares as well? – Andrejs Mar 29 '17 at 21:14
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    @Andrey It applies to existing shares as well. By buying and holding stock, you are reducing the need for additional liquidity for the other shareholders of that company. But again, the true benefit in such action is more in the promotion of social justice through visible means. Making your voice be heard, and standing up against what you find unethical, by refusing to profit from it. – Grade 'Eh' Bacon Mar 30 '17 at 12:43
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Your question is, "how exactly do I support unethical business by trading their shares and does it have any real impact?"

By trading their shares, you're owning their shares. By owning their shares, you're complicit in their activities.

It's true that their are sin-stock activists who genuinely hope to force these businesses to change, but, many investors don't expect their refusal to participate in an exploitative, objectionable business to change anything but their own individual moral condition.

With that in mind, absolutely, yes, it makes a difference.

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