Everybody's Guide to Money Matters / With a description of the various investments chiefly dealt in on the stock exchange, and the mode of dealing therein

by of Exeter F.S.A. William Cotton

CHAPTER IV. INVESTMENTS.

GOING back to the parcel of securities which Miss Smith received from her lawyer, we will presume that they represent safe investments of various kinds. It will be prudent, however, to ask her banker to examine them to see if any, in his judgment, might be sold with advantage (either on account of doubtful character or ex- ceptionally high price), and the money invested elsewhere. This business the bank will transact for her; and in the matter of investment, in addition to using her own common sense as to the nature of the securities in which she should place her money, she should seek the advice of her banker, and rely very much upon his opinion.

The undertakings in which the public are in- vited to invest their money are so numerous, and the prospects of success so speciously asserted, in good and bad alike, that it is necessary to be extremely cautious in accepting any state- ments of the kind without rigid examination and proof of their being true and genuine. Other- wise the investment or purchase becomes a speculation, and, more than likely, will only end in disaster.

The term "securities" applies both to the concerns in which investments are made and to the deeds and documents which represent the investments. Thus a mortgage or a mortgage deed is a "security." The Government Funds, stocks and shares in all companies, bonds, foreign and otherwise, Corporation Stocks, &c., are all termed "securities." A convertible se- curity is one which may be sold in the open market, there being no restriction upon the persons who may hold it.

We will now endeavour to put before the reader some account of the various "securities" in which the public invest their money accord- ing to individual choice, and which (with the exception of mortgage on real property-land or houses) may be bought and sold in the stock- market through the agency of a banker or broker. Quotations of the market price of these securities may be found in the Stock Exchange list, which is published daily, and can be seen at most bankers' offices. Many of them are also quoted in the daily newspapers.

MORTGAGES.

To invest money upon mortgage is to lend it to a person who has house or landed property, and desires to borrow money at a certain speci- fied rate of interest. The title deeds of the property are deposited with the lender of the money, together with a mortgage deed, which describes, in full detail, the terms which may have been agreed upon.

The interest is usually made payable half- yearly, and in the event of its payment not being kept up, or the lender desiring the return of his money, the principal sum can be called up, the lender giving six months' notice of his intention to do so. If the borrower fails to pay, a process of law has to be instituted, called a foreclosure suit, which, if successful, transfers the absolute ownership of the property into the hands of the lender, so that he can receive the rents as his own, or, if he pleases, sell the property under legal authority. In view of such a contingency the value of the property should considerably exceed the amount of the money advanced, so as not only to cover the principal sum, but also any arrears of interest, together with law costs and expenses. The usual pro- portion of an advance on mortgage is two-thirds of the ascertained value of the property, but there might be circumstances which would war- rant some variation in the proportion.

The mortgage deed should be prepared by the lender's own solicitor, who would see that the property had a good title and use all the pre- cautions necessary in transactions of this kind to guard against fraud and loss; and in many cases a professional valuation of the property would be desirable, as a preliminary, before the advance is entertained at all.

Cases have been known where fraudulent per- sons have borrowed money on mortgages of property conveyed to themselves, but as to which they were trustees only for others. The lenders or mortgagees have, in such cases, no alternative but to give up the deeds and submit to the loss of their money.

Debentures are a form of mortgage applicable to the raising of money by a corporation or joint-stock company.

The company mortgages its property for a certain sum, too large for a single person to advance, so it is divided up into even amounts of, say, £100, the money being secured by de- benture bonds, bearing interest at a fixed rate, and being saleable in the stock markets.

THE FUNDS.

"What are the Funds?" The writer has been asked this question over and over again, though it seems scarcely credible that, in these days, any person of ordinary intelligence should be ignorant of the meaning of the term. Unfor- tunately these things are not usually taught in our schools.

"The Funds," generally speaking, is the term applied to the National Debt of Great Britain, the money borrowed by the Government from the people, chiefly for the purpose of carrying on the great wars at the beginning of the present century. For these loans as much as 5 per cent. has in former years been paid, but at present 2 3/4 is the rate payable on the great bulk of the debt.

The year after the Battle of Waterloo the National Debt amounted to nine hundred mil- lions of money; at the present time it amounts to about five hundred and seventy millions, and is steadily diminishing. This being the case, there is of course no need of further borrowing at present, but the loans outstanding - any por- tion of them - may be bought and sold in the market; that is, any lender may transfer all or any part of his loan to some other person, and as there are, daily, hundreds and thousands of individuals wanting to buy or to sell, there is no difficulty whatever, through the medium of the Stock Exchange, in arranging so that a person can obtain, or dispose of, the exact amount of stock he desires.

The chief method by which the National
Debt is reduced is described under the head of
Terminable Annuities.

STOCKS AND SHARES.

The stock of an institution or company is a fixed sum forming the capital upon which the concern is carried on, or it is the fixed sum bor- rowed for certain purposes. Any quantity of stock may be purchased, but shares, which represent the capital of a company, can only be purchased in whole numbers.

The nominal or face value of stocks and shares by no means necessarily represents their market value; in fact it is the exception that they should do so. The market price is con- tinually fluctuating. Thus, if the price of a given stock is quoted in the lists and news- papers at 110, it means that for every £100 of such stock £10 additional has to be paid, and the stock is said to be at 10 premium. If, on the other hand, it is quoted at 90, it means that £100 of such stock can be purchased for £90, and the stock is said to stand at a discount of 10. The interest in either case is of course calculated on the face value, that is, £100.

This applies to all kinds of stock on the same principle, the prices varying according to the esteem in which they are held, or, in other words, the credit they have with the moneyed world.

The shares of companies, which are only purchasable in whole numbers, are of various denominations, or face values; and again these face values by no means represent the market value. Shares of £5 each (nominal value) may be quoted as selling at 6, which would be 1 pre- mium, but the dividend or interest would be calculated on £5. On the other hand, a £5 share quoted at 4 would be 1 discount, but the dividend or interest would still be calculated on the face value of £5.

In very many cases the whole of the nominal value of a share is not called up, i.e., is not re- quired to be immediately paid. Thus a £5 share may have only £3 paid upon it, leaving a lia- bility of £2, which the holder may at any time be called upon to pay, whether convenient or not. This should always be borne in mind when purchasing shares of any kind, as the neglect of this precaution has often involved holders in serious difficulties, from being called upon to pay up when least able to do so.

The dividend on shares of this kind is calcu- lated only on the amount paid up.

DIVIDENDS.

A dividend is the sum apportioned periodi- cally, in the shape of profit or interest, to holders of stocks and shares. It may be a fixed sum according to the rate of interest, as in the case of the Funds, Colonial Stocks, &c., or a varying sum according to the profits made, as in the case of railway shares and those of other companies. The dividends on the Funds and some Colonial Stocks are paid quarterly, at the beginning of January, April, July, and October. A month prior to the date of payment the stocks are marked "ex-div.," meaning that any purchase effected after the 1st December, 1st March, 1st June, and 1st September, would not carry that quarter's dividend, as it is held in favour of the person whose name is registered on the books on those dates.

The interest dependent upon the shares or stocks of companies is usually paid half-yearly, after the periodical meeting, when the accounts are presented and the profits declared. A cer- tain date is fixed when these shares and stocks are saleable "ex-div." or "ex-interest."