This section is from the "Everybody's Guide to Money Matters" book, by William Cotton. With a description of the various investments chiefly dealt in on the stock exchange, and the mode of dealing therein. Some account of the pitfalls prepared for the unwary, and suggestions to the cautious investor.
The stock of an institution or company is a fixed sum forming the capital upon which the concern is carried on, or it is the fixed sum borrowed for certain purposes. Any quantity of stock may be purchased, but shares, which represent the capital of a company, can only be purchased in whole numbers.
The nominal or face value of stocks and shares by no means necessarily represents their market value; in fact it is the exception that they should do so. The market price is continually fluctuating. Thus, if the price of a given stock is quoted in the lists and newspapers at 110, it means that for every £100 of such stock £10 additional has to be paid, and the stock is said to be at 10 premium. If, on the other hand, it is quoted at 90, it means that £100 of such stock can be purchased for £90, and the stock is said to stand at a discount of 10. The interest in either case is of course calculated on the face value, that is, £100.
This applies to all kinds of stock on the same principle, the prices varying according to the esteem in which they are held, or, in other words, the credit they have with the moneyed world.
The shares of companies, which are only purchasable in whole numbers, are of various denominations, or face values; and again these face values by no means represent the market value. Shares of £5 each (nominal value) may be quoted as selling at 6, which would be 1 premium, but the dividend or interest would be calculated on £5. On the other hand, a £5 share quoted at 4 would be 1 discount, but the dividend or interest would still be calculated on the face value of £5.
In very many cases the whole of the nominal value of a share is not called up, "i.e.", is not required to be immediately paid. Thus a £5 share may have only £3 paid upon it, leaving a liability of £2, which the holder may at any time be called upon to pay, whether convenient or not. This should always be borne in mind when purchasing shares of any kind, as the neglect of this precaution has often involved holders in serious difficulties, from being called upon to pay up when least able to do so.
The dividend on shares of this kind is calculated only on the amount paid up.