The various classes of railway stocks and shares represent what is probably the most important financial interest in the United Kingdom, or at least the most important which appears in the Share List. The National Debt of the United Kingdom amounts to nearly 800 millions; the Municipal Debt to about 400 millions. The railway interest is equivalent to both of them combined, for the nominal capital of the British railways at the end of 1902 was £1,216,861,421. It is estimated that the amount of money invested in them represents fully one-twelfth of the total accumulated property of the nation.

The following is a statement of the railway capital as at 31st December 1902 extracted from the Board of Trade Returns for that year:-

Of this, however, £189,400,000 is made up of nominal additions to the stocks in consequence of conversion; so that making allowance for this deduction the actual capital expended on existing railways may be stated at something over 1000 millions sterling.

The forms of the securities constituting the investments in railways differ in the character and the value of the security they furnish. It would take up too much time to explain them all fully, but I may mention the principal classes that are likely to come under your notice.

Debenture Stocks

It may be sufficient here to state that debentures, or debenture stock, which is the form such railway securities generally take, form a debt secured over the undertaking of the company prior to all other shares or preference, or guaranteed stock. The interest on debenture stock has priority over all dividends or interest on any shares or stocks of the company, and ranks next to the interest payable on the mortgages or bonds legally granted before the creation of such stock; but the holders of debenture stock are not, as among themselves, entitled to any preference or priority (except in one or two isolated examples, where the description of the stock shows the fact of its being postponed to prior issues). Railways are not allowed to borrow on debenture a larger sum in the whole than one-third of the authorised share capital; and they cannot exercise this power till the whole of the share capital is subscribed, and one-half thereof is actually paid up. Shortly stated, the definition you have to remember is, that the debentures and debenture stock of a railway company represent the sums borrowed by it on security of the railway and its property.

Guaranteed And Preference Stocks And Shares

On the other hand, the partners of the railway are represented by the shareholders, who are divided into Guaranteed, Preference, and Ordinary. The dividends on guaranteed and preference stocks and shares come next in order after debenture stock. In the case of guaranteed stocks and shares the holders have what is called a cumulative preference for dividend; so that, if in any one year there is not sufficient income to meet the dividend at the full fixed rate on these stocks, the deficiency has to be made up out of the revenue for subsequent years.

In the case of preference stocks, on the other hand, the dividend is contingent on the profit of each separate year (except in the case of three of the North British preferences, where the dividend is contingent on the profit of each half-year); and if there is default of the whole or a portion of the dividend for one year, the holders have no claim for the arrears. The holders of guaranteed and preference stock have a voice along with the ordinary shareholders in the management of the railway, whereas the debenture stockholders have not.

Most railways have several classes of guaranteed and preference stocks. The Great Central Railway, for instance, stands in the Share List with five classes of guaranteed stock and ten of preference stock. The dividend on its 4 1/2 per cent First Preference is payable in full before the 3 1/4 per cent Preference receives anything; while again the dividend on the 3 1/4 per cent Preference is payable in full before the 6 per cent Preference receives anything, and so on. It is important, in referring to a stock, that its exact designation should be stated, as a slight error in this respect sometimes makes a considerable difference. Any one not conversant with the history of the Great Central might be pardoned for failing to distinguish between Great Central 5 per cent Convertible Preference Stock, 1872, and Great Central 5 per cent Convertible Preference Stock, 1894; but the former sells at present at a price over 120, and has paid dividends in full for ten years; while the latter sells at something between 40 and 50, has not paid a dividend since 1898, and is not likely to do so for some time. It is true the contrast in this case is much greater than is usual, and arises from the special circumstances of the Great Central Railway, to which I will refer later; but it differs from other cases merely in amount, for in most cases the order of precedence of the various stocks has its influence on the market price. Take, for instance, the Caledonian Railway, which in the Glasgow Share List has three guaranteed stocks and six preference stocks. The highest guaranteed stock is its 4 per cent Consolidated Guaranteed, which is quoted on the day I write at 120 7/8, while the 1902 4 per cent Preference is quoted at 113 3/8. In some cases railways have consolidated their issues of preference stocks, which at one time had different order of precedence, into one large stock, ranking equally on the profits. The Midland Railway created at different times eighteen classes of preference stock bearing different rates of interest. These have all been consolidated with the consent of the holders into one stock bearing 2 1/2 per cent - the holder of a 4 per cent stock getting £160 of the new stock for each £100 of the old, so that his annual income was the same as before. The holders of the older preferences sacrificed a portion of their security; but in exchange they got a more marketable stock, for, as I have already mentioned, a small stock is not so marketable and does not command so good a price as one of large amount.