Investor Should Understand Terms Used in Stock Market
BUSINESS & INVESTMENTS
A. W. BLUE
Hundreds of thousands of dollars are lost annually in Canada through careless investment. Fraudulent and worthless securities are being constantly poured on to the market to trap the unwary. A general observance of this simple maxim will assist in the reduction and elimination of this economic waste— “BEFORE YOU INVEST—INVESTIGATE”
THIS article is dedicated to the New Army of Canadian investors who are seeking to obtain some of the rewards of our national business prosperity through sane and conservative investment and speculation. Their new experiences have brought attendant trials and difficulties, not least among which is their inability to read understandingly a balance sheet, a profit and loss account or a market report. So many new, strange and apparently meaningless terms are interjected into all financial comment that the uninitiated are left hopelessly confused and discouraged. Many readers have asked us to explain the terms and expressions of ordinary financial jargon, and in response to these appeals we set our hand to the task of endeavoring to clear up some of the shades and mists that now obscure their financial understanding.
The subject is a broad one, and where to begin is a question. In scanning any newspaper market report, however, one is almost sure to find the terms “bull” and “bear” receiving honorable mention. These two expressions are merely market colloquialisms, which in no way involve or reflect upon the respective denizens of the field and forest, whose titles have been exploited, unless it be by way of temperament. Briefly a “bull” is an individual who is an optimist on the future of the stock market, or on the outlook for a select group of stocks in which he happens to be interested, and a “bear” is a contrary-minded person who looks on the dark side of things, and is pessimistic on the market. In other words, the terms indicate a mental state, but the association is not clear, unless it be that the bear possesses a somewhat unpleasant, dissatisfied disposition, whereas the bull has a placid and hopeful outlook on life—but there is room for argument on these points. Nevertheless, the implication is very clear when applied to the human efement in the stock market. Broadly speaking, the public which buys and sells stocks, is divided into two great groups, the optimists and the pessimists. Neither state of mind is chronic or permanent, except in isolated instances, for the bear often becomes a bull, and the bull a bear, but these two opposing factions are constantly present in the market. If the bulls are in the ascendancy, that is, if there are more people with an optimistic outlook for business and the market, and translate their optimism into actual buying of securities, then the market is likely to advance. But if there are more bears than bulls, more people inclined to sell than buy stocks, then the market is likely to recede. Fortunately, there is always a sufficient number of bulls to take stocks on a reaction, or bears become converted to bulls when they feel that stocks have receded to a point where they again present buying opportunities, to steady the market on any setback. Lacking the bullish element entirely, the market would be in a serious way, and it is under such circumstances, fortunately occurring at widespread intervals, that financial panics ensue.
But one may buy or sell stocks without definitely aligning himself in either camp. The investor may buy for the sake of interest return, rather than in anticipation of increase in his capital. He is an investor purely and simply, but is a bull to the degree that he has confidence in the security he is buying, and believes that it will continue to pay interest or dividends indefinitely; and maintain its value, at least at the price at which he bought. On the other hand, one may sell for the sake of raising money for some special need or purpose. He may feel that his stock will eventually sell higher, but he needs the money, and no other course is left to him but to sell.
Unprecedented Volume of Corporate Financing
ONE of the interesting phases of contemporary financial history has been the unprecedented volume of new financing in 1929. During the first quarter of the year a total of $233,000,000 of new issues was placed on the market and offered to Canadian investors. This figure exceeds by one hundred million dollars the total for the corresponding period of 1928. Many industrial corporations have refinanced by the issuance of preferred stock, replacing high yield bond issues outstanding or by common stock issues. In many cases the new issues have presented some rather confusing terms—confusing, at least, to the novice. For example, one frequently sees the term “rights” used. The financial press will record the fact that a certain company is offering valuable rights to shareholders. This simply means that the company in question is making an offering of new securities, and the holders of its shares are given the privilege of buying the stock on favorable terms. For example, Noranda Mines recently offered a new issue of stock to its shareholders at a price of $45 per share. As the current market price of the stock at the time when the issue was announced was well above $50, it seemed that new stock at liberal concessions from the prevailing price was distinctly a bargain, and likely to appeal to the shareholders of the company, as it did. But shareholders were limited in the amount they could buy at this special price, and were privileged to buy one share only for every thirty shares held. A shareholder owning sixty shares could buy two shares at $45, or if he held one hundred and twenty shares he could buy four new shares; and so on. He had the “right” to buy this new stock, and each share carried with it one “right”; but it needed thirty rights to buy one new share. These “rights” are dealt in on the stock market, and have a real value. If a shareholder did not want to buy the new stock he could sell his rights, or if his stock holdings were a multiple of thirty, with an odd number of shares over, say, seventy-five, he could buy only two shares, but by buying fifteen more rights in the market, and adding them to the fifteen odd already owned, he could purchase an additional share.
