Note 210 — Chapter XXII · CURRENCY, BANKING, AND CREDIT

Bonds are promises to pay a certain principal sum at the expiry of a certain term of years. They are issued by governments and by business corporations. They bear interest annually or semi-annually. In the case of registered bonds the name of the bondholder is inscribed on the books of the government or company and a check for the interest is sent to him. Coupon bonds, on the other hand, are payable to bearer and small tickets or coupons must be cut off by the holder and presented on each interest date. Stocks are merely shares in a business corporation and do not carry an obligation to pay a definite sum at any given time. There are two kinds of stock, preferred and common. The preferred stock is entitled to a stated dividend; the common stock takes what is left of the net profits if there are any.

Bonds, as a rule, yield a smaller return than preferred stock, because the security is better. The man who holds common stock takes the greatest risk of all and for this reason expects the largest rate of dividend. When you invest money the income which you get from it is proportioned to the risk which you take. An absolutely safe investment like government bonds brings in only four or five per cent annually; the preferred stock of railroads or industrial corporations may yield six or seven per cent; the common stock of some companies pays as high as eight or ten per cent. When you find that an investment promises a large income you may be sure that the risk is proportionately large. All sorts of “get rich quick” schemes are placed before the public by promoters who promise high rates on “safe” investments. Such investments are not safe; if they were, the banks and large capitalists would put their money into them. To protect the public from these frauds, some states have passed “blue-sky laws,” which require that every stock-selling concern shall be investigated by the state authorities before it is allowed to take money from the people.