The Evolution of The Corporation and Its Impact on Investing

by David Jenyns on September 26, 2007

The invention of the corporation gave way to a new era of financial dealings, melding individuals together to increase their monies, especially with marketable securities.

But first, what is a corporation? It is an intangible legal being designed to assure an organization unlimited life and limited liability. Corporations are of three main types: government or municipal; stock (private) corporations; and religious, charitable, membership or endowment. The first two provide almost all marketable securities.

The corporation first appeared in Europe around the fourteenth century when Queen Elizabeth I was the moving light in the East India Company. Later, a charter was granted by Charles II of England to “The Governor and Company of Adventurers of England Trading into Hudson’s Bay” 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 and others like them 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. Types of securities include bills, issuances, notes, and bonds, depending upon each securities time length and payment specifications. When an investor buys any of these securities he becomes a creditor entitled to two things: the return in full of the precise face amount of the note or bond on the maturity date specified, and regular interest payment at a stated rate in the meanwhile.

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.

Not only is this tax saving of great value, but quality municipal bonds are regarded as among the choicest and safest investments in the world. Municipal bonds are not actively traded, however, and all of them are bought, sold and quoted over-the counter.

Stock corporations may raise money both by borrowing and by selling stock. Corporate borrowing has the following certain advantages: (1) It permits the use of a specific sum of money for a definite period of time at a stated rental (the interest rate); (2) Interest is deductible as a business cost before calculation of net profits; (3) The borrowed money adds substantially to the total capital on which a profit may be earned, and often accelerates the acquisition of new equipment.

The common stock is now an accepted and much sought after investment, not only by individuals, but by mutual funds, endowments, trusts, pensions, savings banks, and life insurance companies. In 1959, Harvard University, the wealthiest private educational institution in the U. S., had over half its endowment funds in diversified common stocks.

Today, common stocks, preferreds, bonds and mutual funds are the standard types of marketable securities. Investing in these have their inherent risks and advantages; just be sure to do your homework before you buy!

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