In order to meet the objections of steady-going investors to the risks involved by thus becoming industrial adventurers, a system has grown up by which the capital of companies is subdivided into securities that rank ahead of one another.  Companies issue debts, like public bodies, in the shape of bonds or debenture stocks, which entitle the holders of them to a stated rate of interest, and no more, and are often repayable at a due date, by drawings or otherwise.  These are the first charge on the concern after wages and other working expenses have been paid, and the shareholders do not get any profit until the interest on the company’s debt has been met.  Further, the actual capital held by the shareholders is generally divided into two classes, preference and ordinary, of which the preference take a fixed rate before the ordinary shareholders get anything, and the ordinary shareholders take the whole of any balance left over.  Sometimes, the preference holders have a right to further participation after the ordinary have received a certain amount of dividend, or share of profit, and there are almost endless variations of the manner in which the different classes of holders may claim to divide the profits, by means of preference, preferred, ordinary, preferred ordinary, deferred ordinary, founders’ shares, management shares, etc., etc.

All these variations in the position of the shareholder, however, do not alter the great essential difference between him and the creditor, the man who lends money to a Government or enterprise with a fixed rate of interest, and, in most cases, a claim for repayment sooner or later.  The shareholder, whether preference or ordinary, puts his money into a venture with no claim for repayment, unless the company is wound up, in which case his claim ranks, of course, after that of every creditor.  If he wants to get his money out again he can only do so by selling his stock or shares at any price that they will fetch in the stock market.

Thus, if we take as an example a Brewery company with a total debt and capital of three millions, we may suppose that it will have a million 4-1/2 per cent, debenture stock, entitling the creditors who own it to interest at that rate, and repayment in 1935, a million of 6 per cent. cumulative preference stock, giving holders a fixed dividend, if earned, of 6 per cent, which dividend and all arrears have to be paid before the ordinary shareholders get anything, and a million in ordinary shares of L10 each, whose holders take any balance that may be left.  This is the total of the money that has been received from the public when the company was floated and put into the brewery plant, tied houses, or other assets out of which the company makes its revenue.