Many Companies Divide or “Split” Their Stock
AGAIN, one of the interesting tendencies has been for highly successful companies to split or divide their stock. Imperial Oil, Limited, and International Petroleum are outstanding examples, the former splitting its stock four-for-one and the latter on a two-forone basis. The investor who owned one hundred shares of old Imperial Oil stock would under the new arrangement become the possessor of four hundred shares, and similarly one hundred shares of old International Petroleum would be transformed into two hundred shares. But, of course, the market value of the new stock would only be one quarter the value of the old in the case of Imperial Oil, and one-half-for International Petroleum. Usually, however, the formality of the printing and delivery of new certificates, receiving payment, and the clearing up of all legal technicalities may entail a delay of an indefinite period running into several weeks and even two or three months. Trading in the new shares is permitted during the interim, but as the stock has not yet been formally issued, the shares so dealt with are subject to the reservation of “if, as and when issued.” This is merely a condition of sale, which does not in any way impede transactions in the stock, although there are one or two points to keep in mind. The purchaser of a stock selling on an “if, as and when” basis does not have to pay for this stock until it has been formally issued. He has to advance the broker’s marginal requirements, but does not have to pay interest on the balance indicated by the purchase price of the stock. The usual commission charges are involved for both buying and selling. If, on the other hand, one sells the stock, he cannot collect his money until such time as the certificates are issued. This is one of the drawbacks in dealing in unissued stocks, though usually the delay is not long and there is the compensative no interest feature.
Par and No Par Stocks
rPHE term “par” value appears to A arouse some confusion. This merely means the authorized face value of the security but does not necessarily measure its market value. Usually the par value is $100; it may be $20, $25 or any figure that the directors care to decide. Stocks are also issued without nominal or par value. They are represented in the company’s balance-she;t as so many shares of no par value, whereas the practice with a financial structure of par value securities is to show the capital at its par value, say $2,000 000 preferred and $1,000,000 common, both of $100 par value. By dividing the respective capitals by 100, one can determine the number of shares authorized. A bond usually has a par value of $100, and when it sells on the market at that figure it is “at par”; when it sells above $100 it is commanding a premium, and when it sells below $100 it is at a discount. This explains the terms “premium” and “discount” bonds.
It is important that the investor should know how to work out interest yields on his investments. This is a simple process in the case of preferred stocks, but extremely involved when bonds are under consideration, as in the latter case such factors as term, maturity date, etc., have to be taken into consideration. Even with bonds, however, an approximate return can be figured out by following directions as applied to dividend-paying preferred and common stocks. The interest return is based on the market price of the security and has no relation whatever to par value. But the actual dividend itself is based directly on the par value—that is, if the stock has a par value. In the case of no par value stocks the dividend is declared as so many dollars per share. Take a couple of examples. Goodyear Tire of Canada preferred has a par value of $100. It pays an annual dividend of seven per cent per annum, paid quarterly at the rate of 1% per cent quarterly. The cash return is seven per cent of $100 or $7 a share. But the investor who pays $109 for the stock gets $7 for each share of stock held. The premium of $9 a share is not considered by the directors of the company in declaring their dividend. To estimate his interest return or the yield from his investment, the investor uses only the price paid for the stock and disregards the par value. For each share held he receives $7 in cash, or for every $109 invested he gets $7 in dividends— $7 on a $100 means seven per cent, but $7 on $109 is something less. To determine the yield, divide 109 into 7, adding four noughts and carrying the quotient to two places of decimals. The result of this arithmetical operation is 6.42 per cent. Take another case: International Nickel paying twenty cents quarterly or eighty cents a year—take care that your calculation is based on annual rather than quarterly returns— and with the market at $48, the return to the investor, computed by dividing 48 into 80 and adding the requisite number of noughts, is 1.66 per cent or slightly more than half bank interest.
