It has been seen that the Stock Exchange is a market, of which the wares are stocks and shares. There is some considerable difference, however, between stocks and shares, and there are various kinds of stocks and various kinds of shares. It may be interesting and profitable to inquire into the distinctions, to examine, in fact, with some detail the wares of the market. A stockholder is frequently called a shareholder even by the most precise, but, strictly speaking, the terms are not synonymous; stocks are not shares. Stock is calculated by quantity and shares by number; stock is capital in a lump, while shares are capital divided into equal parts; although the unit of stock is usually £100, any quantity, such as £218 13s. 1d. worth, can, in the case of leading stocks, be bought, whilst shares, which are usually of the denomination of £1, £5, or £10, are indivisible, and can be dealt in only in multiples of their nominal value.

All the various kinds of securities—including both stocks and shares—can conveniently be divided into three main classes according to the manner in which they are passed from owner to owner. There are inscribed stocks, registered securities, and securities to bearer; and this classification has been adopted by the Stock Exchange itself in drawing up those of its rules which relate to the settlement of bargains, each of the three classes having its own set of rules.

Let us take first the class known as inscribed stocks, and we may reasonably do this, for to this particular class belong the premier securities—Consols, the other British Funds, Corporation stocks, and Colonial Government securities. The holder of inscribed stocks may have a bank receipt, but he has no certificate of his holding; his name is inscribed as the legal owner in a register kept for the purpose at the Bank of England, or some other bank or office. Such stock cannot, therefore, be transferred from seller to buyer by the mere delivery of documents, for there are no documents to deliver. To illustrate the method of transferring inscribed stock, let us see how Consols, for instance, are passed from a holder to the person to whom he has sold them. A ticket, on a form supplied by the Bank of England, is issued by the broker acting for the purchaser, and passed in the way explained in describing the settlement. But in the case of inscribed stock the ticket contains an additional item—the name and address of the ultimate seller who is going to transfer the stock. This, of course, is filled in when the ticket reaches the seller's broker. The ticket is taken by the selling broker to the Transfer Office at the Bank, where the particulars are copied into the Register. The transferor—identified by his broker, who attends for the purpose—or his representative appointed by a power of attorney, then has to sign the register in the presence of a clerk of the Bank, who witnesses the signature, and also has to sign a receipt for the purchase money. This receipt sets out simply that the transferor has received a certain sum, being the consideration for so much interest or share in such and such a stock which he has transferred to the transferee. The receipt is subsequently handed over to the buying broker for his client. The handing of this Bank receipt to the buyer of the stock is, then, the recognised method of delivering inscribed stocks—the seller who delivers the receipt before the appointed time on Settling day is entitled to demand payment of the purchase price. It will be seen that in transferring stock in this way the purchaser himself takes little part; but on the receipt there is a special note recommending transferees, as a protection against fraud, to accept the stock by signing their names in the Register at the Bank. The use of this is that the signature can be verified when any future transfer is made and when dividend warrants are signed.

With the next class of securities, registered stocks and shares, by far the greatest number of Stock Exchange dealings are concerned. In this class are included nearly the whole of the securities issued by the joint stock companies. The distinctive features of a registered security are that it is transferable only by a separate conveyance or transfer, and that no holder has a legal title to the security until his name has been registered as the holder in the books of the company. On the registration of the holder, the company issues a certificate as evidence of his title in the manner described in a previous chapter.

Stocks which are neither inscribed nor registered frequently take the form of bonds to bearer. A large number of foreign loans are issued in this form, as also are a large number of the stocks of the American railroads. These bonds to bearer pass from hand to hand in exchange for money after the manner of bank-notes. They are a very convenient form of security, but, at the same time, somewhat dangerous, as in case of loss or destruction the holder has, of course, no means of proving that he is the rightful owner. In this they resemble bank-notes, but they differ from them in the fact that their currency is recognised in only a narrow circle, and in that they, of course, bear interest. The Government or the company which issues them has no means of knowing in whose hands these bonds may be at the moment, and therefore it cannot remit the interest payments as they become due. It is left for the holder to apply for these payments, and this he does by presenting one of the large number of coupons attached to each bond, each bearing the date of one payment. Besides the coupons there is often attached to the bond a "talon," enabling the holder to demand a fresh set of coupons when his supply is in due course exhausted.

