The October 1987 stock market crash, with its almost 25 percent drop in share prices in one day, brought starkly to the fore the risky nature of investing in "the market". With news of major losses screaming out from newspaper headlines, the stock market attracted the attention of even the least financially inclined. As Christians, committed to do everything in the name of the Lord Jesus, our first reac­tion is likely to be, "That just proves it; the stock market is just legalized gambling; keep away!" Such an automatic reaction would, however, be wrong.

To help decide whether or not a Christian is justified in participating in the stock market, this article addressed two questions. First, can we invest on a "limited liability" basis? Secondly, is the degree of risk involved in the stock market of such a nature that par­ticipants are in fact, gambling?

The "Limited Liability Corporation"?⤒🔗

The underlying reason for the ex­istence of the stock market is the limited liability corporation — original­ly called the joint-stock company. As business enterprises became more com­plex and needed increasing amounts of capital to operate, this organizational form was devised to allow a large number of investors to become part owners of a business without being in­volved in its daily operations. The stock market is merely a means for buying and selling these part-ownerships or shares in a corporation.

Creditors, who lend money or goods to a company, are legally entitled to repayment of their loans at specified times - frequently with in­terest. The company is liable for these debts whether or not it makes a profit. Part-owners or shareholders of a cor­poration, however, are legally entitled to a return of their investment only if the business is wound up and then on­ly if there is any money left after all debts have been paid. Of course, the corporation may pay regular dividends to its shareholder; these payments, however, are discretionary and normal­ly paid only if the company is profit­able.

If an unincorporated business runs into difficulty and is unable to pay its debts, the owner or partners are legally liable to pay these debts from their own private resources. All savings, their houses etc. may be lost. Since they can take an active part in managing the company, such "unlimited" liability is not unreasonable. However, as the number of owners increase, it becomes impossible to allow all of them a say in management. But, without such in­volvement, many potential new owners are reluctant to risk all they have (unlimited future liability) to obtain only a partial interest in the company. Thus, the size of business enterprises remained severely constrained until the "limited liability" corporation was legally established. Shareholders of a corporation are "limited in their liabili­ty" to the amount they have originally invested. They may lose this specific in­vestment; they, unlike the small, unin­corporated business owner, do not risk all they own.

Although it does have negative im­plications, the introduction of limited liability has been a boon to our socie­ty. Without this way of separating ownership from management it is unlikely that society as we know it would exist. The industrialization and job-creating growth that has been ex­perienced in our free-enterprise economies would unlikely have occur­red — at least to the extent we know it.

Concerns?←⤒🔗

Nevertheless, Christians have had, and rightly so, significant concerns about using incorporation as a legal device to escape from their debts. To show that Christians may incorporate their businesses would require a separate article. Let me merely observe that it now appears to be quite general­ly accepted among us. Personally, I think that, unless one incorporates with the intent to defraud or to engage in ventures that are so risky that you would not do so without incorpora­tion, this legal form is permissible.

However, if you believe that a Christian should not incorporate, it logically follows that you should also not buy shares in a corporation; by buying shares you also accept the benefits of limited liability. If such a stand is necessary, consistency demands also that you take a close look at your pension and registered retirement savings plans. Many of us, indirectly, hold company shares through such plans.

Personally, I do not think such drastic action is required. However, I do believe that we do not limit our responsibilities when we buy shares in corporations. We are accountable for the actions taken by the companies in which we invest. Therefore, our choice of shares must be restricted to those of companies who, as far as we are aware, do not act against Biblical principles. As a minimum, this condition requires personal involvement and study of our investment choices. Not for us, investment based on an uninformed tip!

The Stock Market←⤒🔗

If then, the purchase of shares in a corporation need not be rejected as such, we can proceed to discuss in more detail the nature of the "market". Capital markets are an essential part of a free-enterprise system. Somehow, the cash that individuals set aside for retirement (directly or through pension funds etc.) or to purchase larger items in the future, must be invested in new plants and equipment, in new produc­tive resources. Cash stashed under the bed is not only subject to theft but also sterile, unproductive. The stock market performs a necessary role as one means of putting savings into productive use. Its participants thus indirectly may assist businesses in developing the world resources as good stewardship demands of us.

