Stocks and Bonds
Stocks is a general name given to the capital of incorporated companies. They are divided into equal parts, usually of $100 each, called Shares, the owners of which are called Stockholders. A Dividend is a part of the net income of the company, divided among the stockholders.
A certificate of stock is a written paper signed by the proper officers of the corporation, naming the number of shares to which the person named therein is entitled, and the original value of the same.
Preferred stock is stock which is given a preference over the common stock. Ordinarily, a dividend is paid on the preferred stock before any is paid on the common shares.
Common stock is the ordinary stock of a corporation, which has no preference, in the payment of dividends, over any other.
The par value of a share of stock is the value named in the certificate of stock.
When a corporation is prosperous, its shares of stock often sell for more than the value named in the certificate of stock. They are then said to be above par, or at a premium. In times of business depression, often these shares of stock sell below their face value. They are then said to be below par, or at a discount.
The market value of a share of stock is the value for which it sells in the open market.
A stock broker is one who makes a business of buying and selling stocks and bonds. He charges a commission for this which is called brokerage.
A surplus is a part of the earnings of a corporation.
The gross earnings of a corporation are its total receipts from all sources.
The net earnings are the profits remaining when all expenses, losses, interest and debts due are paid.
An assessment is a sum levied proportionate to stock held by stockholders, to help out the business when it is not prospering, or when more money is needed to carry it on. It is levied as so many dollars on each share at its par value.
The directors are those shareholders elected by all to manage the affairs of the corporation.
A bond is, in form, a carefully drawn interest-bearing promissory note. Ordinarily, it runs for a period of years with interest often payable semi-annually. It is more formal than the ordinary promissory note. Bonds are usually [877] issued by national, state, county, or local governments, or by corporations, when they wish to raise large sums of money for immediate use.
Difference Between Stocks and Bonds
A bond runs for a specified time. It bears a specified interest, and is an absolute promise to pay the face of it at maturity. It matures at a definite time, and at that time the holder is paid its face value and no more, by the organization that issued it, unless such organization is insolvent, or has repudiated its debts.
Stocks.—A certificate of stock is no promise to pay. It simply shows that the holder owns as much stock in the corporation as is shown by the face of the certificate. It bears no interest and has no date of maturity.
The interest returns of the bondholder are certain and definite. The returns of the stockholder, dividends, are uncertain and depend on the profits of the business.
Consequently, no table can be arranged to show at what rate stocks can be bought to yield a definite return; but with bonds, tables may be made which show at a glance what the return will be from a purchase made at any rate.
Application of Percentage to Stocks
1. To find the value of stocks, when above or below par.
Rule.—Multiply the price per share, by the number of shares.
Example: Find cost of 65 shares of bank stock, at $107 per share, or 7% premium. Also of 48 shares of railroad stock, at $871⁄2 per share, or 121⁄2% discount.
(1) 65 × 107 = 6955. Ans. $6955.
(2) 48 × 871⁄2 = 4200. Ans. $4200.
2. To find what rate per cent is realized by investing in stocks or bonds when above or below par.
Rule.—Annex two ciphers to the fixed rate per cent, and divide by the cost per share. Or by proportion: As the cost per share is to the fixed rate, so is 100 to the required rate.
Example: Mr. Warren bought ten shares of Illinois Central Railroad stock at 96. What does he get when a dividend of 6% is declared? What per cent is that on his investment?
Work and Explanation:
(1) 1 share at 6% yields $6
(1) 10 shares yield 10 × $6 = $60.
(2) Each share at 96 costs $96.
(2) Each share yields $6.
Query? $6 is what per cent of $96?
Query?$6 is 6⁄96 of 100%, or 61⁄4%.
Query?∴ the investment yields 61⁄4%.
3. To find which is the more profitable investment.
Rule.—Find the rate per cent that each investment yields, by rule, under item 2; then compare rates.
Example: Which is the better investment; 6% mortgages at 10% premium, or 5% bonds at 10% discount?
(1) 110)600(55⁄11%.
(2) 90)500(55⁄9%. 5⁄9 - 5⁄11 = 10⁄99, practically 1⁄10.
Ans. The latter, by 1⁄10 of 1%, nearly.