Last week’s question and answer

I was born in Brooklyn in 1938. My chewing gum was considered a “change-maker,” as it was positioned near cash registers, encouraging people to spend their pennies. After World War II, I introduced Bazooka Joe bubble gum, after “Atom Bubble Boy” failed to take off. In 1951, I introduced baseball trading cards. At first, they played second fiddle to the gum, but now it’s the other way around. Today I’m an international marketer of collectible trading cards, confections (such as Ring Pops, Push Pops and Baby Bottle Pops), stickers and more. I take in around $300 million annually. Who am I? (Answer: Topps)

Capitalizing on Capital One

Capital One Financial (NYSE: COF), the nation’s fifth-largest credit-card issuer, recently reported first-quarter net income of $507 million, up 12.4 percent over last year. Revenues climbed 9.3 percent to $2.4 billion, with interest and non-interest income up 17.6 percent and 5.1 percent, respectively. Profits in the credit card segment rose 18.5 percent, while auto lending and global financial services posted bottom-line gains of 16 percent and 38.5 percent, respectively.

Total managed loans on the books rose by 14 percent, reaching $81.6 billion. The auto finance division, where loans swelled by 50 percent, led the way. The company’s proprietary IBS (Information Based Strategy) software is helping to keep bad debt to a minimum. Capital One’s already successful in-house collection efforts should get even better now that the Senate recently passed bankruptcy legislation making it more difficult for consumers to write off their credit card obligations.

Capital One has grown by leaps and bounds since its birth in the mid-1990s, racking up some 50 million accounts and becoming a top-10 consumer lender. Along the way, it has posted steady gains in both loan growth and earnings every single year. In the past five years, it has doubled its credit-card market share, despite stiff competition from larger lenders.

The stock is trading with a price-to-earnings ratio in the low teens. Now that’s a credit card perk anyone can appreciate.

Biotech can fail

In 1988, at my broker’s urging, I bought 300 shares of a new biotech company at $14.68 per share, for a total investment of $4,406. The stock rose briefly and then faded. I imagined that biotech was a no-fail industry, surely paying off, but in 1993, the company went into bankruptcy and was later taken over by a new group. Original shareholders got one share for each 7 1/2 they owned. I finally sold when the stock slumped to $3.75 per share. I ended up with $110, and a loss of more than $4,000 plus whatever the initial investment would have earned elsewhere over the years. — Carol Washburne, Chesterfield, Mo.

The Fool Responds: Never think that any company can’t fail. Biotech can be especially risky if you’re not well-versed in it. It relies on scientists developing formulas that will have to clear many regulatory hurdles before returning any profits. Many promising drugs end up failing to win approval from the Food and Drug Administration.

E-mail us your dumbest or smartest investment stories, to Fool@fool.com.

A stock is born

How does a stock become a stock? Well, imagine a company called Carrier Pigeon Communications, which promotes international communication via messages attached to bird legs. With people tiring of cell phones and e-mail, its pigeons are (pardon the pun) flying off the shelves. To meet demand, the company needs to secure more pigeons and beef up its operations. But it doesn’t have much cash.

Carrier Pigeon Communications (CPC) has some choices at this point. It can borrow money from a bank. It can issue bonds, which involves borrowing money from individuals or institutions and promising to pay back the lenders with interest. It can find some wealthy person or company interested in investing in the happening “pigeon-com” industry. Or it can “go public” with an initial public offering (IPO), issuing shares of stock.

To go public, it will need to hire an investment banking firm, which underwrites stock and bond offerings. The bankers will study CPC’s business. If they think the company is worth around $150 million, they might recommend (based on the company’s needs) that it sell 10 percent of its business as stock, issuing 1 million shares priced at $15 per share. Once it’s announced that the company is going public, if it seems that people will be scrambling to buy shares, the bank might raise the opening price. A lack of interest might cause the price to be lowered, or CPC might even postpone the offering.

If all goes as planned, $15 million will be generated. The investment bank will keep roughly 7 percent for its services (a whopping million dollars), and CPC will get the rest. From now on, people will buy and sell Carrier Pigeon Communications shares (ticker: SQUAWK) from each other on the market, trading through brokerages.

CPC will not receive any more proceeds from these shares — it got its money when it issued them.

Once it’s a “public” company, Carrier Pigeon Communications will have obligations to its shareholders and the Securities and Exchange Commission (SEC). For example, it will have to announce earnings four times a year.

Learn more at www.investopedia.com/university/ipo and www.fool.com /school.

Worthless stock

I’m sitting on some now-worthless stock. How can I get rid of it and declare a loss for tax purposes? — T.C., Woodbridge, Va.

If you have worthless stock that’s difficult or not worth it to sell through your broker, you can sell it to a friend (or cousin, aunt or uncle) for pennies. (But not to a spouse, siblings, parents, grandparents or lineal descendants.)

Here’s one way to do it:

• Get the actual stock certificates from your broker.
• Formally sell the shares to the purchaser, with a check for payment and a bill of sale.
• Sign over the stock certificate (on its back) to the purchaser. Have the signatures verified by your banker and/or a local stockbroker.
• Send the certificate to the stock transfer agent. Explain that the shares have been sold, and ask them to cancel the old shares and issue a new certificate to the new owner.

Some brokerages will offer you a quicker alternative, buying all your shares of the stock for a penny. They do it to help out their customers and because, over time, some of the shares may actually be worth more than the penny they paid for them.

By selling the shares, you have a closed transaction with the stock and can declare a tax loss. Your friend, relative or broker, for a pittance, has just bought a place mat or birdcage liner. Learn more at www.fool.com/taxes, www.fairmark.com andwww.irs.gov.

Where online can I learn about and compare brokerages? — K.F., Lancaster, Ohio

You’ll find information at www.broker.fool.com and www.epinions.com/finc-brokerages-all. You can check out individual brokers and firms via the Securities and Exchange Commission, at www.sec.gov/investor/brokers.htm.