EVEN in prosperous times enormous sums are lost by investors. It has been calculated that during the 45 years that ended with 1907, the losses suffered by investors in British enterprises alone totalled over £5,600,000,000.
During that period British enterprises enjoyed a very high reputation, as many of them do to-daj-. Recent years have witnessed financial losses on a higher scale than ever known before; and if these have not driven home the truth of one of the primary maxims of investment – that great security and a high yield on capital do not go together – nothing ever will.
Since losses are due – especially in the case of small investors – to lack of know-ledge of the nature of what they are buying, and to inabilit3 to gauge the likelihood of an investment turning out to be what is hoped of it, no excuse is needed for setting out plainly certain facts, which, though familiar enough to business folk, are not universally understood.
Securities in general fall into one or other of two classes, viz. (1) Those issued by governments, municipalities, corporations, other public bodies and undertakings guaranteed by the Government. (2) Those of joint-stock companies.
A joint-stock company may be defined as a business or trading concern, the capital of which was originally subscribed by a number of different people in the game or different proportions.
Government and Municipal Securities. – Buying securities of the first class is regarded as one of the safest forms of investment. The interest payable is fixed and not high; but the payment of it is guaranteed, in the case of a government, by all the taxpayers of the country; and in the case of a municipality, by the ratepayer.
The income from such sources may therefore be looked upon as likely to continue as long as the securities are held. A further attraction is that the capital is protected by having to be repaid in full by a certain date, since it has only been borrowed for a period. In many cases repayment may be spread over a number of years.
The 5 per cent. War Loan is a case in point. This was officially redeemable 1619291947, which means that the Government had the right to pay the loan off at any time between June 1st, 1929, and June 1st, 1947; but must redeem it by the later date.
In 1932 the Chancellor of the Exchequer took advantage of the right, and holders were given the choico of being paid out or accepting a lower rate of interest – ZK per cent.
Where a loan is issued in the form of bonds of a definite value each (£100, £50, £10, etc.), redemption over a period may be by drawings, that is, the numbers of so many bonds are drawn by lot each year, and the holders paid off.
As bonds have been mentioned, it should be explained that stock, in which form many government issues are made, implies that a security can be bought to any value, down to Id. Thu3, one may buy £301 lis. 7d. Worth of 3½ per cent. Conversion Loan Stock; but not a fraction of a bond, nor part of a share in a joint-stock company.
The quotations of a British stock in the financial columns of a newspaper are the present value of an original £100 worth of it; and in the case of bonds, of a £100 bond.
The quotations show plainly enough that even government securities are subject to wide fluctuations and heavy falls in value. Many foreign government securities have but a fraction of their nominal value. The strength of a government and the wealth and general condition of a country have the same effect on its securities as the profits of a joint-stock company have on the value of its shares.
The investor is therefore advised to restrict his choice, where this class of security is concerned, to those issued by or in countries under the British flag – Britain itself especially.
Allowing for Redemption. – The yield of a redeemable stock may not be represented truly by the interest received; and when buying this factor should, at least in the case of stocks redeemable in the course of a few years, or already redeemable, be taken into consideration.
Assume a certain stock to stand at 80, and to be redeemable 10 years hence. The tendency will be for its value to rise steadily to par (that is 100) during those 10 years, and if the holder is paid off at the appointed time he will have received the equivalent of another 2 per cent. Interest per annum on his holding.
If, on the other hand, the stock stands above par, say, at 105, a purchaser at that price has to face a fall of £5, and if this is spread over 10 years, this represents in practice a reduction of interest by I per cent, per annum. Supposing the nominal interest to be 5 per cent., in the first case it would actually be 7 per cent., and in the second 4J per cent.
That is as regards income. On the money actually spent the figures would be respectively more and less favourable. Buying at 80 and redemption at 100 would mean £50 in interest over the period and £20 extra on redemption, or £70 in all, equivalent to interest all through on the purchase price at the rate of 8$ per cent.
Buying at 105 and redemption at 100 would produce the same interest, less an effective loss of £5 – a total of £45, equiva-lent to under 4 per cent, on the money.
