STOCKS AND BONDS

478. Corporations. When a number of persons wish to engage in a business requiring a large capital, they usually raise as much capital as they can among themselves, perhaps soliciting subscriptions from others, and organize a stock company, or corporation.

A corporation is authorized under the law; has certain powers and privileges; is subject to certain limitations; and is regarded by the law as a single person engaged in a stated business with a declared capital, or stock.

479. Shares. The stock of a corporation is divided into equal parts, called shares.

A share is usually $100, but it may be more or less than that sum; unless stated to the contrary the face value of a share, in this book, means $100. If the capital of a corporation is $400,000, it is divided, perhaps, into 4000 shares of $100 each.

480. Stockholders.

A person who becomes the owner of one or more of these shares is called a shareholder, or a stockholder.

Corporations are managed by officers elected by the stockholders, a stockholder having one vote for each share he owns.

A stockholder's liability for the debts of the corporation is usually limited to the original value of the stock he owns.

Stockholders of national banks, however, are responsible for double the original value of their stock.

481. Certificates of Stock.

Every stockholder receives a cer

tificate showing the number of shares to which he is entitled and the original, or par value, of each.

482. Dividends.— When the business has been successful, the profits, after all expenses are paid and a working surplus is laid aside, are divided among the stockholders according to the number of shares each holds. This is called a dividend.

is usually a certain per cent of the par value of the stock.

It

Thus, if the capital stock is $100,000 and the net earnings are $5000, a 5% dividend may be declared, and a man who owns stock to the par value of $1000 will receive $50 as his part of the profits.

483. Assessments. If the business has been unsuccessful, the dividend may be omitted, or passed; and sometimes the stockholders may be required to make up the deficiency by an

assessment.

484. Corporations often issue two kinds of stock, called preferred and common.

The holders of preferred stock are generally entitled to a fixed rate of dividend that must be paid before the holders of common stock are entitled to participate in the profits.

485. Market value. - Stock is said to be at par, when it is worth its face value in the market; above par, when it is worth more than its face value; and below par, when it is worth less than its face value.

When the dividends are large enough to pay stockholders good interest on their investment, the stock will usually be at or above par; otherwise below par.

486. A corporate bond is a corporation's formal written promise under seal to pay a certain sum of money to the purchaser, on or before a specified time, with interest at regular intervals at a fixed rate.

Corporate bonds must be secured by a mortgage, which is an agreement that the holder of the bond may sell the property of the corporation, if the bond is not paid.

487. Government bonds.

Bonds are issued by the United States, or other countries, by states, cities, counties, and other political divisions of a country, to raise money for various purposes of government.

Government bonds are not secured by mortgage.

488. When bonds are recorded by number and in the name of the person owning them, they are called registered bonds. Registered bonds cannot be transferred without indicating the transfer in the records of the bonds.

489. Bonds to which interest certificates, called coupons, are attached, are called coupon bonds.

Coupon bonds are payable to the bearer. When interest is due, a coupon is cut off and presented for payment at a bank or elsewhere.

490. Stocks and bonds compared.-Stockholders of a corporation are owners of the property; bondholders are lenders to the corporation. Bonds bear interest at a fixed rate; the income from stocks depends upon the prosperity of the corporation and the rate of dividend declared.

491. How stocks and bonds are quoted.-The following quotations were found in a newspaper :

These quotations in order mean: American Locomotive common stock, at 61% of its par value; American Locomotive preferred stock, at 113% of par; New York, New Haven, and Hartford railroad common stock, at 1944%; United States registered bonds, paying 3% interest, at 103%; United States coupon bonds, paying 4% interest and due in 1907, at 1033 %; and Central Pacific railroad first mortgage bonds, paying 4% interest, at 99%.

492. A person whose business it is to buy and sell stocks and bonds for others is called a stock broker; the compensation he receives is called brokerage.

The customary brokerage, for 100-dollar shares, is % of the par value for buying and the same for selling.

Dealings in stocks are usually by "blocks" of 100 shares, but a smaller number of shares may be bought.

EXERCISES

493. 1. Which of the stocks and bonds quoted in § 491 are above par? below par?

2. Bonds are usually issued for $1000 each. quotations find the cost of one of the U. S. 3s reg.

From the

How many

3. The capital stock of a bank is $100,000. shares are there? How much of the capital do I own, if I have 12 shares? 30 shares? 50 shares?

4. If on a capital of $100,000 there is a net gain of $5000, what per cent of dividend may be declared?

5. If the semiannual dividend is 31%, what amount of income do I receive yearly from 1 share? from 50 shares? from 100 shares?

6. What is the market value of 10 shares of stock when quoted at par? at 125? at 150? at 50?

How

7. If the par value of an industrial stock is $50, how much above par is it when a share sells for $75? for $100? much below par, when it sells for $25? for $40?

8. A bank fails and the stockholders are assessed 25%.

How much must I pay, if I own 10 shares? 50 shares?

9. If a bank stock is quoted at 300, how much must be paid for 1 share? for 20 shares?

10. If I received $ 5 dividend on every share of a stock that I hold, what was the entire dividend declared on a capital of $100,000?

11. At% commission, what is the brokerage on the sale of 1 share of stock? 100 shares?

WRITTEN EXERCISES

494. 1. Find the cost of 500 shares of C. M. and St. P. R.R. common stock at 1637, brokerage at the usual rate.

Then 500 shares cost 500 times $164, or $82,000.

2. How much must be paid, including brokerage, for 25 shares of Canadian Pacific railroad stock at 174ğ?

3. How much will it cost me to buy 25 1000-dollar U. S. 3s reg., at 23% premium, brokerage at the usual rate?

4. If U. S. Steel preferred is worth 106%, how much will 100 shares of it cost me, including brokerage?

5. Find the cost, including brokerage, of 200 shares of Commercial Cable Co. stock at 1923.

6. How much must be paid, including brokerage, for 500 shares of N. Y. Central R. R. stock at 1371⁄2?

7. Find the cost of 500 shares of an industrial stock at 637, brokerage %, if the par value of a share is $50.

8. A man purchased 100 shares of Republic Iron & Steel Co. pf. at 931 and sold them the same day at 957. Find his net gain, if he paid brokerage for both buying and selling.

9. A speculator bought 500 shares of railroad stock at 671 and sold them the same day at 681, in each case through a certain broker. How much did the broker receive? How much did the speculator gain?

10. A broker received an order to sell 200 shares of General Electric stock and to buy 400 shares of Illinois Central R.R. stock. With the order was a draft for $7000. The broker sold the first at 166, bought the second at 170, and drew on his customer for the balance. Find the face of the draft.