Chapter XXII - Investments Page 02
Or it may be that the manufacturing company does not ask the capitalist to assist, 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 assumed 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 entitled 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 asset common to the whole company.
Each stock certificate tells when dividends are declared; they may be paid quarterly, half yearly, or annually.