Accrued Interest And Dividends

"Ex dividend" means that on the given day when a corporation's books close for the payment of the dividend to all stockholders of record, the stock is quoted with the dividend deducted from the price. Unless this is known the lower price of a stock selling "ex dividend" is likely to confuse the uninitiated. When Union Pacific declares a quarterly dividend of 2 per cent and the price of the shares was $175 the day previous, Union Pacific will sell "ex dividend," or at $173, meaning that $2.00, the equivalent of the dividend on each share, has been deducted. It is the same when a corporation declares a stock dividend in addition to a cash dividend. Sears Roebuck & Co., in 1911, gave the stockholders a stock dividend amounting to about the equivalent of $12 a share. The day after the stock dividend was payable the stock sold, stock and cash "ex dividend," or about $14 less than on the previous days.

In buying bonds on the stock exchange, or for that matter over the counter of a bond house, it is understood that accrued interest is added to the price, although this is not mentioned. For example, a bond bought in May whose interest is due in July, carries five months' interest which is represented in the coupon attached to the bond. This interest for the period between January and May, properly belongs to the holder of the bond from whom it is purchased and must be paid to him in addition to the purchase price. The term "flat" is often used to designate bonds in which the accrued interest is included in the price of the bond. In private transactions, many bonds are sold on a flat basis instead of the accrued interest basis.

Investment Return

The actual percentage return to an investor is not the interest or dividend rate of his securities, but the yield divided by. the price. Figure 8 gives a handy table for figuring instantly the actual return at a given price of securities with different interest or dividend rates.

Rights

"Rights," a term frequently seen, denotes the market value of the privilege accorded to stockholders of record in a corporation to purchase additional shares it has authorized. In value these rights vary in accordance with the market premium the stock may command.

Of course, if a stock is selling for less than its par value, there is no value to the rights to subscribe for new stock. But with some corporations such rights are extremely profitable. It has been estimated for some years back that besides their cash dividend the stockholders in such a prosperous corporation as the Chicago & North Western have received rights to more stock which brought their average return upon their investment nearer to 25 per cent than 7 per cent, provided that they availed themselves of their privilege to sell their "rights."

A corporation with a $100,000,000 capital may elect, upon the favorable vote of the majority stockholders, to increase its capital by $10,000,000. Each shareholder would then have the privilege to take ten new shares for each ratio of one hundred shares owned. If the stock sells for $125, the market value for one hundred shares would be $12,500, and for ten shares $1,250. Therefore, if a corporation offers its shareholders the privilege to take the newly authorized stock at par, the rights would be worth $250 on each block of ten shares or $25 on each share.

Income Yield Of Securities Paying

Fig. 8. Table Showing Income Yield of Securities.

In stock-market parlance, these rights are also called a "melon-cutting." These "melons" may consist of new stock or the distribution of a large extra dividend, in form of cash or stock. Such prospects frequently lead to a considerable outburst of speculation in the shares which are expected to receive liberal treatment.

Odd Lot

While the bulk of the business on the stock exchange is transacted in the unit of one hundred shares or multiple thereof, there is also considerable business done in smaller units and to designate this trading the term "odd lot" or fractional orders has been coined among brokers, meaning the purchase or sale of shares in less number than one hundred shares.

Irish Dividend

"Irish dividend" is a term of sardonic derision. It stands for an assessment levied by an embarrassed corporation on its stockholders in an effort to reorganize and place itself once more among solvent corporations.

Puts And Calls

A "put" is a contract which gives the holder the right to deliver to the maker of the contract a number of shares of stock at a specified price within a limited time. On the other hand a "call" gives the holder the right to demand from the maker of the contract a certain number of shares at a specified price within a limited time.

Speculators often make such contracts with others as a precautionary measure to limit their losses. The buyers of these "put" and "call" contracts pay a certain price for this privilege to demand or deliver stock within the time limited by the contract.

A, for example, will buy one hundred shares of American Car & Foundry stock for $60 a share. He may not wish to take more than a loss of $5 on each share, so he sells a "put" to B on one hundred shares, good for thirty days for $150. Should the stock decline below 55 within these thirty days, each point decline represents a profit to B of $100 on the one hundred shares. If the stock goes to $50 a share then B, the holder of the "put," can go into the market, buy the one hundred shares at a cost of $5,000 and deliver them to A, the maker of the contract, for $5,500. His profit then will be $500, the difference less the cost of the "put," $150, and the broker's commission, $12.50, or $337.50. Should the stock not decline during the term of his contract, he is out only his $150.

The operation is similar in a "call" contract. A, in this instance, sells one hundred shares of Car & Foundry stock at $60 in anticipation of a decline, but wishes to limit his loss to $5, that is, he wants to protect himself against any further advance than $65 a share. So he sells to B a "call" contract that gives B the privilege of calling upon him for one hundred shares at any price above $65 a share within the specified thirty days. Every point advance above $65 represents then a profit of $100 to B, less the cost of his call and broker's commission.

The cost of such privileges varies in accordance with the duration for which they are given: the shorter the time, the cheaper the price; and the longer the time, the dearer the price. The only risk involved to the purchasers of these privileges is their cost. They are out this money if the opportunity to exercise their privilege at a profit fails to offer itself within the specified time. General conditions and the technical position of the stock market usually determine the market value of "put" and "call" contracts.