 Money and Stocks
Stocks and Shares
1 In order to start a business a man must have money to buy or rent a factory or shop, to buy machinery and goods and to pay his workpeople. A man may sometimes be able himself to supply all the money he needs for this; but often he cannot do so, and then he may ask others to help him by making contributions. Money supplied in this way is called capital, and the people who supply it to him become members of this company.
2 Of course they hope, when they lend their money in this way, that the man’s business will make a profit; and when the company does begin to make a profit they all share in its profits – and the share each one gets is in proportion to the amount of capital he has supplied. Thus if Smith has supplied ￡1000 and Jones ￡2000, Jones’s share of the profits will be twice as big as Smith’s share.
3 Another way of saying that Smith and Jones supplied money to found the company is to say that they bought so many shares in its profits. Shares are usually divided into units of 25p, 50p, and ￡1. Let us suppose that in this company they are in units of ￡1. As the company was just being founded it probably happened that with ￡1000 Smith was able to buy 1000 shares. However, when a company has grown and prospered and people start to sell their shares to others who want to buy them, a ￡1 share often costs more than ￡1. This is because people have great faith in the company and they think that, because the profits of the company are likely to increase, it will be worthwhile to pay more than ￡1 for a ￡1 share. On the other hand, if a company is not doing very well its shares may sell for their stated value – or very near it – and if it is doing badly its shares will sell for less than the stated value.
4 It is obvious that people supply money to a company because they think it will make profits. These are paid out to shareholders at least once a year and are called dividends. If the company is doing well it may pay a dividend of, say, 10p for every ￡1 share. This is often expressed not in pence per pound but as a percentage – in this case it would be 10%.
5 The government – which also wants to borrow money from the public – almost always does so. Government stocks are called “gilt-edged”, originally because the certificate on which the loan was recorded had a gold edge like those found on the pages of old books. Later the term “gilt-edged” came to have a wider meaning, standing for safety and security, the government being the one institution that would never fail to pay its debts. Normally the government promises to repay the money borrowed within or at a certain specified time. This often applies to other kinds of stock, but hardly ever to shares.
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