Although, for the purposes of Stock Exchange dealing and settlement, securities may be thus divided into three great divisions, from the point of view of the dealer in the market and of the outside investor and speculator, there are many more interesting divisions, dependent, generally speaking, upon the nature and rank of the security. At the top of the list come the trustee stocks, which are the securities in which the law of the land permits a trustee to invest the moneys he holds in trust without incurring liability for any loss that may occur. Roughly speaking, these include the Government securities of the United Kingdom and of India; certain Colonial Government securities; the stocks of the Banks of England and of Ireland; London Corporation and County stocks; the inscribed stock of any borough or county having a population exceeding 50,000; the stocks of the British railway companies ranking before their ordinary stocks, provided a dividend of 3 per cent. has been paid on the ordinary stock for at least ten years; various Indian railway stocks, the interest on which is guaranteed by the Secretary of State; the stocks of the water companies ranking in front of the ordinary stock, provided that stock has received a dividend of not less than 5 per cent. for at least ten years; and so on. These, of course, may all be regarded as securities of the highest class—as what are termed gilt-edged investments.

Ranking next to them, perhaps, are the first debenture stocks of the railway and other companies which do not come within the Trustee Act. Such a statement as this is naturally only general. Some debenture stocks of industrial and mining companies are far less sound and secure than the shares of the lowest rank of some well-established undertakings. There are mortgage debentures and debentures which carry no right of mortgage, and there are, in the case of many companies, mortgage debentures of various classes, one class carrying a first mortgage, another a second, and so on. Mortgage debentures are secured by a specific charge on certain properties definitely scheduled, and in case of default in the interest payment the Court will appoint a Receiver in respect of such properties for the protection of the mortgage debenture holders. Debentures which are not mortgage debentures are secured by a floating charge over the properties and assets of the company, and in the case of its default they rank as ordinary creditors, being entitled to proceed against the company and levy execution. The mortgage debenture and debenture stocks of a company are frequently described as its fixed charge stocks, because not only does the interest never vary in rate, but has to be paid whatever the profits of the company. In fact, debenture holders, being creditors and not shareholders, receive interest and not dividend.

These debenture stocks, like the loans issued by Governments and Municipal Corporations, may be redeemable at a specified date or after it. The approach of the redemption date naturally affects the market price. If a stock at present quoted at 95 is redeemable ten years hence at 100, the tendency of the price is, of course, to rise to the 100, and one who buys the stock at 95, in calculating what it will yield him, takes into account, of course, not only the annual interest, but the fact that he must receive, as it were, a bonus of £5 when the company buys the stock on the date of redemption. Similarly, if the stock is bought at a higher price than that at which it is redeemable at some future date, the buyer must regard the yield which it gives him as so much less, for when the date arrives he must take for the stock less than he gave for it. Some stocks are irredeemable, which means, of course, that they go on bearing the rate of interest for ever. The holder of the stock may sell it and thus get rid of the arrangement, but the company or corporation is saddled with the debt and the obligation of paying the fixed rate of interest upon it for all time. This may prove inconvenient and unprofitable if the borrower can obtain loans at a lower rate, but the only way to get rid of the burden is to make some arrangement acceptable to the stockholders. Certain of the Government stocks are redeemable at a comparatively early date, Consols themselves being redeemable in 1923, but only at the option of the Government.