These calculations, which might also be applied to any form of redeemable security, are not made to encourage readers to buy securities standing at a discount , nor to condemn those which stand at a premium (above par). Their object is merely to draw attention to a point which is often overlooked.
Some stocks are transferable by deed, others are inscribed. For the first, cer-tificates stating amount, conditions, and ownership are issued to the purchaser; who, if at any time he wishes to sell his holding, has to execute a deed transferring it to the purchaser, and surrender the corresponding certificate. H only part of the holding represented by the certificate is sold, he will receive another certificate for the unsold balance.
Inscribed stocks carry no proof of ownership beyond an cntr in the books of the office or bank from which the issue was made. Transfer of such stock involves the attendance at the bank, etc., of the seller or his attorney.
Bonds are usually to bearer. They are printed documents, to which are attached as many coupons for half-yearly interest as are needed to cover the period up to the date of redemption. As each coupon becomes due for payment it is detached and presented, or paid into a banking account.
Bonds are merely numbered; they carry no proof of ownership, and can be passed from one person to another without any formal transfer, like treasury or bank notes.
Securities of Joint-slock Companies. – These consist of shares and debentures. The capital of a company is all in shares. Any debentures which it may have issued are for money borrowed to carry on its business. As a rule they are repayable by a certain date.
Debentures carry a fixed rate of interest, the payment of which takes priority of dividends or shares. In the case of the company having to be wound up, debenture holders must be paid in full, as regard both capital and interest, before the shareholders are entitled to receive anything.
The debentures may not all rank equally. There may be First, Second and Third debentures. First debentures take priority over Second, and Second debentures over Third. If interest falls into arrears debenture holders can apply for the winding-up of the company.
Shares may be either preferred or ordinary. The capital of some companies consists entirely of ordinary shares. But most large companies issue preference shares also.
Most preference shares carry fixed dividends, usually payable half-yearly; and many are also cumulative. In any case dividends on preference shares in respect of any jrear must be paid in full before any is payable on ordinary shares.
But where preference shares are cumula-tive, any arrears of dividends also must be paid up before ordinaiy shares can rank for dividend. To make this quite clear, let us suppose that for three years, owing to bad trade, preference shareholders in a concern which we will call Antarctic Creameries, Limited, have received no dividends; but that in the fourth year a good profit is made. If the shares in question were non-cumulative they would receive only one years dividend; if cumulative, dividends for that year and for the preceding three years as well, if the profits were sufficient.
Then there are cumulative participating, preference shares. These are cumulative as regards a certain fixed rate of dividend, but are entitled to share with the ordinary shares when the latter also have received so much per cent dividend. The extra amount is usually small – 2 or 3 per cent. When this has been paid the ordinary shares come in for the rest of any profits distributed.
Like debentures, preference shares may be of two or more classes – First, Second, Third, etc. For payment of dividends, and repayment of capital, the First rank before the Second ; the Second before the Third. And so on.
Some companies call their shares Preferred Ordinary shares and Deferred Ordinary shares. These may be regarded as other names for Preference and Ordinary shares. In a few cases there are Preference, Preferred Ordinary, and Deferred Ordinary shares. Here the Preferred Ordinary are in effect Second Preference (usually participating shares).
There is usually no limit as to the per-centage that may be paid on Ordinary shares, so in very prosperous times their value may increase greatly, and in bad times shrink woefully, unless the directorate of the company has wisely devoted part of the profits made in good years to building up a fund for levelling dividends up in lean years.
Various classes of debentures, and of Preference and Ordinary shares, may be regarded as a series of tanks of different sizes and on different levels, each of which, when full, overflows into the tank next below it. It is obvious that, the higher up in the series a tank is, the better is its chance of being filled.
If a company falls upon evil times, the Ordinary tank goes dry first, and then in succession the second Preference and first Preference tanks. Should the drought affect the Debenture tank, those below may be permanently cut off by the winding up of the company at the debenture holders request.
General Advice. – If the prospective investor has any doubt as to the advisability of making this or that investment, he should consult his bank manager or other person with a good knowledge of 89 financial matters, who will be in a position to confirm or criticize, and put forward alternatives.
National Savings Certificates provide great security with a moderate rate of interest in the form of an increase in value. The money invested can be recovered at any time, plus the premium due at the time when the certificates are cashed.
