To organise a stock company it is necessary for a number of persons to
come together and make a certificate to the effect that they propose
to form a company to bear a certain name, for the purpose of
transacting a certain kind of business at a certain place. The
certificate states that they propose to issue a certain number of
shares of stock at a certain price per share, that the capital stock
is to be a certain amount, and that the company is to continue to
exist for a definite period of time. Blank forms for such certificate
are supplied by the Secretary of the State where the company is being
organised, and when such certificate is properly filled out, signed,
and delivered to him, he issues a license, or charter, to the persons
making such certificate, giving them permission to open books, sell
stock, and carry on the enterprise outlined.
State laws regarding stock companies differ very largely. Students of
this course who desire to know the law in any particular State can
easily secure the information by writing to the secretary of that
State.
The usual par value of a share of stock is $100. That is, if a company
organises with a capital of $200,000, there will be 2000 shares to
sell. Each person who buys or subscribes for the stock--that is, who
joins the company--receives a CERTIFICATE OF STOCK. Our illustrations
show two examples; one of a national bank, and the other of a
manufacturing company. These certificates are transferable at the
pleasure of the owners. The transfer is made usually by a form of
indorsement on the back of the certificate, but to be legal the
transfer must be recorded on the books of the company.
[Illustration: A certificate of stock in a national bank.]
The men subscribing in this way become responsible for the good
management of the business and are obliged to act according to the
laws of the State in which the company is organised. Usually they are
not responsible individually for the liabilities of the concern beyond
the amounts of their individual subscriptions.
[Illustration: A certificate of stock in a manufacturing company.]
Every person who subscribes for stock owns a part of the business and
is called a SHAREHOLDER. All the shareholders meet together, and out
of their number they choose a certain number of DIRECTORS. The
directors choose a president and other necessary officers, and in a
general way direct the policy of the company. As a rule directors have
no salaries attached to their positions. General meetings of
shareholders are held once a year to elect the directors and to hear
the reports of the officers.
The student should be familiar in a general way with the different
classes of stock and with the technical terms familiar to stock
companies. The more important of these matters are as follows:
DIRECTORS. All the shareholders meet together and out of their number
choose a certain number of directors. The directors choose a president
and other necessary officers and fix the amount of salary which shall
be paid such officers for their work.
CAPITAL STOCK. This name is given to the gross capital for which the
company is organised, without any reference to its value or to whether
it has been fully paid in or not. The _paid-in capital_ is the amount
received from the stockholders on the shares for which they have
subscribed.
DIVIDENDS. The directors of the company, after paying the expenses and
laying by a certain amount for contingencies, divide the profits among
the shareholders. These profits are called dividends, and in
successful concerns such dividends as are declared quarterly,
semiannually, or annually usually amount to good interest on the
shareholders' investments.
TREASURY STOCK. It often occurs that a new company finds it necessary
to set aside a certain number of shares to be sold from time to time
to secure working capital. Such stock is held in the treasury until it
is needed, and is called treasury stock.
PREFERRED STOCK. Preferred stock is stock which is guaranteed certain
advantages over ordinary stock. It is usually given to secure some
obligation of the company, and upon it dividends are declared in
preference to common stock. That is to say, if a man holds a share of
preferred stock he will receive interest thereon out of the profits
of the business before such profits are given in the form of dividends
to shareholders generally. Preferred stock can be issued only when
authorised by the charter of the company. The interest on the
investment in the case of preferred stock is more sure, but the
security itself is not any more secure than in the case of common
stock.
GUARANTEED STOCK. Guaranteed stock differs from preferred stock in
this--that it is entitled to the guaranteed dividend (interest) before
all other classes of stock, whether the company earns the necessary
amount in any one year or not. This right is carried over from year to
year, thus rendering the shares absolutely secured as to interest.
WATERED STOCK. When stock is issued to the shareholders without
increase of actual capital the stock is said to have been _watered_. A
company may organise for, say, $10,000, and may want to increase to
$50,000 without adding to the number of its shareholders. Each holder
of _one_ share will, in this instance, receive _four_ new shares, and
in future instead of receiving a dividend on one share will receive a
dividend on five shares. The object of this is, quite commonly, to
avoid State laws requiring certain corporations to pay excess of
profit over a stated rate per cent. into the State treasury.
FORFEITED STOCK. Stock is usually sold on certain explicit conditions,
such as the paying of ten per cent. down and the balance in
installments at stated intervals. If the conditions which are agreed
to by the shareholder are not met his stock is declared _forfeited_,
or he can be sued in the same manner as upon any other contract.
ASSESSMENTS. Some companies organise with the understanding that a
certain percentage of the nominal value of the shares is to be paid at
the time of subscribing, and that future payments are to be made at
such times and in such amounts as the company may require. Under
these conditions the stockholders are assessed whenever money is
needed. Such assessments are uniform on all stockholders.
SURPLUS FUND. It is not customary to pay a larger dividend than good
interest. The profits remaining after the expenses and dividends are
paid are credited to what is called a surplus fund. This fund is the
property of the shareholders and is usually invested in good
securities.
FRANCHISE. A franchise is a right granted by the State to individuals
or to corporations. The franchise of a railroad company is the right
to operate its road. Such franchise has a value entirely distinct from
the value of the plant or of the ordinary property of the corporation.
SINKING FUND. A sinking fund is a fund set aside yearly for the
purpose at some future time of sinking--that is, paying a debt.