Dealers in commercial paper, which runs .from thirty to ninety days, receive a regular commission of one quarter of one per cent for selling it. Allowing for only the longest maturities the fund is reinvested four times a year, giving the note broker, if he is for tunate enough to command the reinvest ment each time, an opportunity to make one per cent a year out of a given fund of capital.
Both these commissions — that of the mort gage broker and that of the note broker— are only for the work of locating the capital and inducing the capitalist to make the commit ment. Note brokers sell almost entirely to banks, and each transaction reaches an amount of some magnitude. The high-grade real estate mortgage, although usually hav ing only a local market, is a well-known secur ity in its market. On account of certain market disadvantages, the uneven denomi nations, and the fact that no two mortgages are exactly alike, the work of selling is greater than the work of selling the most active bonds. It is not nearly so great as the work of persuading a capitalist to commit his funds to a relatively unknown though a thoroughly sound enterprise.
More than any other merchant the invest ment dealer assumes a moral responsibility for the goods he sells, irrespective of their gradc. A dealer in merchandise is not ex pected to guarantee the wear of his goods unless he represents them to be of the best class. Though a merchant in investment se curities does not represent everything that he sells to be as safe as government bonds, those who buy from him are disposed to hold him responsible if the investment proves unprofit able and the interest and principal are not paid promptly. A default is a severe blow to his prestige and to the confidence in his judg ment, by virtue of which he holds his clientele.
These facts justify the profits that the in vestment merchant is accused of making. The larger differences between buying and selling price are a consideration for the diffi culties of the business. The credit of cor porations varies widely, as does the market for their obligations. Thousands of people know the value of the Pennsylvania Rail road's promise to pay and need no persua sion to buy its securities. Few people know the value of a similar obligation made by an electric light company in some small city of a remote State. Though the security may seem safe to those who are experts, the larger public has to be convinced of it.
Each investor to whom such securities are offered must be persuaded to believe in them. It may take a year of 'negotiation to in duce him to buy. Bond salesmen have often found it necessary to wait as long as that to sell good but slow paper.
Meanwhile, the dealer's capital is tied up in the bonds he has bought and his money is being spent to convince the investor. The pur
chase and resale of securities which, though good, are but little known, involves more capital, time, labor, and risk than are re quired for the purchase of standard securi ties that always command a market, and it is altogether reasonable that such opera tions should pay a larger profit.
If the investment merchant were unwill ing to undertake this more hazardous and laborious sort of business, the small munici palities in Western States might have to do without their transportation or lights, or to get them at a higher cost. Such communi ties are without the capital required for their development, or, if it can be locally obtained, the cost would be higher than that at which it can be procured in the financial centers. The dealer is paid for making a market and for the cost of the selling; he does not in any way deceive the purchaser.
The investor does not expect, and knows that he is not purchasing, a security imme diately salable through any other channel than that through which he bought it. Usu ally the dealer stands ready in case of need to repurchase the securities so sold at a rea sonable concession. High standards prevail in this business. In comparison with the work done and the responsibilities assumed, the charges are moderate.
Though it is admitted that there is risk in the merchandising of securities, also it should be admitted that often there is actual loss. With all the experience and skill the merchant can bring to bear on his purchases, the conditions under which he works are so complex that he often cannot foresee the outcome. If the hoped-for per cent of profit is not made, the transaction may turn to the loss of many per cent, besides the cost of selling. If a dealer has not been shrewd enough to sell out in advance of falling prices, or does not gauge accurately the duration and rapidity of the decline, he may take heavy losses. Probably no investment ban ker went through the transition, from the period of rising security prices culminating in 1905 to the subsequent period of declin ing prices and the panic of 1907, without taking large losses. Bonds bought in the hope of selling at three fourths of one per cent above the purchase price were sold at a loss of from four to five per cent. Except in the case of specialty bonds sold through a careful education of the investor in the merits of the particular security, a sale in a declining market must be practically imme diate in order to be really profitable. If a dealer misjudges the appetite of purchasers, he gets "hung up" with an issue of securi ties which the investor will not even masti cate, to say nothing of digesting.