3. Distributing Securities. Bond and brokerage houses prefer to sell large issues at small commissions rather than small issues at larger commissions. The expense of investigating a small issue is nearly as heavy as a large issue; the selling expense per share is likely to be smaller in the case of the large issue as it can be sold in larger blocks; and the large issue probably comes from a larger, better known institution and will therefore sell more easily. The commission rates vary widely, the general range being i I 2 to io per cent; the chief factors determining the rate are the size of the issue, the condition of the market, the borrowing corporation, and the publicity that will be required. In addition to the commission, the borrowing corporation must pay legal expenses and fees to accountants, intermediary brokers, and others, which expenses may run to a high figure.
Some bond houses have developed a clientele to whom they sell by mail; some sell through local independent bankers on a commission basis; some have developed a great sales organization and reach old and new customers by advertisements, circulars, and traveling salesmen. A selling campaign may be very exten sive and highly organized; the more underwriters the more widely dispersed will the sales be. The buyers are insurance companies, banks in smaller cities, secondary syndicates, individual trustees and estates, trust companies, savings banks, and individuals.
The bond house or syndicate manager undertaking to market an issue of securities may, particularly if the issue is a large one, have the securities listed on the stock exchange and try to sell part of the issue through that avenue. Thus a ready market is at once established and many people whose names do not appear in the lists of prospects of the various bond houses, or who prefer to buy or sell through the exchange rather than "over the coun ter," may be attracted and buy the securities. The sellers then proceed " to make a market," by creating a volume of transactions sufficiently large to draw the interest of brokers and speculators. The syndicate buys and sells the securities and otherwise manipu lates the market, in this way controlling the price and gradually unloading the securities on the investing and speculative public. Meanwhile a campaign of publicity is being conducted in the financial press and daily newspapers.
Having investigated carefully the history, physical property, earning capacity, present and prospective business policy, and organization of the corporation before undertaking to market its securities, the bond house is in a position to recommend them to its customers. The good-will of a representative bond house
achieved by conservative practice, good counsel, and painstaking service, would, of course, be endangered by recommending securi ties which prove to be of poor quality, and therefore customers come to put implicit confidence in its advertisements, circulars, and daily news sheets. Bond houses thus function as advisors and directors of investment.
Though the policy of the bond houses in protecting their cus tomers varies greatly, it is not unusual for them to contract explic itly to make good their counsels and recommendations as to pur chases, and if the price of securities recommended declines below the selling price, the house stands ready to repurchase and thus protect the buyer. The buyer is often protected, however, quite as much by the moral responsibility which the house feels towards its client as by an explicit contract.
Banking and Other Operations of Bond Houses The intimate relations between a bond house and its customers are furthered by certain of its banking operations. A special department is established for the safe deposit of funds which, together with accruals of interest and additions from time to time, the depositor purposes to invest in securities offered by the bond house. The banking department also makes loans to cus tomers who wish to purchase securities but who have not sufficient funds to pay in full at the time of purchase. In conjunction with the deposits destined for purchase of securities, the banking de partment may accept other deposits subject to check; this service is, however, mainly incidental. It would seem best for the investment market and the commercial bank market to be kept relatively distinct. Some investment banks by adding service to service have become general banking institutions, handling securi ties, savings, trusts, and deposits.
A further activity of bond houses is to act as fiscal agents for business corporations and bodies politic. The payment of divi dends, interest, and principal on stocks and bonds, the flotation of their securities and their financial advertising are all matters entrusted to well-known bond houses in the central markets. Undoubtedly this arrangement improves the financial stability of the country, for in performing these operations of corporate finance the bond houses seek to build and maintain a good-will which less permanent promoters would fail to consider.