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CHAPTER XXXII

STOCKS AND SHARES

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470. Corporations. A stock company or corporation is created by law and is endowed by it with certain definite powers. These powers are described in a document called the charter of the corporation. The corporation may do all things which are naturally incidental to its main business. Thus, it may contract debt, sue in the courts, and be sued.

471. Capital Stock. - The property of the corporation is represented by what is called its capital stock. The capital stock is divided into shares, usually $100 each. This nominal value is the par value of its shares. The owners of these shares are called the stockholders and are the proprietors of the corporation. The stockholders elect a board of directors who in turn elect the executive officers of the company.

A stockholder has one vote for each share. Thus a few large stockholders may control a corporation though thousands of persons own shares in it.

Some of the older stocks, notably that of the Pennsylvania Railway Company, are $50 per share. (See copy of stock certificate on the opposite page.) Shares in minor corporations are often as low as $1 par value. This is notably true of the stocks of highly speculative ventures.

472. Stock Transferable. The stock certificate is the evidence of ownership of stock. (See page 381.) This may be sold, bequeathed, or inherited the same as any other property.

Thus the stock company is a perpetual concern and the stock is in no sense an obligation which the company is expected to pay at a future date.

473. Advantages of Corporation over Individual or Partnership. Many businesses are so large that no single man's fortune is sufficient to furnish the necessary capital. A partnership is unsatisfactory because it usually involves unlimited liability on all partners for the

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acts of each one. As partners retire others have to be taken in, which involves difficult readjustments. Persons with capital to invest who are wholly unfit to conduct a business can buy shares in a corporation and have its affairs conducted by experts.

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474. Common and Preferred Stock. The preferred stock differs from the common in that it bears a definite rate of dividend. The income from the common stock varies with the fortunes of the corporation, while the income from the preferred stock is the same whether the corporation is poor or prosperous, so long as it is able to pay its debts.

475. Cumulative Preferred Stock. In issuing preferred stock it is sometimes specified that in case the company is unable to pay dividends on the stock for any one year, then the dividend becomes a debt against the corporation. That is, in the case of cumulative preferred stock unpaid dividends accumulate until they are paid.

Preferred stock is usually issued when corporations are in straitened circumstances in order to raise capital for improvement or for reorganization. It is a sort of first mortgage on the property of the corporation. The issue of preferred stock renders the common stock less valuable.

476. Gross and Net Earnings. - The total income of a corporation is called its gross earnings. What remains after all expenses of operation, maintenance of the plant, salaries, taxes, and other legitimate expenses have been paid, is called net earnings.

477. Dividends. The net earnings are first applied to the payment of interest on bonds (see page 388) if there are any such, then to the payment of the fixed dividend on preferred stock, and finally to the payment of dividends on the common stock. The dividend is a certain number of dollars per share, or a certain per cent of the par value.

478. Par Value, Above Par, Below Par.-The nominal value of the shares specified in the stock certificate is called the par value. If a business is prosperous and the dividends constitute a higher rate of income on the par value of the shares than the usual returns on investment, then the shares will sell for more than their par value and are said to be above par. If the income from dividends is lower than the usual returns from investment, the stocks will sell for less than their par value and are then said to be below par.

The amount by which a stock sells above par is also called a premium. Thus, stock, par value 100, which sells at 124 is said to be at a premium of 24. If it sells at 92 it is said to be at a discount of 8. The market values of shares are given in dollars and common fractional parts of a dollar. Thus 982 is written instead of 98.75 and 1123 instead of 112.375. In giving values of shares the dollar sign is usually omitted.

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479. Surplus. The net earnings are not all distributed among the stockholders in the form of dividends. It is customary to make the rate of dividend an integral number of per cent or at most a very simple fractional number of per cent. Thus, if a corporation having $1,000,000 capital has net earnings amounting to $87,500, the directors may declare a dividend of 6% or possibly 6%. The remainder will then be carried in a fund called a surplus fund.

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480. Stock Dividends. When a company is very prosperous may decide to invest part of its earnings in extending its plants. The amount of capital stock may then be increased, the increase being distributed among the stockholders in proportion to the stock they already own. Such a distribution of stock is called a stock dividend. 481. Watered Stock. Sometimes the capital stock of a company is increased very largely, without any corresponding increase in its property. This enables the company to conceal excessive earnings, inasmuch as the rate of dividend on the larger volume of stock will be comparatively small.

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482. Forced Dividends. Sometimes a dividend is declared and paid even though the net earnings do not justify it. This is called a forced dividend.

483. To Find Income from Shares When the Rate is Known. Example. What will be the yearly income from 150 shares of stock which pays 6%?

Solution. 6% means $6 per share of par value $100. Hence the required income is 150 x $6

=

$900.

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485. To Find the Rate of Gain on an Investment in Stocks.

Example. What is the rate of income on an investment in 6% shares costing $1064 a share?

Solution. The problem is: "6 is how many % of 106.25” (§ 328). ` 61.0625 = 5.647 = the required rate per cent.

WRITTEN EXERCISES

Find the rate of income from each of the following:

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486. To Find the Price per Share which will Yield a Given Rate

on Investment.

Example. What must be paid for a 7% stock to realize 51% on the investment?

Solution. The problem is: 7 is 5% of what number? (See § 330.)
Hence 7.055 = 127.27 (dollars) which is the required amount.

WRITTEN EXERCISES

Find the price of a share in each of the following:

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