Essentials of Common Stocks

At a great penny worth pause awhile; many are ruined by buying bargains,    —poor richard

INTRODUCTION

We have noted that a corporation is an artificial entity, created by law, and endowed with certain rights and privileges, among which is the right to issue shares of ownership called "common stock." The amount of stock authorized is stated in the corporate charter, and the amount to be issued and outstanding is determined by the board of directors. Such shares o£ stock represent ownership of the total assets and are originally issued to persons who contributed their services and/or funds as part owners. However, these original owners may have found it desirable to sell all, or only part, of their holdings to others, who then, in turn, assume the status of owners, the transfer being easily effected on the books of the corporation. Such shares are termed com­mon stock or capital stock, the former term be­ing in most general use, and the total owner­ship is divided into a number of units called shares. A share of stock differs from a bond in the following ways:
(a) A bond is a contract and as such promises to pay a specific sum of money at a certain future time, and in the meantime to pay a specified rate of interest for the use of the borrowed funds; should the company be unable to meet its interest requirements, the bondholders may recover their funds through legal process. In contrast, common stock has no maturity date and promises no fixed rate of return; further­more, there is no recovery of the invested funds until the company is liquidated or perhaps merged with another. Risks are substantial and must be assumed, since the return upon the investment will depend upon the success of the company management. Obviously, a bondholder is in a favored position since he assumes a minimum of risk; on the other hand, the stockholder may obtain a handsome profit by assuming larger risks.

1. Bondholders have no voice in management, while the stockholders, since they take all the risks, obtain the right to elect the directors and to vote upon matters of company policy.
2. In the case of bankruptcy,  reorganization, merger, or any other change in company status, the bondholders and/or preferred stockholders receive preferential treatment, while the stockholders receive last consideration; the advantages of a simple capitalization, involving common stock alone, are evident.

SOME ASPECTS OF COMMON STOCKS

Common stock is issued by certificates, each one of which indicates the number of shares owned and by whom owned. In case of transfer, an assignment form on the back of the certifi­cate must be filled out, witnessed, and forwarded to the company secretary or his assistant; the old certificate is canceled and the stock then trans­ferred upon the books of the company to a new owner, for whom a new certificate is then issued.

Sometimes the common stock is divided into two classes: the voting stock (whose owners have a voice in the conduct of the business) and the nonvoting, whose owners share in all the risks of ownership without having any voice in the conduct of its affairs. The use of this latter form has now fallen into disfavor, since it is felt that one who assumes the full risks attendant upon own­ership should also have some voice in the enter­prise.

Originally all common stock had a stated or "par" value, based upon the premise that this represented the actual funds paid into the com­pany treasury; actually, few stocks sell at their par value figure, the price depending entirely upon the net asset value and the ability of the company to show consistent earnings and divi­dends. As a result, many states permit the issue of "no par" shares, which are sold for whatever price they will bring upon the open market. For the buyer of stocks the par or the no par value of a given stock is of little consequence, since each share actually represents a fraction of the total net assets and earnings.

While the stockholders assume all the risks of ownership, there are certain legal restrictions placed upon the extent of such risks. In essence, this simply means that the stockholders cannot lose more than the amount paid for their stock. As a further restriction, most common stocks of this day carry a printed legend to the effect that they are "fully paid and nonassessable," which means that the corporation directors have no le­gal right to assess any additional amount against the individual shareholder to meet the needs of the corporation if it falls into financial distress. Liability originally meant that all shareholders were actually held liable for the entire indebted­ness of the corporation, but the experiences of the Great Depression of the thirties showed this to be a complete fiction, since it meant nothing to hold people responsible for debts which could not be collected for lack of funds with which to pay them. Today the shareholders are only lia­ble for the amount which they have actually in­vested, and this rule is practically without ex­ception.

It must be realized that the stockholder is not a lender to the corporation in which he has pur­chased shares, nor do the stockholders actually own the assets; each of them is a part owner in the business and, as such, shares in its success or failure. In the event of liquidation, he is entitled to a just amount derived from the conversion of assets after all other claims are satisfied; meanwhile the corporation is the sole owner of its as­sets, for that is the purpose for which it was orig­inally created as a legal entity.

