10. Ascertain, by local inquiry, how many different types of securities are handled by a given investment institution. 11. Ascertain, by local inquiry, how the smaller corporations in the community have raised their capital. II. INVESTIGATION AND ANALYSIS 12. Which of the various types of securities-government, railway, public utility, and industrial-do you think present the most difficult problems of analysis? 13. Study carefully the chart depicting the various aspects of the problem of bond values. Classify the different questions in the order of their difficulty of correct appraisal. Which do you regard of greatest importance? 14. What is meant by the "equity"? How much, if any, in excess of the amount of the bond issue should the equity of a company be? (Refer back to provisions affecting Class B under the Illinois Securities Law.) 15. “In analyzing an income account one must observe, particularly, the excess of the total net earnings above the amount of the interest on bonds; and in the case of stocks above the amount of the dividend payments." Why? 16. Enumerate as many factors as you can which might affect the "condition of the money market"? the general industrial situation? 17. Draw up in outline form what you think would be a necessary course of study for one who hoped to be a successful analyst of investment values. 18. What is meant by a house of original purchase or issue? May any house make an original purchase? 19. What sort of houses tend to specialize somewhat in investigation and first purchase? 20. The original purchasers are sometimes called wholesale concerns. Do you think this is a correct description of their activities? Do they have anything to say about the terms on which the retailing is to be effected? III. THE UNDERWRITING FUNCTION 21. What is the practical necessity for underwriting? Is there a greater necessity with large than with small undertakings? 22. May a single house underwrite an entire issue? 23. What would determine whether a given issue would be handled by an individual house or on joint-account? 24. What is the difference between a joint-account and a syndicate operation? What would determine which would be used? 25. In the case of a joint-account do the associated houses merely underwrite the issue? Who sells it? 26. What factors would determine the choosing of houses for a joint-account participation? 27. When a syndicate is formed, is it merely for the purpose of underwriting an issue? 28. Show concretely how a house of original purchase may contract itself out of the risks of underwriting through the organization of a syndicate. 29. Is it fair for a house of original purchase to take, say, $1.00 per share for its work? Precisely what is the work for which it receives this $1.00 per share? 30. "The houses of first purchase do not assume any risks." Do you agree? 31. "It is usually good policy for a very large investment house to form an underwriting syndicate, even though its resources be sufficient to swing the entire amount, because it is safer to underwrite 5 per cent of twenty different issues totaling $100,000,000 than 100 per cent of a single $100,000,000 issue." If so, why? 32. Is it possible for a house to secure the profits incident to original purchase in a larger number of issues, if it does not tie up its full resources in underwriting a single issue? 33. Do you understand that an underwriting syndicate is a permanent organization? 34. Define: participation, subscription, allotment, "carrying securities." 35. Is it necessary for underwriters who participate in an issue that is brought out by a house or group of original purchasers to make an investigation of the enterprise? 36. Do the original purchasers also participate in the underwriting? Do you fancy that in practice every underwriting participant makes an independent analysis? IV. THE DISTRIBUTION FUNCTION 37. Enumerate as many sources of demand for investment securities as possible. Which would be the most easily reached? What does this mean? 38. "A bond well purchased is half sold." 39. "The distributing houses do not assume any risks." Do you agree? 40. Work out the steps involved in an issue of one million dollars of bonds of Corporation X. Use actual figures and indicate the division of the profits as between original purchasers, underwriters, and distributors. Sell the same issue at a loss and indicate the distribution of the losses. 41. Does the typical letter to potential purchasers given on page 239 furnish sufficient data for a reliable judgment? 42. What is the purpose of "buying back" securities? Of what advantage is it to the individual investor? Do you fancy many people would not buy "unlisted securities" if it were not for the marketability given to them by the willingness of the bond houses to buy them back? 43. What is the function of the "street brokers"? Are they "profiteering" middlemen, or do they render a service greater than the amount of the commissions? 44. Why cannot a bond house guarantee bonds? How can it usually assume the losses, in actual practice? 45. For what purpose does an investment bank need fixed capital? working capital? 46. In connection with which function is the largest amount of capital required? 47. What other financial institutions are necessary in order to enable the investment banker to engage in underwriting on a large scale? 48. Is it necessary for the houses of distribution to have connections with commercial banks? 49. What determines the amount of profit an investment bank can make: (a) as a distributor of securities; (b) as an underwriter; (c) as original purchaser ? 50. "The investment banker must charge enough more than the expenses involved to compensate for the risks assumed and obtain a profit." Does this mean that the costs involved to the corporation in raising its capital are greater than they would be if raised directly by the corporation itself? 51. Do you see any dangers in leaving investment banks unregulated? Would you favor federal incorporation? 52. Write a summary of the social benefits of the investment banking business. 53. How do you account for the development of the investment banking business? Did society, in any organized capacity, have anything to do with it? 54. In the exercise of his veto power over the development of a given enterprise, is the investment banker actuated by considerations of social well-being? What is the test on which he bases his decision? 55. In a socialistic society how would the distribution of industrial energy between different industries be determined? between different establishments in a given industry? Can you suggest any possible shortcomings in this method? REFERENCES FOR FURTHER READING Annals of the American Academy of Political and Social Science, Vols. XXX and XLII. Bulletins of the Investment Bankers' Association of America. Chamberlain, Lawrence: Principles of Bond Investment, 1911, chap. xl. Gerstenberg, Charles W.: Materials of Corporation Finance. pp. 374-76; 404-11. Lough, William H.: Business Finance, 1917, chaps. xiv and xv. Lyon, Hastings: Corporation Finance, 1916, chaps. ii and iii. CHAPTER XV FOREIGN INVESTMENT TRUSTS The marketing of investment securities, as discussed in the preceding chapter, related primarily to the placing of domestic issues in the American investment market, with only incidental reference to the marketing of securities abroad through the participation of foreign bankers in American syndicates. The placing of investments in foreign markets gives rise to problems of peculiar difficulty, owing to the risks and uncertainties involved in loaning at great distances. It is the purpose of this chapter to describe the investment machinery that has been developed by other countries to meet these difficulties and to indicate the problems that now confront the United States in this connection. Great Britain has investments all over the world. Great Britain has for so many years been the financial center and the great creditor nation of the world that a brief statement of British overseas financial relations will best reveal the nature of the problem. There are now listed on the London Stock Exchange 1,156 foreign and colonial securities, classified as follows: colonial and provincial government, 185; Indian and colonial city, 176; foreign city, 76; foreign government, 210; railways in British colonial possessions, 110; Indian railways, 68; American railroad securities, 56; foreign railways, 276. These foreign issues appear to be substantially in excess of the domestic securities traded in on the London exchange. The distribution of British foreign investments in 1913 has been estimated as follows: railways, $7,402,014,631.50; governments, $4,669,518,679.50; mines, $1,327,527,668.50; financing land investments, $1,188,336,035.50; municipal, $718,037,475.00; commerce and industrial, $707,258,178.00; tramways, $378,565,035.00; banks, $345,811,648.50. Of the total, $8,662,345,667.50 were invested in India and the British |