Stock Commodity Trading - Stock Market Success Part 4

One thing had to happen before marketable securities entered the financial scene. The corporation had to be invented. What is a corporation anyway? It is an intangible legal being designed to assure an organization unlimited life and limited liability. Corporations are of three main types: (1) government or municipal, (2) stock (private) corporations, and (3) religious, charitable, membership or endowment. The first two provide almost all of our marketable securities (although on occasion a church or club may sell bonds publicly to build a new edifice).

The corporation first appeared in Europe around the fourteenth century. Queen Elizabeth I was the moving light in the East India Company, and probably was the first woman stockholder. Of more interest to Americans, however, is the charter granted by Charles II of

England

to "The Governor and Company of Adventurers of England Trading into Hudson's Bay." This famous company, with its clumsy corporate name, began business on May 2, 1670, and is still going strong. It's the oldest company doing business in North America, and its capital stock has been a marketable security for almost three centuries.

Now these corporations have another feature giving them a great advantage over an individual proprietorship or partnership. They provide a vehicle for the gathering together of large amounts of permanent capital from many individuals, for the operation and expansion of an organization. This capital is raised in two ways—by borrowing money or by selling stock.

Government and municipal corporations (whose main revenues are from taxes) do their security financing almost entirely by borrowing. If they plan to repay this borrowed money in less than a year, the security issued is called a bill; if they plan repayment from one

year to five years after issuance, it's called a note. Securities issued for longer terms are called bonds. When you, as an investor, buy any of these securities, you become a creditor entitled to two things: (1) the return in full of the precise face amount of the note or bond on the maturity date specified, and (2) regular interest payment at a stated rate in the meanwhile. Failure of the issuing organization to do either of these things promptly is called a default.

Billions of municipal and government securities are outstanding. Most of them are readily marketable. Relatively few individuals own state or city bonds, but millions of Americans became government bond owners as a result of sales campaigns in World Wars I and II. Government obligations finance our national institutions, while municipals provide for our school systems, roads and public works, police and fire departments, parks, sewage disposal systems, etc., locally in cities, towns, counties, and districts.

Salting Away Profits in Tax-Exempt Income

After making rewarding gains in the market many investors like to salt them away for dependable income and, if their bracket status is sufficiently high, they seek some form of tax shelter. Perhaps the most popular vehicle for this purpose is the tax-exempt bond.

The obligations of states, cities, counties, and districts, and many special purpose issues (parks, fire protection, sewage, highway, school district, etc.) are exempt from Federal Income Tax, regardless of the tax bracket of the holder. They are also exempt from state income taxes (if any) to the holder, if he is a resident of the state of issuance.

The advantage of such tax-exempt income can be really important. For example—if an individual has a taxable income bracket of $20,000 then a 4% yield on a municipal bond is equal to 9% return from a taxable security. If the bracket level is $30,000 then a 4% tax exempt return to an individual is equal to a 10½% tax-