Buying securities is somewhat like buying an automobile. The decision to buy something is relatively easy. What specifically to buy is an altogether different problem. Before you drive your new car home, you have to choose a certain make, model, upholstery and color scheme. So with securities. Although there are only two major categoriesbonds and stocksto select from, the variations and refinements and optional extras are as numerous as they are confusing.
For many investors, one factor may be sufficient reason to determine a choice. The man of modest means will very likely find corporate bonds at $1,000 apiece too steep and their three percent interest payment too small for what he is trying to achieve. A wealthier investor might be fascinated by the potential in common stock but find that he would obtain a greater yield from tax-exempt municipals. All investors, however, will do well to become familiar with the various kinds of securities represented in corporate capital structures in order to understand their effect on each other and their bearing on the choice he eventually makes for himself.
The corporation is an entity marvelously adapted to the requirements of all parties involved. It developed in response to the needs of the business community for funds over and beyond its own resources to enable it to build, expand and grow.
The basic, one-celled form of business life is the individual entrepreneur the store owner who merchandises goods, the artisan supplying services, the small manufacturer whose capital needs are met out of savings or through a modest bank loan.
Somewhat more complex is the partnership, the pooling of the resources of several individuals to share in a joint venture. Presumably the credit of the group is somewhat stronger than that of the individual. The partners also assume responsibility for management of their company, participate in all profits accruing, and are legally liable for all debts outstanding.
As long as firms remain relatively small, either type of organization is adequate. As opportunities for expansion present themselves, however, when new plant and equipment are required, when greater amounts of raw materials must be stockpiled, and branch offices and distributors underwritten, and personnel increased, the individual and the partners are hard pressed. Their surplus generally is too small, their normal lines of credit too limited to do the job.
Enlargement of the partnership is no answer. Outside investors willing to take on the mutual responsibilities of partnership, or to immobilize their funds in a partnership agreement, are hard to come by. In any event, the range of financial needs at this stage usually is so great that only by increasing the partnership to ridiculous proportions could they be met.
The solution? A public stock corporation. Ownership thereby is spread among as many hundreds or thousands of people as are willing to buy in, their proportional part of the firm being represented by the amount of stockor number of sharesthey hold. Their reward is likewise a proportional share of their firm's profits. Their control is exercised through the board of directors they elect. And because their stock is a standardized, known quantityand because there are stock exchangesthey can readily withdraw from the company and sell their piece of ownership to someone else.
Owning stock in a corporation can be an exhilirating (and equally devastating) prospect. It's important to know what you're getting into before buying stock in a publicly owned company, and to hold onto it long enough to allow it to mature. As always, the best bet is to have a balanced, diversified portfolio so that no particular crisis brings your investments crashing down.