A holding of these certificates is a nest-egg, not a source of regular dividends; and it may not exceed a total of £500 (face value) in the case of any one person.
Among the soundest of investment maxims is, not to put all ones eggs into one basket, unless there be very few of them, in which case a very good basket indeed should be selected. This maxim applies not merely to individual issues, especially where joint-stock company shares are concerned, but to issues of the same kind.
In pre-war days railway securities were greatly favoured as gilt-edged, and many people had a large part of their money invested in them. Alas! The unforeseen competition of road vehicles, and other causes, have removed much of the gilding! There are things which the wisest financier cannot foresee, and the only safeguard is to distribute the risk.
Another good maxim for people of small or moderate means to follow is, not to invest more than a minor part, say, a third, of their capital in what may be regarded as at all speculative shares. The latter should be looked upon only as means of bringing the general return of capital to a higher level than that of first-class securities, which should always be the backbone of investment.
The investor who is inclined to back his own judgment will be well advised: (1) To confine himself to securities quoted in the official lists issued daily by the London Stock Exchange, and reproduced in the daily papers. He will then be able to keep an eye on his investments. 4 (2) To think twice before buying shares which stand at a very high premium on the strength of recent big profits. Success brings competition and price-cutting; and the maintenance of abnormal profits becomes unlikely.
Take the case of rubber shares. Immense profits were made in the early dajs of rubber planting. As a consequence companies anxious to share the spoils planted huge areas. Result: great over-production and the shrinkage of prices till rubber cost3 more to grow than it will fetch. (3) To ascertain, in the case of a joint-stock company, what classes of shares are issued, and how many of each class. Also, whether any debentures have been created, and to what amount. A big debenture issue makes Preference shares less attractive; and two or three relatively large classes of Preference shares have the same effect as Ordinary shares. (4) To pay little attention to tips – unless they come from very trustworthy quarters – and to rely rather on obtaining as full information a3 possible about the past fortunes of a company and of the prospects of the particular industry or trade in which it is engaged. This may involve some work – but not so much as replacing money that might be lost by a bad choice.
Safe-keeping. – Certificates of stocks and shares, and bonds, should be lodged with a bank for safe-keeping. Bonds to bearer especially need good safeguarding. It is advisable to have the securities listed separately on the Safe Custody receipt issued by the bank, as any security can then be withdrawn separately on presenting the receipt and having the entry ruled out, and signing a receipt form relating to the document removed.
Accounts. – The systematic investor keeps records of all investments. Details 6hould include: date of purchase; total valuo of stock or number of shares;.des- cription (whether Debenture, Preference, or Ordinary, if shares); price (per £100 of stock, or per share); total cost; when paid for; date of transfer; date of receipt of certificate; number of certificate; date of selling; price of selling; net proceeds; date of sending certificate. Columns thus headed provide all necessary information regarding both purchases and sales.
For information whichwill come in useful when income tax returns have to be made up, and will show the fortunes of an investment, all payments of interest or dividends should be recorded in a book Beady ruled in cash columns. Four columns will be needed for each year and headed respectively: Date of receipt ; Gross Amount ; Tax Deducted ; Net Amount. For income tax purposes a year should be regarded as commencing on April 6th.
Quotations of Stocks, etc. – There are two prices given in a daily quotation of a stock. India 3 per cent, stock, for example, may be quoted as 70-71. The lower figure is what a teller will get for the stock; the higher, what a buyer will have to give. The difference represents the margin required by the jobber, the man who trades in stocks, etc., on the Stock Exchange, buying and selling from and to brokers acting for their clients.
A broker about to do business asks a jobber for prices for a certain stock, without saying whether he is a buyer or a seller. The jobber will make the prices close if there is a brisk business in the particular stock or share, in order to do a deal. Bub if the stock is scarce, or he does not much wish to deal in it, he will protect himself by widening his prices.
So if one sees a stock quoted, say, at 80-00, it has a bad market, and for the time being at least, is best left alone-Should, however, transactions in it multiply, the price will close, sa , to 82-84.
Some of the daily papers give prices at which business, if any, was done on the previous day. These are the best guide to what would probably be asked or given for a stock.
