In the latter case it appeals to the capitalist, and he, though not bearing enough available means of his own, undertakes the work with the knowledge that he can rely on the small investors, whose contributions he has before managed successfully.
STOCKHOLDERS
Or it may be that the manufacturing company does not ask the capitalist to a.s.sist, but itself goes to the small investor with a prospectus of the enterprise, and offers to sell stock in the concern at $50 or $100 a share, as the case may be.
This gives a chance to enjoy the profits, be they great or small; but with the chance for larger profits there comes the greater risk which must always be a.s.sumed in such cases.
Sometimes, when a company is starting, its stock may be put below par. This stock, in the event of success, may appreciate, as with some bank and other corporation stocks, many times above the par value.
When stocks sell in the open market for their face value, they are said to be at par.
KINDS OF STOCKS
Most companies, organized on a stock basis, issue stocks of two kinds. One is known as "common" the other as "preferred."
As the name implies, preferred stock (its rate of interest is always fixed) is ent.i.tled to be paid out of the net dividends first.
Whatever is left after paying the preferred stock interest is divided up equally among the shares of common stock, each getting according to his holdings.
Sometimes the dividends on common stock are far greater than those on the preferred. The preferred stock dividends are regarded as a fixed charge, but there can be no limit as to the payments on the common stock, if the funds are available.
The stocks of railroads, factories, banks and other enterprises may be good forms of investment, and for this they are often held for long periods by investors for revenue.
Most stocks, however, particularly of railroads, are continually changing hands. The buying and selling of such securities has grown to be an enormous business, managed largely by men known as "stock brokers," many of whom are strong factors in the financial world.
As a rule, the buying and selling of stocks through brokers is a hazardous form of speculation, which has in it all the elements of gambling, and we cannot advise too strongly against it.
There is another kind of stock, which some companies keep in their safes to meet an emergency. This is known as "treasury stock,"
and, like the preferred, its rate of interest is fixed.
Let us suppose that a company is capitalized and prints stock to the amount of $100,000.
This company sells $80,000 worth, and the officers believe that they can force the enterprise to success with the money on hand.
Now, it follows that, with the same amount of earnings, the profits on $80,000 will be greater than on $100,000, so the $20,000 unsold stock is held in reserve.
If to extend the business, or for any other reason, it is necessary to have more money, the treasury stock may be sold to secure the extra capital.
If the business is placed on a basis where its success is beyond all question, then the treasury stock may be divided _pro rata_ between the holders of the other stock, for, till disposed of in some way, it was an a.s.set common to the whole company.
Each stock certificate tells when dividends are declared; they may be paid quarterly, half yearly, or annually.
CHAPTER XXIII
BONDS AS INVESTMENTS
The best way in which savings can be invested is to use them in the extension of the business in which they were made.
The wage earner and the man on a salary cannot, of course, do this, but the farmer, the small tradesman, and the mechanic, who is his own employer, may be able to do so. And so, before looking for a field for investment outside, such men should look about them and consider how best the money may be used right on the ground.
AS TO BONDS
But after considering the points suggested, the man who has some money may not be able to find a secure and profitable place for it in or near his own home. One of the safest forms of investments is bonds, though, as with other forms of security, the rate of interest declines as the margin of safety increases.
If a well-established stock company should wish for any reason to increase its available cash, it may issue bonds, or certificate of indebtedness, bearing from four to five per cent interest, payable semi-annually.
These bonds may be transferred the same as stock. They are a good form of security when it is desired to borrow money from the bank, and for many purposes they are as available as so much cash.
Such bonds are issued for a specified number of years and have coupons attached, which are cut off when interest is due, and presented to the treasurer of the company for payment.
These bonds are secured by a mortgage or deed of trust on all the property of the corporation they represent.
To redeem these bonds, when due, the company annually sets apart a sum, known as a "Sinking fund," for their redemption.
Such bonds are far safer than any form of the company"s stock, for they bear interest that must be met, whether or not dividends are declared.
As with a real estate mortgage, the property pledged in the bond should be defined.
RAILROAD BONDS
Every railroad in the country has been built and equipped by the sale of its bonds. In such cases amounts of stock of the same, or approximately the face value of the bond, have been given to the purchaser as a bonus or inducement. Of course, the controlling stock is always retained by the promoters; and it is through the representation of this stock that all the business of the corporation is carried on.
The cases are few where any money was paid directly for the original issue of any railroad stock.
Bonds sold to build a road are usually known as "construction"
bonds. There may be another bond issue for equipment--with a stock bonus--and still other bonds, each series stating the property pledged and the purpose for which the money from sales is to be used.
The _Christian Herald_, in one of its recent financial articles, clearly defines this species of bonds, as follows:
"Railroad bonds are usually pledged by the President and Treasurer of the railroad and by the Trustees, to whom the bonds are made out, and who must defend the rights of bondholders, should the company fail to meet any of the obligations it undertook in the mortgage deed.
"In other words, a bond is the Corporation"s promissory note for the money originally paid by the investor, with interest for the same, to be paid to the investor in stated amounts at stated intervals; and to guarantee its good faith in the matter, the Company pledges the bondholder an interest in certain property in its possession. It follows that a bond has a first call upon the property rights of the corporation; that it represents something tangible; that it pays a definite amount of interest, and that it may be reduced at its full value at a certain time."
BUYING BONDS
Bonds, like wheat, have their selling prices quoted from day to day, and they are equally a thing of purchase and sale.
There are banks and brokerage firms that make a specialty of bonds, and most of these houses are entirely reliable; still, the novice in such things would do well to investigate for himself before investing in any bond recommended by any seller.
It is the purpose of the seller to sell; it should be equally the purpose of the buyer not to be "sold."
Our government, state and munic.i.p.al bonds speak for themselves, and in the main require no examination as to the security, though there have been cities and even states that have defaulted in their payments.
Bond houses and banks of established reputation cannot afford to deceive; they receive their compensation in the way of commissions on sales, and their characterization of the bonds may be accepted without question, for they invariably investigate the bonds, before they lend their names to them by offering them for sale.