Although debentures are called fixed charge stocks, partly because their rate of interest is fixed, and partly because it is a charge on the income of the company before any consideration can be entered into as to what profits there are to be divided among the shareholders, the rate of dividend on certain classes of mere shares which rank after the debentures is also fixed. A company may issue 4 per cent. or 5 per cent. preference shares, and their claim upon the profits, as their name implies, is preferential to that of the ordinary shares, which rank after them. They must receive their 4 per cent. or 5 per cent., as the case may be, out of the profits, and the ordinary shareholders have to look for their dividend to any profits that remain. At the same time, whereas debenture holders are entitled to their interest as a right, and may proceed for it legally as for a debt, the shareholders, even preference shareholders, go without their dividend if there are no profits—and there is an end of it.

Many preference shares, however, are cumulative preference shares, which means that if the profits in any year are insufficient to provide their dividend, the stipulated rate must be made up out of succeeding profits before the ordinary shareholders can receive anything. In the case of preference shares which are not cumulative, each year is complete in itself. They may be entitled to 4 per cent., but if the profits of the year suffice to pay only 3 per cent., that is all they get. Even if the profits of the next year are so good as to enable the payment of the full 4 per cent. dividend on the preference shares, and 2 per cent. or even 5 per cent. on the ordinary shares, the preference shares receive only their 4 per cent., because they are not cumulative. If they were cumulative, they would receive 5 per cent. to make up for the 1 per cent. lacking in the preceding year, and the ordinary dividend would be reduced accordingly. Of course, there may be first, second, and third preference shares, cumulative or non-cumulative, just as there can be different series of debentures, one ranking after another.

It will be seen that while the dividend on preference shares is more certain than that on the ordinary shares of a company, it is at the same time limited, whereas the dividend on the ordinary shares is only limited by the profit-earning capacity of the company. In the case of a well-established and prosperous concern, therefore, the price of the ordinary shares may be very much higher than the price of the preference shares ranking before them. In such a company the preference shares may receive a certain 4 per cent., while the ordinary shares may receive 10 per cent., which, although by no means so certain, may be certain enough for all practical purposes. In the case of many companies, of course, the dividend on the ordinary shares varies considerably year by year, and the price of the shares accordingly fluctuates widely.

Some companies, in order to meet this, have divided their ordinary shares into two new classes, one called preferred ordinary, bearing a fixed rate of dividend, and the other called deferred ordinary, taking what remains for division. In fact, the preferred ordinary bears the same relation to the deferred ordinary as preference shares bear to ordinary shares. Suppose a company has paid a dividend on its ordinary shares or stock averaging over a number of years 6 per cent. In one year it may have paid 4-1/4 per cent., in another year 8 per cent. This ordinary stock with its fluctuating dividend is divided into two parts. Each holder of £100 worth of stock receives £50 worth of preferred ordinary, entitled to a fixed dividend of 6 per cent., and £50 of deferred ordinary, entitled to the remainder. Thus in the year when the company paid 4-1/4 per cent., a dividend of 6 per cent. would be paid on the preferred ordinary and a dividend of 2-1/2 per cent. on the deferred ordinary—this making an average of 4-1/4 per cent. on the whole. In a year when a company pays 8 per cent., the preferred ordinary still receives 6 per cent. and the deferred ordinary 10 per cent. Instead of the stock being thus divided, the same object is attained by its duplication or watering. For each £100 of ordinary stock is issued a nominal £100 of preferred ordinary and a nominal £100 of deferred ordinary. In the case of the 4-1/4 per cent. dividend, the preferred ordinary would receive its fixed 3 per cent., and the deferred ordinary the remaining 1-1/4 per cent. Of course, this stock-splitting or stock-watering enables the holder of the original stock to dispose, if he chooses, of either the more speculative or the more stable security.