Dividends and Bond Interest
TT MAY be here pointed out that stock *■ dividends are usually paid quarterly, and bond interest half yearly. Stocks are bought and sold without regard to dividend dates—no consideration is given to interest that has accrued from the last dividend date; whereas if bonds are negotiated, the vendor expects to be compensated with the accruals of interests from the last interest date to the day on which he sells. Dividends and interest are both payable as of a certain specified day. If the stock is sold on the day prior to the “day of record,” the shareholder will not benefit by that quarterly disbursement. If, on the other hand, he is a bondholder he can collect interest up to the moment he sells. In other words, interest accrues daily, while dividends do not accrue, but materialize in one lump sum on a definite date. Thus bonds are usually quoted at a price plus accrued interest. Stocks are frequently quoted “ex-dividend.” This term is applied shortly after a dividend date, and infers that anyone buying the stock will not participate in the dividend just paid, but must wait another quarter of a year or three months before getting any return on his investment, or if he sells out in the interval he does not get any recompense. Usually, however, the market anticipates a dividend date by adding some slight value to the security, amounting virtually to the amount of the prospective dividend, which is immediately lost when the stock goes ex-dividend.
The callable feature borne by the majority of bonds and preferred stocks, long an inconspicuous factor, has now come into prominence, with the rising tendency of the stock markets, and the movement on the part of officers of numerous companies to exercise the “call” privilege. To call a security means that the borrower can call in, retire or redeem or pay off the obligation. Upon issuance of the security a clause is incorporated detailing this privilege which the management reserves. A security may be called at a certain price—usually five or ten dollars above par and at a certain period, or the borrower may retain the privilege of calling at any time he chooses, always providing an ample margin of time for the investor to conveniently arrange the transfer. It is well for the investor to examine the securities and note the conditions of the call feature, and to weigh ' market price against call price, for when the market approaches the call price, the cream of the speculative possibilities of the security has been dissipated, and then it must be considered purely on its investment merits.
Question—What is your opinion as to the future of Falconbridge Nickel and Siscoe Mines, also Home Oil?—J.C.T., Nova Scotia.
Answer—Falconbridge Nickel has had a substantial rise, and would seem to have discounted immediate possibilities. The mine is not yet producing, although a 200-ton smelter will be installed this spring. Some 5,000,000 tons of $18.00 ore are indicated to date. The mine has investive possibilities, and for a two or three year hold the stock has attraction.
Siscoe is a producing mine, but is not yet making any worth while progress. It has reasonable attraction for one who is prepared to exercise patience.
Home Oil has had a sensational rise, and I am not prepared to predict market movements for the immediate future. A well, producing around 600 barrels of naphtha per day, was recently brought in, and this was the incentive for the rise. The company’s land holdings are in an important location in the Turner Valley, Alberta, and if further developments are as successful as those of the past, the stock can easily sell much higher. That is all for the future, however, and at present levels the stock must be regarded as highly speculative.
Question—Would you give me any information you have on Manitoba Basin Mines? What is your opinion of this as a speculation?— N.C., Winnipeg.
Answer—Manitoba Basin is a mining undertaking of promise. The company has large holdings, widely scattered, in important mining areas in Manitoba. A large portion of land is located adjacent to Sherritt-Gordon, in the Cold Lake region. It controls the Manitoba Tin Company and has other interesting properties. The company is well financed and is in good hands. Comparatively little development work has been completed as yet, and one cannot speak with assurance as to the general prospects. However, the mine seems to be above the average in its general outlook, and if one is prepared to speculate, it seems to offer a fairly promising opportunity for an indefinite hold.
Question—I wish to obtain the benefit of your advice and experience on behalf of a lady who has $1,000 to invest. Her situation in life is thàt of a housekeeper. She is employed at $60 a month and board. She has a house and lot in this city ( Vancouver), from which she receives by way of rent $60 per month. The $1,000 which she desires to invest represents the proceeds of a sale of two lots which she previously owned.
I realize, of course, for absolute safety probably no better investment could be made than Dominion of Canada bonds, but it is desired, if possible, to combine safety with a possibility of appreciation in value from the investments. Would you be good enough to recommend a list of investments which would meet the purposes above outlined?—S. J., Vancouver.
Answer — Taking into consideration the special financial circumstances of the investor in question, referred to in your letter, it is my opinion that she should not step outside the bounds of absolute security. In other words, Government Bonds are all that she should consider.
The earning power of the individual in question is extremely limited, her resources are small, and while she is doing fairly well in her present employment, it might be difficult to duplicate this situation if an emergency arose. One might consider the first mortgage bonds of such companies as the Bell Telephone Company, Massey-Harris, Canada Cement, Montreal Power, Canadian Pacific Railway and others of like status, but their returns are comparatively little more than Government Bonds. There are also some attractive preferred stocks which give a fairly high yield, but then the element of risk enters in to a limited degree. I have in mind the Canada Cement preferred, Massey-Harris, Canadian Canners, first preferred, Goodyear Tire preferred. I do not consider these suitable, however, and would suggest only the first group, namely, Government Bonds.