Rights are special privileges which accrue to the holders of common stocks, although not all corporations include such "pre-emptive rights" in their charters. Where they are granted they may permit the stockholders themselves to have prior rights to buy any additional shares, usually at a price below the current market quotation, such rights being intended to prevent dilution of extent of interest. For example, we will sup­pose that the Quicker Freezit Corporation has 200,000 shares of capital stock outstanding and wishes to sell an additional 100,000 shares for use in expanding its facilities. It may offer this new stock for a limited period of time on the basis of one new share for each two old shares owned and at a price usually somewhat below the current market. The purpose of this arrange­ment is that the ownership shall not be dis­turbed as it rests with each stockholder. How­ever, if a present stockholder should decide against making the purchase, then his rights may be sold for cash to an underwriting firm, or even on the open market. Should the issuing corpora­tion be able to continue to maintain or even in­crease its profit margins upon the newly added shares as well as upon the old, then the pur­chaser of the new shares under "rights" is better off than before. Many of the larger and better known corporations have made extensive use of rights as a means of raising new capital funds; perhaps they feel that the best potential pur­chaser of new stock is the satisfied owner of stock already in public hands, who realizes that his in­terests are being safeguarded.

A stock dividend is a means of increasing the number of outstanding shares without actually selling any additional stock. For example, sup­pose that the Little Gadgette Manufacturing Company has 500,000 shares outstanding and de­clares a 20 per cent stock dividend. Then every stockholder is entitled to receive 20 per cent of the shares he holds as a premium: if he holds 100 shares, he will get 20 additional shares; if he holds 10 shares, he will get 2 in addition, and so on, except that any fractions must be paid in cash. The purpose of such a stock dividend is threefold:  (a)   to conserve cash which, for a  growing company, is often better used in the fur­ther expansion of the business; (b) to bring down the market price to a level where more people will be able to own the stock, thus achiev­ing a wider knowledge of the company and its products and/or services among the general public; (c) to break up ownership into smaller bits and thus considerably increase the number of stockholders. It is not at all unusual for a com­pany whose shares are quoted at $60 to declare a 100 per cent stock dividend so as to have the stock in the $30 price class. Some company offi­cials are of the firm opinion that a modestly priced stock is more popular and is sought after and traded more frequently, which thus makes the company more widely known. It also seems a truism that John Doe would rather own 20 shares at $30 than 10 shares at $60. At any rate, it is an actual fact that the shares which are not too highly priced are traded more often and are more widely distributed.

Warrants are actually options, usually allow­ing for the purchase of additional shares of stock for a specified price, regardless of market condi­tions. Such warrants are often issued to company officials as an incentive for greater loyalty and effort, although some may be available on the general market. Sometimes the warrants are at­tached to other securities, such as bonds. Some are good only for a fixed period of time, but oth­ers are perpetual. Since the prices of warrants fluctuate sharply, they tend to be very specula­tive and are to be avoided by all except the most experienced investors.

Our description of common stock has set forth the essentials without going into great de­tail or into technicalities. It seems quite obvious that a fair understanding of common stock is by no means difficult, yet a consumer survey con­ducted by the Department of Public Relations and Market Development of the New York Stock Exchange showed that less than one fourth of our adult population could define a common stock adequately. Of shareowning households, 61 per cent could describe common stock ade­quately, while of the nonshareholding house­holds only 19 per cent could do so. The need for educating the general public in this respect is quite obvious.

EARNINGS AND DIVIDENDS

Since the shareholder is a part owner in the business, he naturally has a strong interest in the ability of the company to earn money upon his invested capital; consequently, the earnings per share assume great importance. Some corpora­tions issue quarterly or semiannual statements of the state of their business, so as to keep the stockholders informed; others do not, so that the shareholder may have to wait until the annual report is received, or look up the most recent re­ports to the Securities and Exchange Commis­sion as printed in one of the several investment advisory services. The prime reason for such keen interest in earnings is that the dividends per share, as declared by the board of directors, will depend upon the earnings; should earnings be very poor, there may be no dividend at all; should earnings be quite modest, the dividend may be small; should earnings be good, then div­idends will be more generous. We hasten to add, however, that the total earnings are not paid out as dividends, because the company must satisfy its current financial needs, and also because a certain amount of the earnings must be put back into the business in order that it may continue to grow. As a result, the "payout percentage," as we may call it, varies greatly from one company to another. In some cases the payout may be ex­tremely generous, ranging from 50 to 70 per cent of earnings; in other cases it may be extremely conservative, being in the 20 to 40 per cent range, this latter being especially true when it seems necessary to conserve capital funds for which there may be an immediate and pressing use. In the case of the so-called "growth" stocks, there may be no dividend at all, or at most it may be very small; such a business may require all earnings to be plowed back in order to con­tinue to grow and to expand.

