What are proxies in the stock market?
Proxies Take the Temperature of the Market. A market proxy is a broad representation of the entire stock market. Analysts take a group of stocks in a particular class and combine their performances into an index — also called a proxy — for those stocks. The proxy acts a bit like a thermometer, measuring the health of the companies within the group.
What is a proxy and how does it work?
A proxy is a quick way of checking how companies in a bucket are performing on a day-to-day basis. More specifically, investors use proxies as a benchmark to measure the performance of individual stocks against general trends in the marketplace.
Are dividend stocks a good proxy for bonds?
Although there is no equivalent market proxy for the bond market as comprehensive as the S&P 500 Index, informal references are made to dividend stocks being a proxy for bonds. Dividends are cash outlays to investors by corporations as a reward for owning the company's stock.
Is S&P 500 a good proxy for the stock market?
BREAKING DOWN 'Market Proxy'. The S&P 500 Index is a broad proxy of the stock market based on market capitalization of the 500 largest companies traded on the NYSE and Nasdaq stock exchange. Most agree that it is a better proxy than the Dow Jones Industrial Average (DJIA), which arbitrarily uses nominal share prices to calculate the index value.
Proxies Take the Temperature of the Market
A market proxy is a broad representation of the entire stock market. Analysts take a group of stocks in a particular class and combine their performances into an index — also called a proxy — for those stocks. The proxy acts a bit like a thermometer, measuring the health of the companies within the group.
How Proxies Are Classified
Proxies are classified in various ways: by region such as the U.S., Europe or Asia, by stock exchange, by business size or by industry such as energy, finance or electronics.
Why We Use Proxies
A proxy is a quick way of checking how companies in a bucket are performing on a day-to-day basis. More specifically, investors use proxies as a benchmark to measure the performance of individual stocks against general trends in the marketplace.
Investing in Market Proxies
Today, investors often choose to put their money into so-called passive funds, also known as index fund management. With passive investing, you're creating a portfolio that's intended to track the returns of a particular market proxy such as the S&P 500.
What Is a Proxy?
A proxy is an agent legally authorized to act on behalf of another party or a format that allows an investor to vote without being physically present at the meeting. Shareholders not attending a company's annual general meeting (AGM) may vote their shares by proxy by allowing someone else to cast votes on their behalf, or they may vote by mail.
How Does a Proxy Work?
While proxy voting is often an option, management encourages shareholders to vote in person. If the shareholder cannot attend, voting by proxy is another option. For a person to act as a proxy for an individual, formal documentation may be required that outlines the extent to which the proxy can speak on the individual's behalf.
Proxy Statements
Before the annual shareholder meeting, all shareholders receive a packet of information containing the Proxy Statement. The proxy documents provide shareholders with the information necessary to make informed votes on issues important to the company's performance.
Benefits of Proxy
Management ensures that ownership interests are fully represented by often encouraging shareholders that are unable to attend annual meetings to vote by proxy. Information presented during annual meetings often affects the future direction of the company, which can directly impact the value of a shareholder’s stake in the company.
Real World Example of a Proxy
Below is a portion of the proxy materials for the annual shareholders' meeting of Corning Inc. in 2016. 1
What Is a Market Proxy?
A market proxy is a broad representation of the overall stock market. A market proxy can serve as the basis for an index fund or statistical studies. The S&P 500 index is the best-known market proxy for the U.S. stock market.
Understanding a Market Proxy
The S&P 500 index is a broad proxy of the stock market based on a market capitalization of 500 large companies traded on the New York Stock Exchange (NYSE) and Nasdaq stock exchange. 1 Market capitalization–or market cap for short–multiplies the company's stock price by its outstanding equity shares.
Bond Market Proxy
Although there is no equivalent market proxy for the bond market as comprehensive as the S&P 500 Index, informal references are made to dividend stocks being a proxy for bonds. Dividends are cash outlays to investors by corporations as a reward for owning the company's stock.
Popularity of Market Proxy Funds
Index funds, many of which are essentially market proxies of the S&P 500, have grown in popularity due to their low fees. Index funds are not actively managed by an investment portfolio manager, meaning stocks are not being bought and sold in and out of the fund.
You don't have to attend corporate meetings to make your voice heard
Alyce Lomax is a columnist for Fool.com specializing in environmental, social, and governance (ESG) issues and an analyst for Motley Fool One. From October 2010 through June 2015, she managed the real-money Prosocial Portfolio, which integrated socially responsible investing factors into stock analysis. Follow @AlyceLomax
What is in a proxy statement?
A proxy statement tells you a lot about a company's management and board of directors.
Board of directors
The first order of business in most proxy statements is voting for or against individuals to serve on the board of directors. The role of the board is to oversee management, talk through a company's future plans, and lend their expertise.
Compensation
The second common element of a proxy statement is a vote on CEO and management compensation. It will often disclose both the fixed and variable pay of management. This will show how much compensation is base salary versus more subjective metrics for restricted stock units, performance cash bonuses, etc.
