§ 8. Corporate securities. Corporations are business enterprises which issue stock, or certificates of a share in their ownership and income. Doubtless the convenience of the sale and transfer of invested capital by the use of stock has been one of several reasons for the large increase of this form of organization since the beginning of the nineteenth century. Originally the stock of a company taken collectively represented all the capital invested, and each share entitled the owner to a given portion (called a dividend) of the total income earned. The shares are issued in regular denominations in terms of money; this amount expressed on the face of the share is the so-called nominal value, or par value, or face value.5 But as a business proves more or less profitable, the value of a share of its income rises and falls regardless of the nominal amount of stock issued. At once there is a divergence between the denomination and the market-price (often called value) of the stock. The nominal amount of stock is relatively permanent, the same year after year; it may be increased by further issues, or it may be decreased by cancelation after purchase with funds in the corporation's treasury. But when stock is the only form of claim on the earnings that is issued, the fluctuations of the market-price of the stock record the market's judgment of the business; that is, its expected dividends capitalized at a market-rate for investments of that grade of safety.

3 E.g., in a circular issued in 1908 prices were quoted: "$100,000 City of Boston registered 4 per cent bonds, due June 1, 1928, price 106%, yielding 3.55 per cent; same kind due June 1, 1938, price 1081/4 yielding 3.55 per cent; same kind due June 1, 1948, price 1091/2, yielding 3.55 per cent." The gross yearly income is $4000, of which but $3776.31 would be treated as net income, and $223.69 would have to be reinvested each year to leave the capital undiminished at the end of the period for which the bonds run. The opposite is necessarily the case with bonds bought at a discount, the rate of net income on the investment being somewhat larger than the percentage that the annual payment is of the par value.

4 The practice of counting the capital as equal to a fixed sum of money has suggested to some the idea that capital is, in its very nature, a permanent quantity of value. But this is an illusion, for the "sum of value" may be both increased and diminished, and may be utterly swept away. Capital is no more than the bookkeeping expression of the present worth of a person's control over income, definite at the moment that the first investment has been made, and thereafter merely an estimate, until the property (right) is again sold at a price.

But in present practice there are several forms (of which stock is but one) in which corporate incomes are marketed and in which an investor may buy a share in the earnings of the business. Bonds, representing money loaned to a company and entitling their holder to regular interest payments, hold legal priority to the claims of any variety of stock. They usually do not give their owner a vote in the management or make him in the technical sense a part owner in the business. Next stands preferred stock, which entitles the owner to share first in the dividends, if there are any; and finally the common stock, which gets a share only when the other claims are satisfied. All of these are called corporate "securities," tho they are in many cases far from "secure," in the sense of being free from risk. By the multiplication and further variation of these readily saleable claims on industrial incomes, the investors' desires are met more fully and with greater precision, and correspondingly the corporations more conveniently obtain the funds needed.

5 This is an unfortunate use of the term value. It would be better to speak of the amount of a single share as the denomination, and of the product of the denomination by the number of shares outstanding as the nominal amount of stock.

§ 9. Capital value of public franchises. Franchises for the use of public highways by railroad, gas, water, and lighting companies enable their owners to get incomes which can be capitalized. If a company is given the exclusive right to operate in a locality (with use of streets, alleys, public roads, and the right of eminent domain to condemn private property) any income above an average rate of return on the investment is capitalized either in the higher price of the stock or in additional stock issued without additional outlay upon the plant. If the franchise is unlimited, the income may be capitalized as practically perpetual; if the franchise is limited, and is to expire in thirty or forty years, only the limited series of privileged incomes can ordinarily be capitalized. When, however, the managers are able to exert influence enough to have the franchise extended, and the investors believe in the skill of the managers to influence the legislators by fair means or foul, the value of the stock continues higher than it could usually be under a limited franchise. Such circumstances becloud the question whether the exceptional income arising under the franchise should go to the public or to the company. The important question, however, is whether the company is entitled to the income, for if so, the capitalizing of the income somehow, as is done in every other business, is inevitable.

§ 10. Incomes sold in perpetuity. In creating any income-yielding debt, public or private, the seller is capitalizing the promise of regular incomes to be paid to the buyer. It is not essential that a debt agreement should call for the repayment of the capital sum advanced by the lender. Many if not all of the early "public stocks" were in form promises to pay an annual income perpetually (without specified date of maturity) as the "British consols" (national bonds) are to-day. They sold for whatever they would bring in the market as a means of borrowing money. They could be redeemed and canceled only by purchasing them at their price in the open market.

The sale, in the Middle Ages, of a "charge" on the rents of a landed estate, called a "rent charge," was in very simi-lar form.6 A landowner, wishing money to go on a crusade or to improve his estate or to invest in some other business, sold a rent-paper entitling the purchaser to receive permanently a given sum, to be paid out of the rent of the estate. The debt was a "charge" upon the rent, until it was paid. The seller gave up the right to retain that amount of rent as it came in year by year, and received a capital sum in hand. Generally he had the right to repay the sum whenever he wished and thus extinguish the rent-charge. Logically viewed, the purchaser, in buying an equitable part of the income, bought an equitable part of the rent-bearing wealth. In effect it was just like a loan except that the purchaser of the rent-charge could not demand the repayment of his money. He could, however, sell the rent-charge when he wished to get his capital out. Gradually it became usual to sell and transfer rent-papers just as is done to-day with mortgages and bonds. Kent-papers thus came in the fifteenth century to be negotiable paper in somewhat general use. There was a rise and fall of the value of the rent-paper with changes in the demand for investment in rent-charges or with changes in the security.

§ 11. Bonds with fixed maturity. The modern public and corporate bonds issued by nations, states, municipalities, and corporations, for war, public buildings, public works, such as wharves, canals, water supply, etc., are looked upon by both the borrower and the lender much in the same way as were the old annuities. The main difference is that the modern obligations promise to repay a stated capital after a stated number of years. If the income of a $1000 4 per cent bond (interest payable semi-annually) running for 20 years, is $40, and the bond sells for $900, it will yield an income of $40 each year for 19 years and an income of $1040 the 25th year, of which $900 equals the original capital invested, and $100 is the increment of value distributed over the whole period. Such a transaction would be said to net the investor 4.78 per cent. The incomes received from public bonds are paid from the proceeds of taxation and are a charge on the rents and incomes of all taxable property; and the incomes received from bonds of industrial and public service corporations are a charge on the earnings of the enterprises.

6 See ch. 14, sec. 4.

Even a deposit evidenced by an interest bearing "certificate of deposit" in a commercial bank or in a savings bank may be seen to have this same character. The bank is the borrower, exchanging the promise to pay each year, or half year, or quarter, an amount of interest proportioned to the amount deposited, and to repay the capital sum on certain agreed conditions. The life annuities sold by insurance companies preserve very closely the character of the old annuities and rent-charges, tho the annuity that can be bought for a present payment is proportionately larger than a perpetual annuity, because the number of payments is limited to the lifetime of the purchaser.