Perhaps the most common error into which many common-stock owners fall is relative to dividends. Some of them have the mistaken idea that dividends must continue year in and year out; others think that dividends may always be increased but never be decreased; still others, having no ideas of corporate finance, maintain that the company "owes" them such dividends in exchange for the use o£ the capital funds. All such ideas are false! Common-stock ownership carries with it all the risks of ownership, and these include the fluctuations in our national economy. Should business conditions be good, then a given company may enjoy continued suc­cess, and its dividends may be steady and even increase; should general business conditions take a turn for the worse, it may happen that earnings will fall sharply and the dividend rate may be reduced or perhaps even suspended for a period of time. It may be emphasized here that there are a few exceptions to the above state­ments, because certain essential industries (util­ities are a good example) feel such fluctuations in business conditions far less than others; since they represent what might be called basic or "defensive" stock ownerships, their dividends may continue without interruption, although a change in rate is sometimes justified. There are numerous public utilities which have paid steady dividends for over half a century, which is a strong recommendation of them for the in­vestor of modest means (see Appendix D).

Who owns common stocks? A recent census of shareholders, as prepared by the Department of Public Relations and Market Development of the New York Stock Exchange indicated that approximately 12,500,000 people (1 in every 8 adults) owned shares in publicly held corpo­rations. Women outnumber men (52.5 per cent), the typical shareholder is forty-nine years of age, and what is most striking of all of the statistics is the fact that the average share­holder's median income is $7,000, while only 23 per cent of shareholders have incomes of over $10,000 per year!

The rate of return from any stock investment will depend upon two things: the price paid for it, and the dividend received. For example, sup­pose that Fred Frostingcake owns twenty shares of Supergadgette Manufacturing Company and that he bought these shares at a price of $10 per share (we omit any commission charges at this time) ; suppose further that during the year Fred has received a total dividend of 50 cents upon each share. Then his rate of return is 5 per cent, which is obtained by dividing $0.50 by $10. As long as this dividend remains unchanged, his rate of return will also remain unchanged, since the rate of return is entirely independent of the current market price of the stock; for the moment, at least, Fred is scarcely interested in the current price. Suppose, how­ever, that Fred is in need of cash because his wife is about to have a baby; he wants to sell the stock, but first would like some idea of what the current price may be. How does he go about finding out?

PRICE QUOTATIONS

Price quotations of common stocks are to be found in the current newspapers, many of which feature them as part of their financial section. Should a given stock not appear on the pub­lished list, then a stockbroker's office will gladly furnish the quotation, often obtaining it by wire from New York if necessary. The price will be based upon what buyers are willing to pay for the stock and what sellers are asking for the stock. Suppose that Fred finds out from his broker that the stock of Supergadgette Manu­facturing is quoted "10-104"; this means that buyers are willing to pay $10 and sellers are ex­pecting to get $10.25 per share for the stock in what are called "round lots"; in the case under discussion, a round lot will very likely be 100 shares. It is easily seen that if any transaction is to take place the price may be anywhere be­tween the figures quoted above; for example, a round lot may have been sold for exactly $10 per share. In Fred's case, he may have to take slightly less ($9.875), because he is not selling a full round lot; this means that someone must combine his shares with other shares to make up a round lot for later sale.

THE EXCHANGE

It may be wondered how the newspaper ob­tains the prices it prints. They are gotten di­rectly from the market place where stocks are traded, called a stock exchange, and the prices themselves are based upon the transactions (purchases and sales) during the day, except that in case no actual sale is made, the prices are those at which offers to buy or sell have been made. We may define a stock exchange as a mar ket place for securities. It should be emphasized that any stock exchange is now subject to regu­lation under the Securities and Exchange Act of 1934, by which it agrees to co-operate with the Securities and Exchange Commission (SEC) in the enforcement of the Act and to comply with any rules and regulations which the Commission may consider desirable. Such a stock exchange is not exactly comparable to a real-estate office, where the broker brings a buyer for a listing given him by a seller; nor is it like an auction, where there is only one seller and the buyers compete among themselves. The stock exchange is really a two-way auction market, but—as it is amazing to find that only about four people in every ten know—the New York Stock Exchange does not own the stocks listed for sale to the public! Here is how it works: bidders compete with one another to purchase at the lowest pos­sible price the shares they want to own. Simul­taneously, those seeking to sell compete with one another to get the highest price for the shares they are offering. The buyer bidding the highest price and the seller offering at the low­est price agree on a figure which is acceptable to each and the transaction is made. The prices simply reflect the basic law of supply and de­mand. It is a market place where shares in American industry can be bought and sold al­most as readily as you can deposit money in the bank.

