The last few decades have seen a remarkable explosion in the different types of securities that are tradeable on the world’s financial markets.
These days you can buy shares on an instalment plan, buy and sell future shares in the present, and even sell shares that you don’t own, that belong to other people.
We can only wonder at the extraordinary ingenuity of the financial engineers who dreamed up these instruments. But these are the same geniuses who also gave us the CDOs - opaque, pooled streams of mortgage income that nearly wrecked the entire world financial system.
One of the things that all these instruments have in common is that none of them generate any more capital for the companies who ultimately produce all of the value that underpins them.
So what about developing a new type of security that would generate a continuous stream of capital for companies? At the moment, companies make an issue of new shares, and receive an influx of new capital on a once-only basis when they first sell these shares to the public. But once these shares enter the second-hand market, aka share market, companies no longer benefit from them being sold, even though they may be sold hundreds, or even thousands of times again, in some cases at 100 times their original value.
This is a little reminiscent of the art market, where artists benefit from selling their paintings to the first buyer, but have traditionally received nothing when the paintings are resold years later, perhaps for hundreds of thousands of dollars or more. If Van Gogh were still around, he would still be a pauper.
In Australia we have seen the obscene spectacle of Indigenous art being sold at these types of prices while the artists barely have enough food to eat.
It was for these reasons that many countries have now introduced resale royalties for art, in which a small surcharge on the resale price is returned to the artist, who, after all, is the original creator of all the value that everyone receives from the painting.
What about applying the same type of system to shares? Companies too are the creators of all the value, and also the added value, that accrues to shares. Shares only appreciate in value if the company is successful and the amount of profit per share increases. Consequently, shares are usually valued at a certain multiple of the earnings per share.
Why shouldn’t BHP Billiton or Westpac get, say, 1 per cent of the resale price of every BHP or Westpac share that is sold on the stock market? This would give them a tidy amount of extra capital to plough into expanding their operations, and therefore creating additional value. And the beauty of it is that they could obtain this extra capital at effectively no cost, and because they would not have to issue additional shares, they would not be diluting the returns that each shareholder can get in the short term (i.e. before the increased productivity flows through the pipeline).
On any given day, 15 million BHP shares might change hands on the Australian Stock Exchange, at say $30 per share (less at the depressed prices in the current downturn). At the rate of 1 per cent per share, this could generate $4.5 million in additional capital for BHP in one day’s trading.
Of course other companies have lower share prices, and would thus generate lower amounts of extra capital. I know of another mining company, Admiralty Resources, that has fallen on hard times and had to sell its most valuable asset (a salt lake rich in lithium) to survive, because it couldn’t raise the money to develop it.
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