An investigation into the definition of the words "stock" and "share" has led to the discovery that neither the United States nor Canada provides a legal definition for either. Securities legislation defines the term "security" using the word "stock." The company and investors who first defined what stock is, the Dutch East India Company and its investors, would probably turn their noses up at many of the revenue-less and profitless companies that trade today.

It has been suggested that a progressive move on the part of the Canadian and U.S. governments would be to restrict the issuance of stock to companies that have reported profits.

Arguments that this move could even save lives have been proposed. With no doubt, renaming securities offered by profitless companies would provide a higher level of "full, true and plain disclosure," a standard to which all professionals involved in the industry are held to.

Debate over securities sold by profitless firms

So if a company without profits couldn't sell stock, or already had stock outstanding, what would they do? There is a simple solution. Rename their stocks, or new issues, to something that more accurately describes their features and benefits. Two that seem appropriate are perpetual one-time-premium equity-profit swaps or perpetual equity-profit options, which are both novel derivative instruments.

It may be that the instrument being proposed isn't a derivative at all, but another form of equity. In reality, all three may be equally correct, and function in identical ways.

For this example, we will call these instruments perpetual equity-profit options, or options to save space. Esteemed input has been considered with regard to calling something with no definitive underlying price an option.

As has highly regarded input surrounding consolidations, splits, acquisitions, mergers, and shares outstanding. Options, and even stocks and bonds, are defined by people. Not by the Lord or mother nature. Options serve the needs of people and can be designed in any way acceptable to those who deal in them.

Features of financial instruments dictated by people

An option is a contract between two counterparties: buyers have the right to take possession of an asset (a stock in this case), upon the occurrence of a predetermined event (profitability in this case). Buyers pay a premium, initially to writers (issuers in this case), and later to market participants; similar to a stock's price. Some options require an additional cash outlay upon delivery, which would be unnecessary for equity-profit options.

Voting rights, identical to those that accompany shares, could be attached. Options could be split, consolidated, and serve the same function for mergers, acquisitions, secondaries, and private placements.

Goldstar Minerals Inc. (TSXV: GDM), discussed in the first part of "What is a stock?", carries a book value per share of $0.01, as reported by Yahoo Finance. If GDM stock was converted to an option, this ratio could simply be changed to book value per option of $0.01.

Simple to implement

If regulators stipulated that only profitable companies be permitted to sell stock, and that the profitless must sell something else, options being proposed here, the TSX Venture Exchange, where GDM shares trade, wouldn't even need to adapt. The issuer, its underwriters, investment advisers, analysts, and journalists would be required to change how they describe the equity of each firm, but the change would require little in terms of revamp to infrastructure.

It would seem logical that Canada's premier stock market, the Toronto Stock Exchange, should only list stock in profitable companies, and that the nation's junior market, the TSX Venture, should list instruments in unprofitable or exceptionally small firms. While an example is being made of the Canadian marketplace, it would seem that the same observations would apply to OTC markets in the United States, as well as to some issues that trade on organized exchanges.

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