Among the better-known and more promi­nent stock exchanges are: the New York Stock Exchange (NYSE), the American Stock Ex­change (ASE), the Midwest, and the Pacific Stock Exchange.

It must be strongly emphasized that no ex­change sets or regulates prices. The prices are those that are agreed upon by buyer and seller in order to consummate a transaction. Brokers are in continuous touch with one or more of the exchanges, either by telephone, telegraph, or ticker tape; this last prints the symbol which identifies the company, the number of shares bought or sold, and the recorded price expressed in dollars and eighths. For example, GM 2.4514 means that 200 shares of General Motors were sold at $45.25, the figure 2 representing 200 shares, since two standard 100-share lots are in­volved.

While there are a number of stock exchanges in operation, there is no doubt that the NYSE is the dominant one. About 1500 common stocks are listed and traded there, including such giants as American Tel. & Tel., General Elec­tric, General Motors, Ford Motors, Standard Oil of New Jersey, Woolworth, du Pont, Sears-Roe­buck, U. S. Steel, etc.

On May 17, 1792, a group of merchants and auctioneers decided to meet daily at regular hours to buy and sell securities under an old buttonwood tree on Wall Street only a few blocks from the present site of the Stock Ex­change. These men were the original members of the New York Stock Exchange. They handled the public's buy and sell orders in the new gov­ernment stock, as well as in shares of insurance companies, Alexander Hamilton's First United States Bank, the Bank of North America in Philadelphia, and the Bank of New York.

In 1793 the Tontine Coffee House was com­pleted at the northwest corner of Wall and William Streets and the brokers moved indoors. Soon after the turn of the century, it was evident that the Tontine Coffee House was too small to accommodate the volume of trading in securities and the stockbrokers moved to a meeting room at what is now 40 Wall Street. Greater activity brought the need for a more formal organization than that created by the simple 1792 agreement. On March 8, 1817, the first formal constitution of the New York Stock and Exchange Board, as it was then known, was adopted.

From 1817 to 1827 the Board met in various offices. After that, it moved a dozen times or so before settling at 18 Broad Street, which con­tains most of today's trading floor. The office building at 11 Wall Street was added in 1922. Other historic dates are: 1863, when the name "New York Stock Exchange" was adopted; when the first stock tickers were installed: when memberships were made saleable; 1871, when the call market gave way to a continuous market; 1879, when the first telephones were installed in the Exchange; 1886, the first time that a day's volume topped 1,000,000 shares;  1910, when the Exchange discontinued unlisted trading (previously unlisted stock could be traded, but the unlisted company had no responsibility  to comply with  Exchange  standards) ; 1915, when the basis of quoting and trading in stocks changed from per cent of par value to dollars; 1922, when the questionnaire system for regular examination of the financial condition of member firms was inaugurated; 1933, when independent audits of financial statements were required of listed companies; and 1938, when a sweeping reorganization of the Exchange called for a paid president for the first time.

A member of the NYSE may be a partner or holder of voting stock in one of the brokerage concerns which, by virtue of his Exchange mem­bership, is known as a member firm or member corporation. There are 651 such firms. From the founding of the Exchange in 1792 until May, 1953, member organizations were limited to partnerships. Then the Exchange's Consti­tution was amended to permit corporations to become member organizations, provided they are engaged primarily in the securities business as dealers or brokers. Membership now totals 1366, although the Constitution makes pro­vision for 1375 members. About half the mem­bers are partners or officers in firms doing busi­ness with the public—so-called commission houses. These members execute customers' orders to buy and sell on the Exchange and their firms receive the commissions on those trans­actions. Many firms have more than one mem­ber.

An exchange provides the investor with a medium by which he may convert his funds into securities which he hopes will bring him income, a gain of capital, or both. Without this invested capital America would not enjoy the products of modern industry which we take for granted today.

Although a stock exchange is not in itself a source of new equity capital—of risk funds es­sential to developing new industries—the flow of new capital soon would slow to a trickle with­out it. If there were no stock exchange—no market place where people could sell their se­curities for cash—capital would soon become sluggish and the financing of new ventures, no matter how promising, would be heavily cur­tailed.