HOW TO BUY AND SELL STOCKS AND SHARES
THOUGH the purchase and sale of a security may be done privately, in 990 cases out of 1000 it is conducted through a stockbroker, who is a member of the London or a provincial Stock Exchange, and charges his client a small commission for his services.
Buying. – An explanation of the procedure of buying stocks or shares which are transferable by deed – that is, those of which the holder has certificate of ownership bearing his name – may be given most easily by talcing an imaginary ex.I mple.
Mr. X, having made up his mind to invest hi 100 £1 Preference shares of Great Western Coaches, Limited, writes to a stockbroker, asking him to purchase them. He gives the limit price per share beyond which he is not prepared to go.
If the broker is able to buy at or below the price named, -Mr. X receives a contract note, whereon is set out the price paid per share, and the total amount payable. To the latter are added commis sion charges, cost of contract stamp, cost of stamp duty on the transfer that will have to be signed, and the fee (usually 2s. Od.) charged by the company for entering the transfer in its books and issuing a new certificate to the purchaser.
At the bottom of the note will be found the words For the Account, or For Settlement, followed by a date. The date given is that bj which the shares must be paid for by Mr. X.
Some days after this date, Mr. X, who has duly sent Ins cheque to the broker, receives a transfer, already signed by the person from whom the shares have been bought. This is a printed document, with spaces filled in in ink to show that Mr. Y of such-and-such an address, in consideration of a certain sum paid by Mr. X, transfers to Mr. X 100 Preference shares of £1 each, numbered from this number to that, in Great Western Coaches, Limited. (The price, it may be noted, will not agree with that on the contract note.)
Mr. X signs the transfer in the presence of a witness, who has to state his or her address and occupation. (The wife or husband of the person executing – signing – a transfer is not a valid witness.)
The transfer is returned to the broker, and in due course Mr. X receives a certificate issued by Great Western Coaches, Limited. The business is then complete.
Selling. – A year later, Mr. X, seeing a profit, or fearing for the fortunes of Great Western Coaches, Limited, decides to sell his shares. The broker is commissioned to put through the sale, at and over a certain price per share. The contract note for the sale gives the price obtained per share and the total fetched by the .shares, from which contract stamp and commission are deducted. Mr. X as seller, has to pay neither stamp duty nor companys fee, for which Mr. Z, the purchaser, will be responsible.
The transfer of the shares is in this case signed by Mr. X first, and is returned to the broker with the certificate of the shares. Mr. Xs part in the transaction is then concluded. Shortly afterwards he will receive from the broker a cheque for the amount realized.
Note. – A transfer contains the following: As WITNESS our Hands and Seals this . . . day of . . . One thousand nine hundred and. … The date obviously must not be filled in by the seller, as the purchaser has not yet signed; and in all cases it is best to leave the completion of the date to the broker.
Bonds. – Bonds to bearer require no transfer to be signed by either seller or purchaser. They are merely posted or handed by the seller to his broker, who pays as soon as the purchaser has settled up.
Inscribed Stock. – Transfer of an inscribed stock (one for which no certificates are issued) requires the seller or his duly appointed agent to attend at the bank or office from which the stock was issued, and sign an entry in the stock register. The purchaser – or his agent – has to do the same.
For Cash. – In the case of bonds and some stocks completion of purchase or sale does not have to wait till a settlement day. This will be indicated by the words For Cash at the bottom of the contract note. The seller for-wards his bonds, etc., at once, and may perhaps receive payment on the day following.
Most newspapers record the daily prices at which stocks and shares are dealt in, but a uniform system is not generally adopted. In some newspapers two prices are given, for example, Conversion Loan 99-101, and in others only one price – Conversion Loan 100. In the former example it can be taken approximately that a holder of this loan would receive about £99 for every £100 he sold, but would have to pay £101 for every £100 if he were a bu er of the stock. The middle price, namely, 100, if there were any dealings in the stock, can be regarded roughly as the price at which the last deal was recorded.
Where one price only is quoted say, 100J, this indicates the approximate closing price of the stock, and conveys the information that for every £100 of stock bought at the quoted price £100 2s. 6d. Was paid.