Even this list of Government loans, home and foreign, of trustee stocks, of mortgage debentures, of debentures, of cumulative preference shares, of preference shares, of ordinary shares, of preferred ordinary and deferred ordinary, by no means exhausts the various kinds of wares dealt with in the market. For instance, there are founders' shares, which are usually issued at the time of the flotation of a company to those specially interested in its promotion. Their peculiarity is that they usually participate with the ordinary shares in any profits remaining after a certain rate of dividend has been paid upon those ordinary shares. There may be 100,000 ordinary shares of one pound each and 100 founders' shares also of one pound each. It may be stipulated that the founders' shares participate equally with the ordinary shares after the latter have received a 7 per cent. dividend. Suppose the divisible profits amount to £20,000, the ordinary shares take their 7 per cent., which amounts to £7,000, and the remaining £13,000 has to be divided equally between the ordinary shares and the founders' shares. The 100,000 ordinary shares receive a further £6,500, raising their dividend to 13-1/2 per cent., and the 100 founders' shares receive the other £6,500, making their dividend 6,500 per cent. Had the company earned only £7,000, that would have sufficed to pay only the dividend on the ordinary shares, and the founders' shares would have received nothing.

An objection to the system is at once evident. If the directors were under the influence of the holders of the founders' shares, as they usually are, they would not be content to earn a steady profit of £7,000 for the advantage of the large number of ordinary shareholders, but would strain to divide a large profit in one year, even at the expense of making an actual loss in the next. For this and other reasons founders' shares are objectionable, especially in the case of those finance companies which earn their profits by speculation. These founders' shares are not to be confused with legitimate management shares entitled to a fair rate of dividend, and issued to the officials of a company to provide them with an incentive to work well in its interests.

There are also vendors' shares—shares allotted to a vendor in payment, or part payment, for the property which he sells to the company. If he is willing to take shares instead of cash for the property, it is a good sign, for he shows that he believes in it and desires to continue interested in it; that he does not wish merely to pocket the cash and walk off. When these shares come upon the market for sale, however, it is an obvious sign that the man who probably knows most about the property is clearing out. The rules of the Stock Exchange recognise this aspect of affairs by laying it down that no special settlement may be granted in vendors' shares until six months after the settlement of the shares issued to the public.

Sometimes amongst the wares of the market there are actually found stocks and shares which do not exist. A big Government loan is known to be impending, and although no prospectus has been issued and the market knows nothing about the terms, dealers, confident that these terms will be reasonable, and sure that there will be a big public demand for the stock, offer to sell it or to buy it at a fraction over the issue price, although they do not know what that issue price will be. Transactions of this kind sometimes occur not only in the case of a big Government loan but in the case of the flotation of an important company. After the prospectus appears, and the applications for allotment of the stock have been sent in, the dealings become quite general, although no one is yet in possession of the stock which he sells, nor do even the applicants know whether they will get the whole of the amount for which they applied, a part of it, or none at all. Some are tempted by the premium to sell the full amount for which they have applied, in the hope that they may get all of it, or, at all events, that they will get some and be able to buy the balance in the market. Others more cautious can often arrange to sell at a lower premium whatever amount of stock they may be allotted. These, of course, are on surer ground, and so are those who deal in the allotment letters themselves when they actually come out.

The practice of dealing in shares before allotment has from time to time for very many years past been the subject of much criticism, and the Stock Exchange Committee has frequently been called upon to put a stop to it. It has even now and again made attempts so to do, but these attempts have proved futile, and the penalisation has often fallen upon the less guilty of the two parties to the bargain, to the advantage of the one who has turned round and said, "If I complete the transaction, it will mean loss to me, and I shall not do so, and you cannot compel me to do so, because you have broken the rules of your Committee in dealing before allotment at all." Thus after several attempts the Committee seems to have given up all effort to restrain dealings before allotment, except by adopting a negative attitude, to the discouragement but not the penalisation of such dealings. Dealings take place not only in stocks and shares before allotment and in the letters of allotment, but also in what is called scrip, which is a provisional certificate issued some time after the letter of allotment and endorsed with a receipt for the payment of each instalment on the stock. It is a kind of temporary stock certificate issued in advance of the real one, which is forthcoming when the stock is fully paid up.