In reality, the stock market is not, of course, one general market in which all company shares are traded. Shares are traded both "over-the-counter", that is, among many stockbrokers directly, or on one of the formal "stock exchanges", e.g., in Toronto, Montreal, New York, where specifically listed stocks are traded. In all cases, an in­dividual will buy or sell through a broker who will "execute" the trade.

We should also distinguish be­tween the "original issue" market and the "secondary" market. The first refers to the selling of new shares by a corporation to investment dealers or "underwriters" who arrange the sale to the final investors. The money paid by the investor goes to the corporation where it can be used for productive purposes. It is this primary market that makes it possible for corporations to raise the necessary capital. An efficient market makes it possible to raise funds speedily and at relatively low cost. If it did not exist, all corporations wishing to sell more shares would have to eat the bushes and find buyers for their own shares. How costly, inefficient, unstewardly that would be!

The shares traded on the stock ex­changes and most of those traded "over the counter", however, make up the secondary market. The term refers to the buying and selling of old shares — those previously sold by the companies. Although the money exchanged when these shares are traded between in­dividuals and institutions does not enter the coffers of the corporation whose shares are traded, this secondary market is an essential complement to the primary market. It provides an opportunity for buyers to sell their shares.

If investors had to hold their shares until the issuing company chooses to liquidate itself or they were able to find an acquaintance to buy them, how many shares would they be likely to buy? By providing a market place to allow one to sell shares virtual­ly whenever one chooses, the secondary market provides "liquidity" and makes share-buying possible for many people or institutions that would otherwise not be able to invest. Money set aside for retirement, for example, could not be invested in shares because eventual­ly that money will need to be available to live on. By expanding the size of the market for shares (increasing demand) the secondary market makes it possible for companies to raise significantly more capital, at a lower cost, than would otherwise be possible. Thus both "markets" provide an essential func­tion in our free-enterprise economy.

Gambling←⤒🔗

The stock market, therefore, is not a gambling den by nature. Nevertheless, we must ask the question, "Is it possi­ble to gamble on the market?" or "Is the purchase of a share, in spite of the beneficial aspect of such a transaction, in the nature of a gamble? After all, we Christians of Reformed background still frown on gambling, do we not?

Richard Chewning, Professor of Business, at Baylor University, Texas, in a 1984 article in the Presbyterian Jour­nal presented some very useful distinc­tions between gambling, speculating and investing. Gambling according to Chewning, is an "all-or-nothing" risk. For instance, when you buy a lottery ticket you either win the prize or you lose everything you have spent. In this sense, the normal purchase of a share is not a gamble. When you buy a share, you will, on average, be able to sell your share eventually for more than you paid for it. You may have to sell for less and lose part of your investment. On­ly rarely does a company go bankrupt leaving the shareholder with a total loss; generally, you do not lose everything.

There are ways of "playing the market" that approach gambling, i.e., options and futures. However, in some circumstances, even these instruments can be properly used as "hedges" — a form of insurance to reduce risk. Nor­mal buying and selling of shares is not a gamble.

Speculating←⤒🔗

On the other hand, speculating is a normal activity on the stock market. As defined by Chewning, speculation is "the buying and selling of a security with an eye to making a capital gain that is based on market fluctuations not associated with the company's earn­ings and dividends". That is, specula­tors buy stocks which they expect to go up in price fairly quickly at which time they intend to bail out. They buy stocks which are "underpriced" in the hope that they will become popular or be­cause they expect favorable news to come out shortly, e.g., announcement of mergers or oil discoveries.

