SELLING STOCKS AND BONDS 1. Methods of selling securities.—There are four general methods of selling corporate securities : 1. Compulsory or preferential offering to present stockholders 2. Thru underwriters and the Stock Exchange to investors 3. