to the company, or hold them and collect the interest to maturity. (8) "Serial bonds" are issues paid in installments. A portion of each bond may be paid annually, but the usual method is to have a certain number of the bonds to mature each year. For the issuer this is simpler than the sinking fund. For the investor an early reinvestment may be necessary, but if the investor has his bonds scattered through the groups, he gets an ever-increasing margin of safety. (9) "Amortization bonds " are those upon which the payments made annually, or more frequently, include a part of the principal as well as the interest. The result is that when the last payment is made, the entire debt is canceled.

253. Methods of selling securities. There are three methods of selling securities: (1) inside distribution, (2) direct to the public, and (3) to investment bankers or brokers, or through their agency.

254. Inside distribution. · All the stock or bonds may be absorbed quietly by those who are already in the business, or who are well acquainted with the prospective management and opportunity of a new business. In a well-established business of good profits, it may be an easy matter to distribute new securities pro rata among those who are already owners of the business. If sold at par the offering of a bargain would attract quick buyers. Any quantities of such an offering not taken by a stockholder on account of financial inability could be easily sold directly, or indirectly, to others of more financial strength. In cases of consolidation new securities are frequently exchanged for old ones.

255. Direct sale to the public. A large business of only normal earning power, a business launching into a new field, or a well-established business offering securities to yield fixed returns of normal income, may need funds of greater amount than its friends can, or are willing to,

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supply. The sale must be to the public. How shall the public be interested? The public consists of two classes: those who are seeking investments, and those who are seeking speculations. Often they are the same people; they may be separate and distinct. The investors are (1) professional and salaried people who have surplus incomes, which they desire to become income-producing, (2) women and minors who have funds received largely by inheritance, (3) trust funds, (4) savings banks, and (5) insurance companies. The speculators are (1) shrewd business and professional men who want properties likely to increase in value and who are willing to take risks, (2) professional speculators and their imitators who buy "on margin" and are desirous of quick and large returns. There are also those who seek investment, but who, due to ignorance, lack of intelligence, or cupidity, become the blind victims of the unscrupulous promotor or broker. These classes of prospective purchasers must be reached. Their interest must be aroused; their confidence must be secured. How can it be done? The three methods of commerce are open, open, advertising, correspondence, salesmen. The chief weapon of each of these means is the prospectus. This statement is an exposition of the facts concerning the project, especially its past record, and a discussion of the prospects for future profits. The good features may be magnified and the poor ones glossed over. Glowing statements of what fortunes have been made in similar enterprises may be made. Grossly false hopes may be put to the credit of "competent judges" or "some who have seen." A purely investment enterprise will likely have only a cold statement of simple facts, the very conservatism of which carries conviction, a quality which has led to its imitation by promoters of speculative enterprises. The prospectus has thus been used dishonorably as well as legitimately. In the United States it has been

employed in such an unscrupulous manner that, except for small issues, direct appeal to the public is likely to fail. In England reputable enterprises have used this method more successfully. "To take one instance, it is said that the Eastman Kodak Co. was floated without any assistance whatever from bankers or underwriters. About $5,000,000 of stock was sold to the public through direct newspaper advertising, circularizing, and the issue of an attractive prospectus."2 That the method in this instance was entirely successful is shown by the history of the company's stock. Governments often take subscriptions for bonds at an announced rate.

The disadvantages of direct selling are: (1) it is an expensive method of bringing the buyer and seller together, and (2) the buyer has no expert intermediary. One of the best services of the successful middleman is to furnish expert advice as to an article. He inspires confidence because he is in sight, near at hand, can be held morally responsible, has a past record of ability, and a reputation to maintain.

256. Sale through a middleman. - Bankers or regular bond and brokerage houses may (1) sell the securities on a commission basis, (2) buy them outright for investment and resale, or (3) undertake to sell the securities within a certain time and guarantee the amount to be realized from their sale. It is the practice of governments to sell their bonds privately to such a house, or to offer them to the highest bidder, subject to the legality of the issue. During the Great War J. P. Morgan & Co. bought $250,000,000 of the 5% bonds of Great Britain at 98 and offered them for resale at 99. Railroads and business corporations usually sell privately and nearly always to the same banking house.

2 William H. Lough, Corporation Finance, p. 231. (Alexander Hamilton Institute, New York, 1909.)

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The investing public of the world is best reached through these security dealers. There are thousands of very wealthy capitalists who have funds to invest who go to them for their investments. There are many thousands of small investors who go for a like service. The Bond Buyers' Dictionary says there is one house in Wall Street which has been in business for over seventy-five years which has a list of customers which could not be purchased for several million dollars. It includes 22,000 names and absorbs security issues to the amount of $100,000,000 a year. How is this business built up and maintained? What methods inspire such confidence? *

4

The investment banker does not guarantee the securities he sells to be sound investments, but he does put upon them the stamp of his judgment and the result of his investigations. He may agree to buy back at market price any security he sells, or even guarantee that it will not fall more than a few points. He may decline to handle a small security issue, certainly any one less than $100,000. There are three good reasons for this: (1) the profits will be small, (2) the market is too narrow, and (3) the profits must be large enough to warrant a sweeping investigation. The reputable investment bankers turn down the majority of propositions which seek them. They require that the men connected with the corporation must. be of good reputation, there must be present no risky factors, and there must be a safe margin of earnings over all fixed charges and proposed dividends. Each house usually has a particular field out of which it will not go. Professional experts from the ranks of the legal profession, manufacturing managers, engineers, and accountants, must report favorably. Obviously all this appeals to the in

3 Ibid., p. 236.

4 Edward S. Mead, Corporation Finance, p. 128. (D. Appletor and Co., New York, 1915.)

vestor. It is to his disadvantage in that he may rely so confidently upon the bankers that he gains no first-hand knowledge of the elements of the risk himself. He is placed entirely at the mercy of his banker, and he has to pay for the services which he receives. This charge, however, is small compared to the charges the investor would have to meet in making investigations for himself, and it is small compared to the fees charged by middlemen in other businesses. Besides if bankers handle an entire issue upon subscription, the investor has an advantage in knowing that the entire issue is sold.

The fact that the investment public interposes the middleman between them and the issuers of securities, makes it likely that an attempt at direct sale will fail. At the same time it is likely that a sale, even if not to, but through, bankers will succeed, especially if it is underwritten. The corporation in having its own selling organization, ignorant of who the buyers would likely be, would be put to such great expense that it can save money by giving a liberal commission to its bankers, who have expert advice as to what the market will stand. Not only that but the corporation needs funds at certain dates. By sales to, or guarantees from, bankers it is assured of funds at the agreed dates. Apparent failure at selling would affect a corporation's credit. If the entire responsibility is shifted to the middleman, the uncertainty of the corporation becomes certainty.

257. The operation of a syndicate. A banking house may subscribe for and take all of a security issue at a certain price, intending to resell it to its clientele at a higher price. If the issue is so large that it is unwilling to risk so much of its capital in a single venture, a group of bankers is formed, each banker agreeing to take a certain amount of the issue. Similarly, a large house might alone guarantee a sale of securities, or invite others