INVESTMENTS
It is a remarkable fact that many men who have shown remarkable
shrewdness in conducting a business in which a fortune may have
been accumulated, exhibit the judgment of children when it comes
to making investments.
There are able lawyers who have made fortunes in the practice of
the profession which they understood, only to lose them by
investments in mines or other ventures, about which they knew
absolutely nothing but what was told them by the scheming
speculator and smooth-tongued promoter.
As has been intimated before in these pages, there is a great
difference between saving through and hoarding through a spirit of
miserliness.
SAVINGS
Every wage or salary earner, no matter how small his compensation,
should try to lay by something of that little as a provision
against the unproductive days.
No matter how small the amount a man has set aside, after paying
for life's necessities and meeting all just debts, he is to that
extent a capitalist.
The miser would hide his savings out of reach, but the man with
the foresight to save will usually have the judgment to place
these savings where they will fructify and grow, producing the
fruitage known as interest.
The young man or the young woman, or any one else who places his
little accumulations in a savings bank, has begun a form of
investment that may, if persisted in, place him or her above want,
even if it does not entitle either to a place on the lists of
great capitalists.
CAPITALISTS
The capitalist not only has money of his own to invest, but he may
and very often does need more money properly to exploit the
enterprises in which he is engaged.
Money loaned to such men, after being assured of their ability and
integrity, is an advantage to the lender as it is to the user.
The lender's profit is assured if the enterprise does not fail,
and the added capital not only insures against failure, but it may
enable the manager to succeed beyond any expectations he could
have if forced to carry on the work with only his own resources.
The capitalist may choose to buy land in the suburbs of a city and
build thereon a house to be sold or rented. This should always be
made to secure the money borrowed.
A capitalist may establish a fund from which, on good security,
the business men of the community may obtain loans, for which they
get a higher interest than that which they undertake to pay to
those whose money they are using.
Again a capitalist may undertake to loan to farmers, who have not
the means to carry on the work, but who are anxious to make their
lands more productive, through drainage and crop rotation. In this
case the money loaned is secured by the usual bond and mortgage.
Or it may be that another body of men is anxious to start a great
manufacturing enterprise in the neighborhood, but has not enough
money to place the venture on a paying basis.
In the latter case it appeals to the capitalist, and he, though
not bearing enough available means of his own, undertakes the work
with the knowledge that he can rely on the small investors, whose
contributions he has before managed successfully.
STOCKHOLDERS
Or it may be that the manufacturing company does not ask the
capitalist to assist, but itself goes to the small investor with a
prospectus of the enterprise, and offers to sell stock in the
concern at $50 or $100 a share, as the case may be.
This gives a chance to enjoy the profits, be they great or small;
but with the chance for larger profits there comes the greater
risk which must always be assumed in such cases.
Sometimes, when a company is starting, its stock may be put below
par. This stock, in the event of success, may appreciate, as with
some bank and other corporation stocks, many times above the par
value.
When stocks sell in the open market for their face value, they are
said to be at par.
KINDS OF STOCKS
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 getting
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.
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, and we cannot advise too strongly against it.
There is another kind of stock, which some companies keep in their
safes to meet an emergency. This is known as "treasury stock,"
and, like the preferred, its rate of interest is fixed.
Let us suppose 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.
Now, it follows 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 treasury stock may be sold to
secure the extra capital.
If the business is placed on a basis where its success is beyond
all question, then the treasury stock may be divided _pro rata_
between the holders of the other stock, for, till disposed of in
some way, it was an asset common to the whole company.
Each stock certificate tells when dividends are declared; they may
be paid quarterly, half yearly, or annually.