The investment-banking business has built up a highly efficient mechanism for the initial sale of securities issued by a new enterprise. The investment banker buys an entire issue of se­curities from the new company and it is his job to sell the securities to the investing public, both institutional and individual investors. As a general rule, after the investment banker has made this primary distribution of securities, the number of investors in the company is still comparatively small. These are the investors willing to put their money into new enterprises which have not yet developed a widespread public appeal. As new securities become sea­soned, however, they may qualify for listing. That step makes the securities more attractive to more people and enables the holders, when and if they wish, to liquidate their investment in a market place and to put the proceeds into another enterprise.

How important are the 1,500 companies with stock listed on the NYSE? Some measure of their importance may be got from these figures: these 1,500 companies earn about half of all the net profits after taxes reported by all U. S. companies; they pay their stockholders half of all the dividends disbursed; about 90 per cent of these companies paid cash dividends in the last twelve months and almost three hundred have paid dividends every single quarter for twenty years or more. Corporations listed on the Exchange provide jobs for more than 11 million workers. These companies produce practically all the automobiles and trucks made in this country, ship about seven eighths of all the finished steel, produce three quarters of all the electric power, refine 90 per cent of all the oil produced, and handle 95 per cent of our railroad traffic and air passenger travel.

The list of Stock Exchange securities has grown with the country. Up to 1869 listing on the Exchange was a highly informal action. In that year the Stock Exchange laid down its first requirement for listing—that it be notified of all stock issued and valid for trading. In the following years the Exchange added more re­quirements, including frequent earnings re­ports, full and prompt disclosure of changes in property or business, and maintenance of se­curities transfer offices. The philosophy behind the Stock Exchange's listing requirements is simply this: The investor or trader who owns, buys or plans to purchase listed securities is en­titled to information about the corporation which will help him to make his investment de­cisions intelligently.

At the time a company qualifies for listing on the Stock Exchange, it must be a going concern with substantial assets and demonstrated earn­ing power. The Exchange places greater em­phasis on such considerations as degree of na­tional interest in the company, its standing in its particular field, the character of the market for its product, relative stability, and position in its industry. The company's stock should have a sufficiently wide distribution to offer reason­able assurance that an adequate auction market in its securities will exist. The company should show earnings of at least a million dollars in the preceding year and should have at least 1,500 stockholders, holding among them at least 300,000 shares. Concentrated holdings are not considered in applying this standard.

The Exchange feels strongly that the owner of common stock must have the right to vote in the affairs of his company—so strongly, in fact, that since 1926 the Exchange has refused to list nonvoting stock. The Exchange expects, too, that the owner of common stock in listed com­panies shall have the right to vote in reasonable proportion to the ownership interest repre­sented by his stock.

This policy was recently strengthened when solicitation of proxies was made a prerequisite to listing. The New York Stock Exchange is the only securities market place in the world to have this requirement. Ninety-five per cent of all listed companies now solicit proxies from their stockholders so they can freely exercise their vote without having to come personally to an­nual meetings or other meetings called to con­sider matters of importance to the shareowners.

If a listed company wants to list additional shares of an issue already listed, or a new issue, it must get Exchange authorization, and in cer­tain cases also obtain stockholder approval. All approved listing applications are made public promptly by the Exchange. A company not only must meet certain standards to be listed but also must meet minimum qualifications to maintain its listing.

To understand the Exchange's own controls, it might be well to go back to a portion of the original agreement written in 1792: "The Ex­change's object shall be to maintain high stand­ards of commercial honor and integrity among members; and to promote and inculcate just and equitable principles of trade and business." No other business has a stricter code of con­duct.

HOW STOCKS ARE BOUGHT AND SOLD

Execution of an order is a relatively simple matter. An understanding of the various steps which take place is best found in the following imaginary transaction:
Let's say that a Dr. R. J. Charles of Baltimore has sold his summer place and decides to buy common shares in U. S. Steel Corporation. He asks the member firm's registered representative to find out for him what Steel shares are selling for on the Exchange.

Over a wire to his New York office the repre­sentative asks for a "quote" on U. S. Steel. A clerk in the firm's New York office dials the quotation department at the Exchange and hears, over an automatic tape announcer, the current quotation on U. S. Steel. Bids and offers are made in multiples of the unit of trading (ordinarily 100 shares) and the highest bid and the lowest offer have precedence. Bids and offers must be called out loud. Transactions are promptly reported over the Stock Exchange's nationwide ticker system. No trades are allowed on the Exchange floor before or after trading hours. Current quotations on all listed securities are received by the quotation department over direct wires from each trading post on the floor. Each stock is assigned a particular location at one of the eighteen posts on the trading floor and all transactions in a stock must take place at its assigned location.

