It is remarkable that many people who have shown great insight in running a financially successful business should exhibit the judgment of children when it comes to making sound investments. These people make fortunes in the profession for which they have both the knowledge and the experience to succeed, only to lose those fortunes by making investments in areas about which they know absolutely nothing except for what a smooth-tongued promoter tells them.
As investments are essential to maintaining financial security, it is important to understand the basics of what makes them sound.
When considering basic savings, it is important to note that there is a great difference between saving intelligently and hoarding through a spirit of miserliness. Every wage or salary earner, regardless of the size of his compensation, should try to lay aside something of that amount as a fallback for difficult times. No matter how small the amount he puts away after paying for life's necessities and meeting all his financial obligations, he is to that extent a capitalist, a topic which we will address momentarily.
The miser would hide his savings out of reach, but the man with foresight will usually have the judgment to place these savings where they will do more than collect dust, where they will grow by producing an additional amount known as interest.
The individual who places his accumulations in a savings bank has begun a form of investment that may, if continued over time, place him above want, even if it does not entitle him to a place on the list of great capitalists.
Capitalists are individuals (or groups of individuals) who not only have money of their own to invest, but who may -- and very often do -- require more money to exploit the enterprises in which they are engaged. Money loaned to such individuals, after being assured of their ability and integrity to manage it wisely, is as much an advantage to the lender as it is to the users.
The lender's profit is assured if the enterprise does not fail. As a result, the added capital he provides not only protects against such failure, but it may also enable the users to succeed beyond any expectations they could have if forced to carry on the work with only their own resources. One such enterprise is the purchase of land able to be developed -- upon which a house or other structure can be built and then either sold or rented for profit. Another is a manufacturing enterprise, where the users do not have enough money on their own to place the venture on a paying basis. In this case, they rely on other investors, whose contributions they have hopefully managed successfully in the past, to undertake the project.
Capitalists may also operate by establishing a fund from which, on good security, other businessmen in the community may obtain loans. The individuals can obtain a higher interest on the money lent than the interest they pay out on the money used for the fund.
It may be, however, that the manufacturing company does not ask the individual capitalist for assistance, but instead goes itself to small investors with a business prospectus and offers to sell stock in the company, at a certain amount per "share." This gives others a chance to enjoy the profits, be they great or small; however, the larger the chance of profits, the greater the risk that the investors must assume to achieve them.
When stocks sell in the open market for their face value, they are said to be at par. Sometimes, though, when a company is getting started, it may put its stock below par. This stock, in the event of success, may appreciate many times above the par value.
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 individual or group receiving an amount 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 after the initial payments.
