6. How par value fools the public.—The last crit icism leveled at stock-watering, namely, that it re sults in the sale of stock to the public at exorbitant prices, has more to support it. As a matter of fact, this is usually the purpose of stock-watering. As long as there is an investing public, gold bricks will be sold. If investors spent one-tenth of the energy studying finance, that they spend sitting before brokers' boards reading meaningless figures, hunting for tips, and feverishly absorbing the daily. mass of false information that is carefully prepared for them by hungry promoters, the hallucination of par value would not long exist.
We refer to the beautifully engraved and seriously funny words appearing upon stock certificates, "of the par value of $100." Or the par value may be $50, $10, or $1, according to the state of mind or the financial ability of the intended victims. A, man died recently leaving stocks exceeding a million dol lars, par value, but the executors appraised them at $200.
It seems to the writer that the whole evil of stock watering is found in the unconscious significance which poorly informed investors place upon par value. There is no doubt that par value fools the uninitiated, and encourages swindling. The theory of the law itself seems to lend some significance to par, as, under the law, stock is not supposed to be issued until it has been paid for at its full par value. Does not this antiquated law foster deception? Par value has no significance in common stock. It would make no difference in the actual value of its property or its capital stock whether the mining com pany which cost a few thousand was capitalized at $1,500,000 or at $15,000. In either case, this particu lar company would be over-capitalized. Upon ma turity, bonds are supposed to be paid off at par, but in common stock the words have no further service than to carry a false inference of value. There is much irony in printing the word "value," with this arbitrary $100 mark, upon the face of a ten-cent mining certifi cate. But we shall have to admit that it is often a decided success.
7. Proposed remedies for stock-watering.—Of the various remedies proposed for this situation, two of some possible value may be mentioned: 1. The removal of par value from common stock certificates 2. The issue of new securities only upon certificate of approval by some public authority, stating the facts regarding the promotion and the manner of payment of capital stock.
New York State already has a law permitting the issue of stock without par value. The certificate merely states the number of shares which it represents and the total number of shares which have been au thorized. Each owner is thus able to calculate the proportion of the corporation which he owns, but he is under the necessity of placing his own value upon it. Market quotations are upon the basis of so much per share, and there is no limit to the number of shares that may be issued. The corporation is taxed upon the basis of its actual capital. If this practice should be uniformly adopted, it would, without question, go far toward removing the confusion which par value now brings to the mind of the uneducated investor.
Without par value there could be no such thing as over-capitalization, or stock-watering, but it must be distinctly remembered, on the other hand, that this would not prevent the sale of worthless shares to the public. It is the custom of those who sell blue-sky shares to assign to them an arbitrary price from day to day, and this is marked up occasionally to stimulate sales, until the whole issue has been disposed of. There is no market price in such case, altho the marked-up prices are often mistaken by the "inves tor" for real market prices.
Market price is one at which securities may be pur chased or sold in the open market. The arbitrary price to which speculative securities are marked up for public sale is only the selling price for the promoters or syndicate. Investors would very soon see the true situation if they should endeavor to sell at that price in any large quantity. The removal of par value would not remove this practice of marking up stock values or of otherwise manipulating stock prices by syndicate operations to a marked level above their actual worth.
It is probable that the injection of a larger measure of publicity, supported by more uniform and thoro accounting methods, and by statement of the facts be hind all new stock offerings, would go far to eliminate the sale of deceptive or worthless securities. If those who promote or capitalize new companies were com pelled to file certificates under oath, showing in detail the manner in which stock had become fully paid up, verified, perhaps, by a public appraisal of the prop erty, and if the facts shown in such certificates were available to the public, it is probable that most stock swindling operations would cease.