Business to-day is carried on in three different ways; viz., by individuals, by partnerships, and by corporations. The grocer, the butcher, the baker, or any one man who carries on a business is an example of the first. If, however, the grocer and the butcher, or the grocer and the baker, combine their businesses for the good of both, they form a partnership. When the amount of capital necessary for carrying on the business becomes so large that the money of many people is needed, a corporation is formed. The amount of money which any one individual invests in the company is represented by a certain number of shares of the capital stock of the company, entitling him to his portion of the dividends, or interest on the money he has invested. These shares of the capital stock are transferable and can be bought and sold like an automobile or a house. Since there is no time limit as to how long a corporation may do business, a change in the ownership of part of the stock, or the death of a stockholder, is not accompanied by the same result as in a partnership, where the death of one of the partners sometimes breaks up the business. Furthermore, in a partnership each one of the partners is personally liable for any debts made by any of the partners in behalf of the business, whereas the personal possessions of a stockholder in a corporation cannot be held as security for any debts incurred by the corporation. These are two of the more important advantages of corporate organization over partnership.
The Finances of a Corporation
It has been estimated that if one were to count money, dollar by dollar, one dollar every second for eight hours six days a week, it would take him six weeks to count one million dollars, and over one hundred years to count a billion dollars. This may help us to appreciate the sums of money spoken of in the following: In 1914 the market value of the Commonwealth Edison Company of Chicago was over $83,000,000. The valuation placed on the properties of the Chicago Railways Company in 1914 exceeded $79,000,000. The Union Pacific Railroad Company had invested in its properties in 1914 approximately $500,000,000. The capital obligations of the United States Steel Corporation in 1914 were over $1,500,000,000. There are hundreds of such organizations in our country, the investments in which run to and beyond $50,000,000 each. It must be plain that, except in a very few cases, these vast amounts of money do not represent the investment of one, or of a few, but of many persons. In uniting their capital, these persons decrease the cost of making or distributing the product and so increase their profits.
Stocks
When a large company of this kind is organized, a certain amount of money is agreed upon to be the capital of the company, and it is divided into small portions, ordinarily $100 each, called shares. The total of the shares is called the authorized capital stock. These shares are sold, the purchasers of the shares being called shareholders, or stockholders, of the company. The number of shares a person holds determines what part of the profits he is entitled to. For example, if a company is organized for 1000 shares of $100 each, or a capital stock of $100,000, and you owned 100 shares, you would be entitled to one-tenth of the divided profits of the company. Such profits of the company, divided proportionately among the stockholders, constitute the dividends.
Often the capital stock is of two kinds, preferred and common, as in the case of the Union Pacific R. R., which has $200,000,000 of authorized preferred stock and $296,178,700 of authorized common stock. As the names signify, preferred stock is ordinarily better than common stock, the dividends on preferred stock being paid before any dividends are paid on common stock and usually at a stated rate of interest; as, 4, 5, or 6 per cent. In the case of the Union Pacific, this rate is 4 per cent. If the company earns only enough profits to pay the dividends on the preferred stock, the common gets no dividends. On the other hand, if the profits are enormous, the common occasionally gets more than the preferred.
Par and Market Value
The par value of a stock is the face value of one share of stock, indicated on the face of the certificate. This may be $10 or $50 or $100, whatever the amount agreed upon for one share when the company is organized. The amount most commonly used as par is $100. The market value of the stock, however, need not be this amount, but may be greater or less, dependent on how successful the company is and what rate of dividends it pays. If a company's standing is very good and the dividends are high (over 6 per cent), the stock will probably sell on the market above par. If the company's finances are in a doubtful condition and there are evidences that the company will pay small dividends, if any at all, the market price of the stock will fall below par. For example, in January, 1914, Union Pacific R. R. common stock sold for about $158 per share, because the finances of the company were in good condition and the company had paid 10 per cent dividends steadily each year since July 1, 1907. If, however, any occasion should arise to make the public doubt the payment of future dividends at the same rate, the stock would probably decline. To go to the other extreme, in the same month Wabash R. R. common stock sold as low as $8½ per share, although the par is $100. This was because for some years the company had paid no dividends and was then in the hands of receivers. To take a middle case in the same month and year, Erie R. R. first preferred stock sold at about $45 per share, notwithstanding the fact that since 1907 no dividends had been paid. The reason for this seemingly high price was that the company had for some time been reconstructing its property, had gradually increased its business, had earned a $9,000,000 surplus in 1913, and had a good outlook to a dividend in the near future.
These are not the only influences that affect the price of stocks. The old factor of supply and demand has a great influence on price. If, for example, a financier decides to buy a large "block" of some stock, the market will almost immediately be affected, and that stock will go up. One example will suffice. In 1901 E. H. Harriman set out to buy $155,000,000 worth of Northern Pacific stock in the open market to gain control of the Northern Pacific railroad. Of course, the market felt the demand, and the price of the stock rose from a little above par until it touched $1,000 a share before it started back to normal. When Mr. Harriman unloaded that same stock in 1906, because he failed to gain control, the market went down so considerably that he lost $10,000,000 and almost caused a panic.
Often the stocks of a company sell below par because the stock is watered; that is, the company has issued more stock than there is value invested in the property. Many of our railroads, for example, were built on borrowed money—that is, from the proceeds of the sale of bonds—and, to make the bonds sell more readily, stocks were given away with them. This, of course, increased the capitalization greatly without increasing the value. The temptation in forming new companies, especially in mining schemes and wildcat ventures, is to water the stock heavily by voting a large block of stock gratis to the organizers. Before one invests in any of these companies, he should thoroughly investigate them. Sometimes companies water their stocks when their dividends have become very large and they wish to bring the rate down to that commonly paid. The Wells Fargo Express Company did this in 1910, presenting their stockholders with $16,000,000 worth of new stock without any new investment in the property.