The clerk in the New York office immediately relays the information to Baltimore that U. S. Steel common is quoted "65-654." This means that, at the moment, the highest bid to buy Steel common stock is $65 a share and the lowest offer to sell is $65.25 a share. Thus Dr. Charles learns that 100 shares will cost him approximately $6500, plus a broker's commission.

He tells the registered representative to go ahead. The latter writes out an order to buy 100 shares of U. S. Steel "at the market" and has it wired to his New York office where it is phoned to his firm's partner on the floor of the Ex­change. "At the market" means at the best price possible at that time. The floor partner hurries over to the trading post where U. S. Steel shares are traded.

About the same time, a San Francisco hard­ware man, James Green, decides he'll sell his 100 shares of U. S. Steel to get funds to enlarge his store. He calls his broker, gets a "quote," tells his broker to sell. That order is also relayed to the floor over a direct wire. Green's broker hurries to the Steel post. Just as he enters the Steel "crowd," he hears Charles's broker calling out "How's Steel?" Someone—usually the spe­cialist—answers, "65 to a quarter."

Charles's broker could, without further thought, buy the 100 Steel offered at 654, and Green's broker could sell his 100 at 65. In that event, and if their customers had been looking over their shoulders, the customers probably would have said, "Why didn't you try to get a better price for us?" The customers would have been right, for that is what a broker is expected to do. Every broker is charged with the responsi­bility of getting the best possible price for his customer. He must exercise his experience, knowledge and brokerage skill. He must make split-second decisions.

Here's how Charles's and Green's brokers might figure as each tries to obtain the best price for his customer:
Charles's broker: I can't buy my 100 at 65. Someone has already bid 65 and no one will sell at that price. Guess I'd better bid 65⅛.
Green's broker: Looks like I can't sell my 100 at 6514; someone has already tried to get that price. I'd better try to get 658.
Green's broker hears Charles's broker bid 658 and instantly shouts, "Sold 100 at 658." They have agreed on a price and the transaction takes place.
This is the auction market in operation. Over and over again every day this procedure is re­peated on the floor of the Exchange.

The two brokers complete their verbal agree­ment by noting each other's firm name and re­porting  the  transaction  back  to  their phone clerks so that their customers can be notified.

In the meantime, an Exchange employee has sent a record of the transaction to the ticker de­partment for transmission over the ticker net­work. The report of the transaction is printed simultaneously on 2490 stock tickers in 438 cities in this country, Canada, and Cuba. It ap­pears like this: X658—X being the ticker sym­bol of U. S. Steel. The number of shares in a round lot transaction is specified only when more than 100 shares are involved; otherwise only the stock's symbol and price appear.

Thus within a few minutes Dr. Charles has ar­ranged to exchange the proceeds from the sale of his summer cottage for 100 shares in the world's largest steel company; Green has sold his shares in the company for money to expand his own business.

You may ask, what if Dr. Charles had only about $1000 to invest in U. S. Steel stock, rather than $6500. In other words, could he buy 15 in­stead of 100 shares? Yes, he could buy only one share if he wanted to do so. In most stocks an order to buy or sell less than 100 shares is an odd lot order. These orders are serviced by odd-lot members who act as dealers in odd lots on the floor of the Stock Exchange.

If Dr. Charles had ordered only 15 shares of U. S. Steel "at the market," his broker's floor clerk would have sent the order to an odd-lot dealer at the Steel trading post. There are at least four odd-lot dealers at each post. The dealer would fill the order at a price based on the next round lot transaction in Steel common. As­suming this next round lot trade is made at 658 a share, the odd-lot dealer would sell 15 shares of Steel from his own inventory at 65a. The additional one-quarter point, or 25 cents per share, is designed to cover expenses incident to the odd-lot dealer's operations. If the round-lot price had been below 40, the difference would have been one-eighth point, or l22 cents a share.

Much the same procedure would have been followed if Jim Green had had only 15 shares of Steel common to sell. His broker's clerk would have sent the sell order to an odd-lot dealer. If the next 100-share transaction in Steel had been at 658a share, the dealer would have bought Jim's stock for 64d a share. In neither instance could the odd-lot dealer have refused to sell 15 shares to Dr. Charles or refused to have bought the odd lot offered on behalf of Green.

