The capital stock of a company is the amount, as estimated by the incorporators, required for the purposes of the business. Authorized and fixed by the charter, it can be changed only by amendment of that instrument. It is divided into shares, the face value of which is usually one hundred dollars, though the matter is discretional with the incorporators and other amounts are often chosen. Generally the state laws require that a certain minimum amount of the capital stock be subscribed and in some states paid in, before the corporation may begin business; thereafter additional stock may be issued as required, up to the charter limit.
This is in itself a nullity, it is merely the right to issue stock if subscribers can be found, and until so issued represents nothing.
This is stock actually subscribed for and the subscriptions accepted by the company, and, usually, for which stock certificates have been duly made out and delivered to the subscribers. It is a liability of the company and the subscriptions or the cash and property received should be an equivalent asset.
Stock which has been subscribed, issued, and fully paid is termed full paid stock, and the words "Full-paid and Non-assessable" should always appear plainly printed upon the face of its certificates.
This term is commonly but erroneously applied to unissued stock, or even to stock subscribed but unpaid. Strictly speaking, it is such stock which has been issued, paid for usually in full- and then by gift or purchase has come back into possession of the company. It may be taken in the name of the treasurer, or of a trustee, or may be held in the name of the corporation itself. In either case it is accounted an asset of the company and may be held or sold at the discretion of the board of directors. When sold below par the purchaser incurs no liability, for the stock if once full paid, remains so. So long as held by the company, it can neither vote nor participate in dividends, but remains lifeless and without rights or powers. It is issued stock, but, being in the treasury, is not outstanding stock. This distinction does not, however, exempt such stock from the franchise taxes imposed under the laws of certain states, as New Jersey and Delaware.
Stock issued without special privileges or restrictions- general or ordinary stock- is embraced in the term common stock Unless special stock of some kind is issued by the company, all its stock is common stock. The owner of common stock has the right to attend and vote at all meetings of stockholders, to share in the profits of the business, and on the dissolution of the company, to have his due proportion of the final assets.
This is a stock issued under an agreement that it is to receive a stated dividend from the profits before anything is allotted to the common stock. It is sometimes called guaranteed stock, though this term is more properly applied to stock issued by one company with a certain dividend guaranteed by another company.
Preferred stock, unlike a bond, does not in any way represent a debt or liability of the corporation. It is merely an investment; its owners are but stockholders; its dividends, while payable before anything is given the common stock, may be paid only out of profits, and the failure of dividends gives no ground of action against the corporation. For these reasons preferred stock, if it can be sold is much preferable to bonds as a means of raising money. Should the corporation become insolvent, usage as to preferred stock is not uniform. Under the laws of New Jersey and certain other states, should the assets be sufficient, it is redeemed at its face value, after the debts are paid, and before the common stock receives anything.
That which purports to represent, but does not represent in good faith, money paid into the treasury of the company, or money's worth actually contributed to the working capital of the corporation, is watered stock. For instance, if a certain stock is paying annual dividends of 10 per cent, as much more stock may be issued, giving each stockholder twice as many shares of stock bearing 5 per cent. Companies having municipal franchises for lighting, water supply, street railways, transportation and other semi-public functions, always, as a matter of policy, issue sufficient "fictitious" stock to keep their dividends down to an apparently low figure. In many cases, corporations judiciously "water" their stock to prevent rivals, or possible competitors, from knowing the real profits of the business.
Generally there is no legal prohibition against the "watering" of stocks, provided no one is defrauded thereby. In many states, however, all such issues of "fictitiously paid-up" stock are prohibited. These statutes, however, are frequently evaded.
The stock certificate is documentary evidence of ownership of stock in the corporation issuing such certificate, by certifying that the person named therein is the owner of record of a certain number of shares of the company's stock. The ownership of the stock goes with the certificate and its signed indorsement, but the ownership of record remains with the original holder till the transfer is made upon the books of the company. In the meantime the original holder has power to exercise all the rights of a stockholder. For this reason transfers should be made without delay.
A subscription to the stock of a corporation is an agreement on the part of the subscriber to take a specified number of its shares and if unqualified, is held to mean at par and for cash. Stock subscriptions may be paid in property, and in most of the states, in labor or services when it has been so agreed. Stock may be issued in this way for mines, factories, patent rights, the good will and other assets of a business, and for any other kind of property that might be purchased for cash. The privilege of safely issuing stock for property is often of the greatest importance in the exploitation of mines, inventions and other speculative enterprises. It is so often abused that in some states it is most rigorously hedged about, and any over-valuation is made dangerous for both the officials of the company and the holders of its stock.