" 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.
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. For some, the potential gain from such gambling makes this an attractive endeavor; for those looking for a safer return on their investment, however, it may prove a risk not worth taking.
There is another kind of stock which we should mention, known as "treasury stock;" some companies keep such stock in their safes to meet an emergency. Like the preferred stock, its rate of interest is always fixed.
To understand the nature of stocks, it may be instructive to use an example. Let us suppose, then, 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. It follows, then, 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 $20,000 treasury stock may be sold to secure the extra capital.
If the business' success is beyond all question, then the treasury stock may be divided pro rata between the holders of the other stock, for, until it is disposed of in some way, it is an asset common to the company as a whole.
Each stock certificate tells when dividends are declared; they may be paid quarterly, half yearly, or annually.