COMMISSIONS

Commissions are charged by all stock ex­changes for each transaction. The rates are among the lowest for the transfer of any property and represent a payment for a service—the pur­chase or the sale, as the case may be. Since the commissions charged by the NYSE set the pat­tern and are, to a very considerable extent, used with some modification by other exchanges, they are presented below. The basic transaction is the "round lot," which, for the majority of stocks, is 100 shares; the commission itself is figured as a flat charge plus a percentage of the cost as shown in the following schedule:
Money Value           Commission
Under $ 100            as mutually agreed
$ 100-$ 399            2% plus  $ 3
$ 400-$2399           l% plus   $ 7
$2400-$4999          2% plus $19
Odd lot        as above less $2
Suppose a customer of a NYSE firm buys 100 shares of a stock at $18.75 per share, a total of $1875. Commission is 1%, or $18.75, plus $7, total $25.75.

Suppose 100 shares are bought at $24.50 per share; commission is 2 per cent, or $12.25, plus $19, or $31.25.

For the investor of small means it would be very instructive to compute commissions on somewhat smaller sales, especially those in­volving the odd lot since he would, in most cases, be buying less than 100 shares.

Suppose he buys or sells 20 shares at $13.75; his total amount is $275; since this is not a round lot, he is charged full-lot commission less $2; hence he will pay 2 per cent plus $3 or $8.50 less $2 or $6.50.

Suppose he buys or sells 10 shares at $35, with a total amount of $350; he will be charged 2 per cent plus $3, or $10.00 minus $2 for the odd lot or $8.00.

Suppose he buys or sells 10 shares at $18, with a total amount $180; he will pay the minimum of $6, since lots above $100 carry a fee of no less than $6 minimum.

It must now have become obvious that the commission rates are not excessive, but that it would pay, in the long run, to make one's trans­actions in the range of at least $250, since one has to pay the minimum $6 commission, which represents only about 22 per cent of the sales amount, on any sale between $100 and $250 any­way. It is easy to see that this $250 can be made up by 25 shares at $10, 10 shares at $25, etc.

In addition to the regular commission charged by the Exchange, there are certain state and Federal transfer taxes; these range from 1 to 6 cents per share and are paid only by the seller. The total of such a tax on a single transaction is quite small.

THE STOCK BROKER

The broker is, like the customer, a person. His customers range from millionaires, who may spend as much as $100,000 at a time, to the per­son with limited funds, whose largest transaction may total somewhere between $200 and $500. He is called upon to handle all ages, both sexes, and a wide variety of both political and social viewpoints; he is expected to do this with pa­tience, harmony, and understanding. He must be as much of a trusted official as an insurance agent, a real-estate broker, or a lawyer. He is both ready and anxious to give the best service within his power, including extensive and up-to-the-minute information; but there is one thing he cannot do—make customer decisions. He may give an opinion if it is requested, but the only way in which he is allowed to make decisions is for the customer to give him legal authorization to handle the account. Otherwise all final de­cisions must be made by the customer and when they are made in the form of an order to be executed, he will do his best to carry it out and at the most favorable price he is able to obtain. In case you so desire, you may ask that your broker keep your securities and even care for the crediting of dividends to the account.

The only way in which the broker can best serve is to obtain a full disclosure of financial status, which includes income, expenses, in­surance, savings, and other investments, such as real property. This will enable him to judge the extent of the risk to be assumed; if he considers such a risk needs to be minimized, do not be surprised if he recommends bonds or high-grade preferred or public-utility commons and says flatly to avoid speculative oils and minerals like a plague. Remember, he has had the necessary experience to be in a position to help.

The selection of a broker is not difficult. Merely look in the financial pages of a news­paper or the telephone directory "yellow pages" and you will find many brokerage houses listed. Some even advertise in the pages of many of the current magazines. People sometimes feel some­what embarrassed in making a selection and then going into a brokerage house to discuss their financial needs; but they should have it in mind that the brokerage house, like a bank and like an insurance agent, is there to serve. Many of them are spending large amounts in adver­tising every year in order to tell the small in­vestor that they are interested in him and seek his patronage. When entering such an office, all that it is necessary is to say "I wish to open an account," or "I wish to discuss possible invest­ments through this house"; immediately a quali­fied representative will be assigned.

The size of your investment account does not have any bearing, since the small investor may, at some future date, become the large investor. Besides, many brokerage houses have at last come to realize that there are large numbers of potential investors of modest means; they know that these people are the best exponents of a capitalistic system, since they are capitalists, or they would not be able to invest. Indeed, as we have already remarked, there are now more than 122 million such people and their ranks are being increased by more and more each year. They are destroying the myth that stock invest­ments are only for the few and they represent every part of our country and every occupation and every walk of life.