Speculation also relates to the na­ture of the company whose shares are bought. Harry Bregman of Gordon-Daly Grenadier Securities, in a newslet­ter recently defined two types of specu­lations. "Seasoned speculations" are "shares of established companies listed on the major stock exchanges, whose condition is precarious and whose fu­ture earnings may range from heavy losses to exceptional profits". They may, for instance, be in commodity-oriented businesses, where a small swing in product prices could mean huge changes in profits. Share prices can swing by over 100% in a year. "Junior speculative" issues, even more risky, are those of companies that are usually new, have no record of previous earnings or dividends and are not listed on a senior stock exchange.

I am unable to present a clear, un­ambiguous Christian view about spec­ulation. On the one hand, let me sug­gest, that for the average Christian investor such speculation should be avoided. Many such short-term oriented transactions are likely to be greed in­duced — based on the "something for nothing" philosophy. Moreover, for someone not close to the market on a daily basis such action is likely to be financially disastrous in the long run since he is unlikely to be able to beat the professional.

On the other hand, the profession­al speculator carries out an essential role in the market. For instance, while buying when others are selling, the spec­ulator may reduce rapid price changes and promote an orderly market. Some traders provide this service as official "market makers".

In searching out and buying "un­dervalued" shares, speculators also en­sure that the benefits of an efficient market are available to many companies — not just a small minority which are presently in fashion. They ensure that shares of equal potential return and equal risk trade roughly at the same price.

While professional speculators may, of course, also be carried away by greed, their basic function requires a lot of skill and effort. For those who have these skills and put in the effort, these activities may well be permissible from a Christian point of view.

Moreover, normally, such activities would not be an investment of all avail­able funds in one "speculation". Rath­er, it will involve a carefully balancing of risks among diversified transactions. Thus, while individual transactions may be very risky, the overall combina­tion of investments may be much less so.

In addition, speculation does not occur only on the stock market. Most businesses will from time to time buy in larger quantities because the price is ex­pected to go up. Many farmers will hold their crops for a period of time in the hope of better prices later. Are these astute business practices also to be rejected?

In the final analysis, many trans­actions are speculative to varying de­grees. As a minimum, Christians must carefully review their motives, the cir­cumstances of the transaction and the available information before involving themselves. The "opportunity" to make a quick killing based on limited infor­mation should be rejected.

Investing←⤒🔗

Investing, according to Chewning, is quite different. Instead of seeking to gain from a short-term increase in the price of a share, investors purchase shares for the longer run. They study company, industry and general economic information to choose com­panies that are expected to be prof­itable in the long run. By buying shares of such companies, they hope to profit in the form of regular dividends and/or eventual gain when the shares are sold. The expected increase in the share price is linked to the underlying growth in the company — not to some short-term temporary circumstance.

Investing of this type would prob­ably be restricted to what Harry Bregman refers as "conservative issues" — shares of well-established companies with a high level of current earnings or liquid assets. They pay dividends, and their share prices, while subject to variations over time, are rarely subject to violent changes.

In my view, this kind of participa­tion in the stock market is quite accept­able for a Christian. In fact, since the long-term return on shares has been higher than that on fixed-income in­vestments — savings accounts, guaranteed investment certificates and bonds, investing a reasonable portion of one's assets "in the market" may well be a stewardly action. Such invest­ment, in carefully chosen stocks may also indirectly, since it enables produc­tive investment by businesses, con­tribute to the better development of the world's resources to the glory of God. As such, we can invest "in the name of the Lord".

Let me caution immediately, however, that such action entails risk — as the October crash has once again impressed on us. It should not be undertaken without a lot of knowledge. This article is not a recommendation for anyone to invest in the market.

Rather, I have attempted to pro­vide a personal answer to the question, "May a Christian invest in the stock market?" My answer is a guarded "yes". The stock market is an essential element of our free-enterprise economy. It is not a gambling den, although it is possible to use the market to speculate in an unacceptable way. Responsible investing for the longer term can, I think, be done "in the name of the Lord". But, as Chewning con­cludes, "If you decide to buy common stock, use the best mental faculties God gave you. But remember, God does not guarantee His children success in the stock market".