Shareholder resolutions
Shareholder resolutions (also known as shareholder proposals) appear at the end of proxy statements. They are filed by everyone from individual investor activists to groups of like-minded investors to major fund shareholders.
Voting on shareholder resolutions
It is very important to carefully read both the shareholder proposal and management's response. Even if you're just researching a company and not actually voting the proxy, you can learn interesting things about a business by reading these proposals.
Accounting firms
As a shareholder, you are also entitled to vote for or against the accounting firm the company uses. While some might argue that having the same auditor year after year represents continuity, as with boards of directors, too long a tenure may lead to a certain degree of chumminess and be associated with less-robust outcomes.
What Is a Proxy Vote?
The term proxy vote refers to a ballot cast by a single person or firm on behalf of a corporation's shareholder who may not be able to attend a shareholder meeting, or who may not choose to vote on a particular issue.
How a Proxy Vote Works
Publicly-traded companies report their activities to shareholders through their annual meetings. Before those meetings, shareholders receive information on topics to be voted on at the meeting, such as share ownership, the structure of the board of directors (BOD), and executive salary and benefits.
Special Considerations
Sometimes a plurality vote applies when a company elects its board of directors. The winning candidate simply needs more votes than their competitor in a plurality vote. Therefore, an unopposed director only needs one vote to be elected. If shareholders are opposed to the candidate, they may withhold their voting rights.
Example of a Proxy Vote
On Nov. 25, 2019, Kirkland Lake Gold ( KL) announced that it intended to acquire Detour Gold in an all-stock deal. 1 The two companies would become one company, with Kirkland Lake Gold shareholders owning roughly 73% of the resulting company, leaving 27% for shareholders of Detour Gold.
How to Find a Proxy Statement
Because proxy statements are required regulatory documents, they are kept on file for public view using the SEC's database, known as EDGAR. From the EDGAR web portal, simply enter the company’s name here and select the appropriate entry to view its SEC filings, including its proxy statement.
Profile of Management
The proxy provides detailed information about a company's chief executive officer, chair, and board of directors. This is valuable because it gives investors insight into officers' abilities and experience.
Insider Ownership and Executive Compensation
The proxy statement can tell you whether a company is being run for the benefit of shareholders, or for the benefit of insiders. One section will detail executive compensation and how much board of directors members get paid .
Senior-Level Loans
Sometimes in the course of business, companies will make sweetheart deals with their senior-level executives. These loans are sometimes in the hundreds of thousands or even millions of dollars. This is bad for the average shareholder for several reasons.
Changes in Auditors
Sometimes a company will switch auditing companies. The proxy will outline the rationale behind the change and give the investor some insight into whether it was a legitimate switch or due to a disagreement on accounting practices.
Overall Health of the Business
Similar to an annual or quarterly filing, in a proxy statement, management will also typically include a general discussion about the overall health of the business. Interesting insights can often be gleaned from information on the backlog, gross margin trends, balance sheet opportunities, or other concerns.
Detailed Business Plans
The proxy will detail business plans or issues on which the board may vote. This information, while sometimes contained in the 10-K, is often much more concise and easy to read in the proxy statement.
What Is a Proxy Fight?
A proxy fight refers to the act of a group of shareholders joining forces and attempting to gather enough shareholder proxy votes to win a corporate vote. Sometimes referred to as a "proxy battle,” this action is mainly used in corporate takeovers.
How Proxy Fights Work
Shareholders may appeal to a company’s board of directors if they’re dissatisfied with a specific management decision.
Special Considerations
Sometimes shareholders are uninterested or apathetic about reviewing options for new senior management positions, and it can be difficult to arouse their interest in these matters.
Example of a Proxy Fight
In February 2008, Microsoft Corporation made an unsolicited offer to buy Yahoo for $31 per share . The board of directors at Yahoo believed the offer by Microsoft under-valued the company, and, consequently, the board stalled any negotiations between Microsoft and Yahoo executives.
What Is A Proxy?
How Does A Proxy Work?
- While proxy voting is often an option, management encourages shareholders to vote in person. If the shareholder cannot attend, voting by proxy is another option. For a person to act as a proxy for an individual, formal documentation may be required that outlines the extent to which the proxy can speak on the individual's behalf. A formal power of attorneydocument may be required to pr…
Proxy Statements
- Before the annual shareholder meeting, all shareholders receive a packet of information containing the Proxy Statement. The proxy documents provide shareholders with the information necessary to make informed votes on issues important to the company's performance. A Proxy statement offers shareholders and prospective investors insight into a company's governancean…
Benefits of Proxy
- Management ensures that ownership interests are fully represented by often encouraging shareholders that are unable to attend annual meetings to vote by proxy. Information presented during annual meetings often affects the future direction of the company, which can directly impact the value of a shareholder’s stake in the company.
Real World Example of A Proxy
- Below is a portion of the proxy materials for the annual shareholders' meeting of Corning Inc. in 2016.1 1. The corporation's assigned proxy is highlighted in blue showing that the shareholder's vote can be cast by the proxy. 2. As noted in the bolded statement, if no choices are made, the nominated members of the board will be voted for by the proxy.