Common Stocks And Corporations

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.