Author Topic: Does an index fund include IPOs?  (Read 1928 times)

APowers

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Does an index fund include IPOs?
« on: February 20, 2017, 07:09:22 AM »
My mother is entirely averse to putting any money into the stock market. Her stated main concern is that she doesn't want to be "supporting" companies that are engaged in moral wrongdoing.

It's my understanding though, that when you buy/sell stock in the market, you're doing so second-hand-- i.e., to some other individual and no money ends up going to the company whose stock is being traded. That it's akin to buying something in a thrift store or on craigslist, where no portion of the money that changes hands goes back to the original manufacturer.

The exception to this would be an IPO, of course. (Are there other exceptions?) But does an index fund like VTSAX include purchases of IPOs?

NorCal

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Re: Does an index fund include IPOs?
« Reply #1 on: February 20, 2017, 08:02:11 AM »
I would be incredibly surprised if VTSAX included IPO's.  Any S&P 500 fund will NOT include IPO's, as these focus on the largest companies.  Passive funds are a rule are unlikely to buy into IPO's, since the index's they track are based on already-public companies.

There is one exception to your statement, and that is Secondary Offerings.  These are already-public companies selling new shares to the public.  This is pretty rare though.  The only routine instances I'm aware of are small biotech companies without much earnings (these won't be in an S&P index funds). 

I also believe some of the largest banks were forced to do secondary offerings during the financial crisis as a way of increasing capital cushions.  Transactions like this WOULD happen in most index funds.  Of course, you would have no way of knowing whether your fund participated in the offering, or bought shares in the secondary market.  But this is so rare that I would consider it immaterial to the investment.

Heckler

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Re: Does an index fund include IPOs?
« Reply #2 on: February 20, 2017, 08:44:29 AM »
What does an IPO have to do with moral wrongdoing?

APowers

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Re: Does an index fund include IPOs?
« Reply #3 on: February 20, 2017, 08:57:30 AM »
What does an IPO have to do with moral wrongdoing?

Basically, an IPO is a way for a company to raise funds and expand business (assuming I understand this correctly). If I buy shares in an IPO, my money goes to become some of the capital that the company uses to engage in its business. IF that company is in a business I think is morally wrong (e.g., abortion, eugenics, politics, war, etc), then in some more-or-less direct way, my purchase/contribution has helped support that.

I would be incredibly surprised if VTSAX included IPO's.  Any S&P 500 fund will NOT include IPO's, as these focus on the largest companies.  Passive funds as a rule are unlikely to buy into IPO's, since the index's they track are based on already-public companies.

There is one exception to your statement, and that is Secondary Offerings.  These are already-public companies selling new shares to the public.  This is pretty rare though.  The only routine instances I'm aware of are small biotech companies without much earnings (these won't be in an S&P index funds). 

I also believe some of the largest banks were forced to do secondary offerings during the financial crisis as a way of increasing capital cushions.  Transactions like this WOULD happen in most index funds.  Of course, you would have no way of knowing whether your fund participated in the offering, or bought shares in the secondary market.  But this is so rare that I would consider it immaterial to the investment.
Thanks! I didn't think about secondary offerings.

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Re: Does an index fund include IPOs?
« Reply #4 on: February 20, 2017, 09:09:46 AM »
What does an IPO have to do with moral wrongdoing?

Basically, an IPO is a way for a company to raise funds and expand business (assuming I understand this correctly). If I buy shares in an IPO, my money goes to become some of the capital that the company uses to engage in its business. IF that company is in a business I think is morally wrong (e.g., abortion, eugenics, politics, war, etc), then in some more-or-less direct way, my purchase/contribution has helped support that.


Owning stock makes you a shareholder of the company. Regardless of who you bought it from, buying it supports the company.

There are often "social choice" funds that may or may not meet your criteria. They generally have higher fees.  But if you buy index funds, you are supporting every company in the index.

APowers

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Re: Does an index fund include IPOs?
« Reply #5 on: February 20, 2017, 07:27:20 PM »
What does an IPO have to do with moral wrongdoing?

Basically, an IPO is a way for a company to raise funds and expand business (assuming I understand this correctly). If I buy shares in an IPO, my money goes to become some of the capital that the company uses to engage in its business. IF that company is in a business I think is morally wrong (e.g., abortion, eugenics, politics, war, etc), then in some more-or-less direct way, my purchase/contribution has helped support that.


Owning stock makes you a shareholder of the company. Regardless of who you bought it from, buying it supports the company.

[snip]
In what way does my ownership of shares provide support to the company?

aschmidt2930

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Re: Does an index fund include IPOs?
« Reply #6 on: February 20, 2017, 08:14:02 PM »
What does an IPO have to do with moral wrongdoing?

Basically, an IPO is a way for a company to raise funds and expand business (assuming I understand this correctly). If I buy shares in an IPO, my money goes to become some of the capital that the company uses to engage in its business. IF that company is in a business I think is morally wrong (e.g., abortion, eugenics, politics, war, etc), then in some more-or-less direct way, my purchase/contribution has helped support that.


Owning stock makes you a shareholder of the company. Regardless of who you bought it from, buying it supports the company.

[snip]
In what way does my ownership of shares provide support to the company?

Where do you think the money you pay for the shares goes?

To the company...

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Re: Does an index fund include IPOs?
« Reply #7 on: February 20, 2017, 08:53:35 PM »
What does an IPO have to do with moral wrongdoing?

Basically, an IPO is a way for a company to raise funds and expand business (assuming I understand this correctly). If I buy shares in an IPO, my money goes to become some of the capital that the company uses to engage in its business. IF that company is in a business I think is morally wrong (e.g., abortion, eugenics, politics, war, etc), then in some more-or-less direct way, my purchase/contribution has helped support that.


Owning stock makes you a shareholder of the company. Regardless of who you bought it from, buying it supports the company.

[snip]
In what way does my ownership of shares provide support to the company?

For one, Your ownership raises the stock price which allows them to seek more capital based on being successful.

You are an owner of the company, and have a vested interest in their success. do you think it is ethical to profit against something you see as morally wrong? Would you want a company you have ownership in to do poorly?

aspiringnomad

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Re: Does an index fund include IPOs?
« Reply #8 on: February 20, 2017, 09:38:20 PM »
What does an IPO have to do with moral wrongdoing?

Basically, an IPO is a way for a company to raise funds and expand business (assuming I understand this correctly). If I buy shares in an IPO, my money goes to become some of the capital that the company uses to engage in its business. IF that company is in a business I think is morally wrong (e.g., abortion, eugenics, politics, war, etc), then in some more-or-less direct way, my purchase/contribution has helped support that.


Owning stock makes you a shareholder of the company. Regardless of who you bought it from, buying it supports the company.

[snip]
In what way does my ownership of shares provide support to the company?

Where do you think the money you pay for the shares goes?

To the company...

Nope, not generally. Only in a public offering (initial or otherwise) is this the case. Post-IPO, shares are traded on the secondary market, where your money goes to the person selling the shares, not the company. But buying and holding stock does very indirectly support the company's capital base by adding ever so minimally to demand for shares available for sale on the secondary market - and share price relative to book value is sometimes a factor in whether a company will decide to raise additional capital through new equity issuance.