WELLINGTON NEWS

Hokitika Guardian, 30 December 1927, Page 1

WELLINGTON NEWS

SIIAREAfARKET IX 1927. (Special to “ Guardian ”.) W.FLLfXG'i'OX. Dee, 28. Notwithstanding the trade depression and the increiia in the hank rate which took place in Alav last, and

the general stringency of the money market, the volume of business done in the Stock Exchange throughout the Dominion has been remarkably good. The outstanding feature has been the active trading in bank shares. The clemand was persistent, but it was largely speculative. There is , a big difference between a. speculative demand and an investment demand. The one who buys for investment buys to keep and looks for a reasonable interest return having regard to the safety of the security. Bank shares should yield the investor about 5} per cent for that rate can he obtained on high grade local body debentures. Investors are now looking for a reasonable return on bank shares, hut while there was a speculative demand for (hat class of shares the yield was not taken into consideration, but the profit that accrued on the issue of new shares.

Quite a number of hanks issued new shares during the year, some because they were able to find profitable use for additional capital, and others because of amalgamating with or acquiring (lie businesses of other hanks. Thus the Bank of New South Wales raised fresh capital when it acquired the Western Australian Bank. The English. Scottish and Australian Bank absorbed the Royal Bank of Australia and issued new sfinres, as did Hie Commercial Banking Company of Sydney when it absorbed the Bank of Victoria. The Commercial Bank of Australia, the National Bank of Australasia, the Bank of Adelaide and the Queensland National Bank made new capital issues to provide for extension ol business, and the net) shares which were in all eases offered to the shareholders in the first instance were readily taken up because there was profit in the business. This ran he illustrated by the pending issue by the Commercial Bank of Australia. This bank is offering for subscription among its shareholders 500,(XX) ordinary shares of 10s each at a. premium of 10s. The cost of every one of the new shares will he £l. hut the market value of the ordinary shares is 295, so that those who secure the new shares stand to make a tidy profit. The existing ordinary shares will presently he quoted at a price “cum rights,” that is the right to take up the new shares, and the price will take into consideration the profit to lie made on the new shares. There would then be a speculative demand for the shares.

If a bank issuing new shares at the same time decided not to allocate any larger sum for dividend distribution, the price cum rights would drop liecause on a larger number ol shares with no increase in the amount allotted for dividend, the dividend per share and per cent of capital paid up would he less. Fortunately, so far all the institutions that have issued new shares have maintained the rate per cent of dividend distribution. Some companies declare dividend and bonus, and with some concerns this has !>cen an annual occurrence for many years past. This is done purely for appearance sake and partly as a precautionary measure. Once a dividend is declared no company likes to reduce it, for such a reduction means con fraction in profit, and investors and speculators alike avoid the shares of such concerns. Regular dividends lit a fixed rate ensure confidence. A bonus need not he fixture, and a reduction in the bonus rate is not viewed with the same concern.

Tlio .shares of the four insurance companies quoted on the Stork I'.x(■liangc have a speculative value which is well above the investment value. Insurance companies must maintain large reserves, and year after year they add substantial amounts in. the reserve funds. There comes a time when the. reserve hind is larger than is necessary for the* safe conduct ol the business. The surplus is the capitalised. that is a call is made on the shares, and a sum is taken from the reserve fund and applied to meeting the call. The South British Insurance Company recently called up 5s per share and found the money to meet the call out of the reserve fund. The advantage to the shareholders was that the shares which carried a liability of 5s each became fully paid up without any liability.