THE MONTHLY INVESTMENT PLAN (MIP)

This plan was devised by members of the New York Stock Exchange for those people who wished to buy common stocks on an installment basis, so that each month they could make a regu­lar payment for that purpose. For quite some years the Exchange had received inquiries, and in 1953 members devised a plan whereby a per­son could buy common stocks regularly with a minimum payment of $40 monthly (or even quarterly). All stocks which were bought would carry the same commission rates charged on other NYSE transactions.

The plan was offered to the public in January, 1954, and has achieved a considerable measure of success. The investor decides what amount he will pay, either monthly or quarterly, and also designates the particular stock which he wishes bought for his account; he may change, or even discontinue, his purchases at any time. One might be tempted to think that the MIP investor would be likely to buy low-priced and highly speculative issues; to the contrary, on the fourth anniversary of MIP (January, 1958) it became evident that the investor utilizing MIP pre­ferred those stocks which were of better grade, whose names were household words, and whose price range lay in the $40-$30 grouping. In addition, a definite preference was expressed for certain industries, the leaders of which were, in order: public utilities, chemicals, petroleum, and natural gas. Still another perti­nent fact is that the large majority of stocks selected for purchase were consistent dividend payers, having unbroken dividend records rang­ing from 10 to 75 years. The number of plans in effect amounted to about 66,000 and rep­resented a total investment of approximately $80 million.

The Monthly Investment Plan offers the modest investor many benefits. For instance, it makes available to him a system called "dollar cost averaging," which is simply the investment of a certain sum in the same stock at regular intervals, and it enables the investor to capitalize on price fluctuations instead of worrying about them. The method works because you buy more shares of your stock with the fixed amount of money when the stock drops in price than you do when it is comparatively high, and when the stock rises again you make a profit on the greater number of shares you got at the lower prices.

For example: Leaving commission charges out of the picture for the moment, suppose you decide to invest $100 every three months. Let's say the stock you pick sells at $20 when you start; you get 5 shares. Three months later, the price had gone up to $25; this time your $100 buys 4 shares. You now own 9 shares and you have spent $200. The average price in the two transactions was $22.50, but the average cost per share to you is only $22.22. Over a long period of time this difference between average price and average cost on a number of shares can amount to a good deal of money, and as long as you ultimately sell at a price above your average cost, dollar averaging can make money for you no matter how the price of your stock goes up or down.

Under the Monthly Investment Plan, which operates on the principle of dollar averaging, you can invest as little as $40 every three months or as much as $999 every month or any amount in between. You merely send to your broker the sum you decide on, and he buys for you the stock you select. You pay only the standard com­mission any other investor pays. There are no fees, dues, assessments, interest charges, or other costs. You may miss a payment and your plan will still be in force; and you may termi­nate it at any time without penalty.

Critics of the Plan object to the fact that the purchaser will pay a somewhat higher commis­sion when buying a share at a time, or perhaps a very few shares. This is, of course, true; but whenever anything is bought on pay-spreading arrangement it always costs more, whether it be a piano, a new automobile, a suit of clothes, or even a share of stock! Many say that they are willing to pay the slightly higher commission because of the convenience of the "pay-as-you-go" feature of the Plan; besides, many state that they are buying for future capital gains, rather than just income, so that they expect the long-term increase in value to offset the com­mission charges.

The Monthly Investment Plan also has an­other advantage. It makes it possible for the in­vestor to buy parts of shares, just as a modern gasoline pump allows you to buy fractional gallons when you drive up to a service station and simply ask for "three dollars' worth." Frac­tional shares of stock are always figured to the fourth decimal place. Dividends are figured the same way. It is surprising how rapidly these fractions add up to whole shares.

Finally, under MIP, dividends can be auto­matically reinvested, and this means that your total investment grows more rapidly.

SUMMARY

The preceding discussion is by no means com­plete, because we have deliberately included only those essentials which will enable the reader to understand what a common stock share is, how it is bought and sold, and some of the necessary machinery by which common stocks become available for purchase or sale. At the same time we may emphasize that commit­ments in common stocks, while interesting and rewarding, are nevertheless hazardous. Earn­ings and dividends may fluctuate sharply, so that the purchase or sale of stocks requires very careful selection and careful timing for best results. Fortunately, there are some common stocks, the so-called "defensive" equities, which are not subject to quite so wide a variation as others. The selection of these, as well as others, the methods of evaluation, the methods of tim­ing, and other similar matters form the sub­stance of the next chapter.

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