Question—Please give me your opinion on the following speculations: Canada Cement, Kelvinator, Home Oil and International Power?—Mrs. S. P., Western Ontario.
Answer—Canada Cement common is a speculation that over a term of years should reach substantially higher levels. The company is engaged in a fundamental industry and is its chief operator in the Canadian field. With the country’s prosperity the earnings of the Canada Cement Company should grow, and this will be ultimately reflected in the value of the common stock. We do not anticipate any sharp movement, but rather a slow steady progress.
Kelvinator has had rather unusual difficulty in getting established, but apparently the worst is over and the future is more promising. However, the stock is decidedly speculative, and scarcely suited to the woman investor.
Home Oil has reached a level where we decline to make any prediction as to the future course of the stock. Further wells of importance of the one recently brought in, which is producing at the rate of 600 barrels of naphtha, will undoubtedly have a substantial market influence, but that is for the future.
International Power is associated with a number of thoroughly established companies and the common stock has speculative possibilities for a hold.
Question—Some years ago I purchased several shares of the Western Life Insurance Company, and have never received any dividends from these holdings. Would you advise me to sell the stock even at a loss, or do you think it would be more profitable for me to hold it?—W.R., Calgary.
Answer—The Western Life Assurance Company has been in business now for fourteen years, and is making steady progress. The company is licensed by the Department of Insurance at Ottawa, and is a sound concern financially. Usually, however, a shareholder in a small company has to exercise a good deal of patience in the matter of dividends, and the dividend outlook for Western Life Assurance Company is indefinite. Usually the shareholder has to be satisfied with market appreciation in the value of the stock for a term of years, and this applies to the stock in question.
Maybe Adam Laughed at These
Just to be Sociable—Boss: “Yes, I want an office boy. Do you smoke?” Boy: “No, thank you, sir, but I don’t mind having an ice cream cone.”— Strathmore Standard.
Diplomacy—Christmas Party Hostess —“Won’t you have another meringue, Betty, dear?”
Betty (remembering her promise not always to answer “Yes”): “Well, the idea isn’t repugnant to me.”—The Pathfinder.
Tenses—Lady: “Hobo, did you notice that pile of wood in the yard?”
“Yes’m, I seen it.”
“You should mind your grammar. You mean you saw it.”
“Nó’m. You saw me see it, but you ain’t see me saw it.”—Toronto Globe.
If only . . .—A young woman walked into a bank the other day and, stepping up to the window, said:
“I would like to open an account at this bank, please.”
“We shall be very glad to accommodate you,” said the teller. “What amount do you wish to deposit?”
“Oh,” she said, smiling, “I mean a regular charge account such as I have at the department stores.”—Toronto Mail and Empire.
He went Untipped—The prim old lady was dining one evening, and while the waiter was standing by the table she asked him to find out the title of the piece the orchestra was playing.
Other duties claimed the waiter for a time, and when he returned the lady had completely forgotten her request. Imagine her confusion when he bent toward her and softly whispered, “What can I do to make you love me?”—Farm and Ranch Review.
Practical—Brown was called to the police court to receive a reward for rescuing a woman from the water. “I am pleased to pin this medal to your breast,” said the magistrate, “and also to lodge $25 to your credit in the bank as an acknowledgment of your great bravery.” Brown showed some little embarrassment, and then said: “If it’s all the same to you, sir, I’d rather you’d pin the $25 to my breast and lodge the medal in the bank.”—Wall Street Journal.
Discipline—On one occasion at sea, when the squadron went to night quarters, “Man overboard” was shouted. Boats were lowered, and search made, but with no result. The question then arose, “Who was the man?” Many had seen him disappear, but none could identify him.
In the meantime the order was piped, and the crew fell in by divisions. The mystery only deepened, for no one was missing. At last up the ladder appeared a very scared looking A.B., and addressing the officer of the watch, said: “I think, sir, as ’ow the man overboard must ’ave been me. I went over, sir, but ’eld on to a securing chain, and climbed in again very soon, sir.”
“Then why on earth didn’t you say so?”
“Very sorry, sir, but being in the lifeboat’s crew, I had to go away to look for a man overboard.”—Strand Magazine.