Is it ethical to invest in the stock market? For most stock investors, this might be a question that never crossed their minds. Putting your money in stocks has become such a common and almost standard way of investment, people would hardly relate it to “ethics”.
Even when ethics is brought into the discussion on the stock market, what does “ethics” even mean? Does that refer to companies that are somehow breaking the law? Is that something that can be traced to a set of Bible verses? Is the stock market evil because it promotes capitalism?
Regardless of its exact meaning, ethics can still play an important role in how investors choose which stocks or funds to purchase. In this post, I’ll introduce some ideas to help get your gears turning so that you can make a better informed decision on whether or not investing in the stock market is ethical.
To answer the question in a few sentences: Yes it is ethical to invest in the stock market if you choose to do so ethically. But, it’s up to you to decide what moral, ethical, or religious principles will guide your investment decisions. There are mutual funds and other research tools out there that can help you find selections of stocks that align to your ethical principles.
What does “ethical” mean?
Ethics is always a huge and very subjective topic in any subject, and I’m not planning to publish an overpriced college textbook on investing ethics. I said that as a joke, but later found out (unsurprisingly) that there actually is an entire book written about this. I guess if you’re trying to write a paper on the ethics of investing or are obsessed with learning about ethics for some reason, that might be a good read.
If you’re like the rest of us who just want to hear the answer and move on with life, it’s largely up to the individual to decide for themselves what they believe is ethical or not (aside from breaking the law with things like insider trading or tax evasion). That’s not something anyone can define for investors authoritatively.
If that answer isn’t satisfying enough for you, here’s a rule of thumb that might help: if you think making a certain investment decision might cause you to feel guilty afterwards, then that decision would be unethical.
While there’s no singular “dictionary definition” to answer the question of whether or not it’s ethical to invest in the stock market, there are certainly a few ethical themes and concepts to consider. I’m not sure exactly what ethical dilemma brought you to click on this post, but I’m going to list out a few ideas to think about.
Social impact of a company
The Social Impact Of A Company Generally Refers To The Company’s Impact On Communities Either Locally Or Globally. For Example, This Could Refer To Environmental Sustainability, Worker Pay, Or Equal Human Rights. Basically, Whether Or Not The Company Is Helping Or Hurting People.
This is a big factor that a lot of people look at when trying to invest ethically. Usually if a company is doing good things like making donations or volunteering their employee time/services, the company will try to put that front and center for the public and media to see. If they are doing shady things, usually it’s a 3rd party who finds out and reports on that.
Unhealthy market competition/Monopolies
The most favored companies in the market are often monopolies with big market shares. Their growth comes at the price of those smaller companies’ losses. Some people do not like the idea of monopolies, and don’t want to encourage such unhealthy market competition.
If you’re someone who believes monopolies are acting unethically by stomping out the competition or discouraging healthy market competition, you may want to shift your attention to mid or small cap stocks.
Trading stocks perceived as gambling
If you think that trading stocks is the equivalent of gambling and that gambling is unethical, then trading stocks is unethical. To be fair, there are cases where people have lost a lot of money playing with stocks (myself included).
I think this mainly comes from a place of not fully understanding how stock market risk works. Sure, if you’re buying and selling stocks on a whim, you’re effectively gambling. However, with a solid plan in place that you are sticking to over the long term, trading stocks can be a reliable strategy of growing your investments.
More info on that in my post on stock market investing.
Trading stocks perceived as a “zero-sum game”
Some people might think when someone makes money in stocks, by definition, someone else must be losing money. Following this logic, you’re essentially “taking” someone else’s money.
There are certain industries that are generally thought of as “unethical”, like tobacco, gambling, alcohol, etc. If you uphold yourself to high moral standards, you might want to stay away from industries like these.
I can’t really think of a reason why you would want to invest in these industries other than to make money (not necessarily a bad thing). So from an ethics perspective, there’s not really any strong argument in favor of investing in these industries above other “normal” industries.
Individual religious morals may also play a role. Depending on your religion, your religion’s denomination, and level of devotion to that religion, your religious values can dictate whether or not you should invest in certain companies. Apparently, that’s a big issue in Islamic countries.
I’m not an expert on all religions out there, but I’m guessing some religions may prohibit certain “evils”. Some may go so far as to say even being remotely associated with this “evil” means you are committing a “sin”.
Just an FYI if you hold yourself to religious standards.
Ethical conflicts of interest
When you own a stock in a company, you could potentially run into a conflict of interest. That’s a big thing in academia. If your funding source is coming from a large company, they’re obviously going to want to see results from your study that favor their business objectives.
In the same way, when you own stock in a company, you could have (or be perceived to have) an interest in seeing the company do well. If that company happens to be doing something “unethical”, your stance on that something comes into question.
Own stock in a company that relies on child labor when you yourself are against child labor? You may have a hard time convincing people that you are against child labor. You could also be viewed as someone who is benefitting from or enabling child labor.
Your investment decision doesn’t “matter” as much as you think it does
Regardless of whether or not investing in a certain stock is ethical or not, it’s always helpful to remember that your personal investment has a very minimal impact on the stock price, much less the company itself.
When you purchase a stock, you aren’t exactly giving money straight to the company unless it’s the company’s IPO. It probably goes to a seller in the secondary market, where another trader is essentially selling their shares to you.
So it’s not exactly like you are directly donating money in support of child labor or anything like that. Your purchase of company stocks in the secondary market only has an almost negligible effect of raising the company’s stock price which primarily influences how much money the company can borrow.
The impact of your stock investment decisions is too small to make a significant difference, unless you are talking millions of dollars invested in one particular business, which you probably aren’t doing anyways. You can think about your investment as adding a drop of water to an olympic swimming pool.
If you’re a utilitarian or someone who thinks very practically, you might find peace of mind knowing that your decision really doesn’t make much of a difference in the grand scheme of things (aside from your own personal finances).
Socially Responsible Investing
If you are or want to start to be conscious about what companies you invest in, you should know that there are funds that screen companies and avoid those “unethical” companies based on certain criteria. Because ethics are so broad, most will tend to focus on a specific set of values, such as environmental friendliness or human rights.
The barrier to entry is pretty low, with many options available that do the ethical research for you. Wealthify, for example, has certain funds that allow you to invest while sticking to ethical companies. You can also trade individual mutual funds and ETFs that focus on ethical companies through your own stock broker.
So is it ethical to invest in the stock market? Unless you hold extremist views that are strongly opposed to the free market, investing in the stock market can be done ethically if you put in intentional effort to do so. Since ethics are something that varies from person to person, it’s ultimately up to you to determine what’s ethical or unethical when it comes to the stock market.
Investing in stocks doesn’t have to be done at the expense of your ethical values. You can both set yourself up for financial success in the long term at the same time as sticking to your ethical values. All you have to do is put in just a little leg work to find ethical investment options.
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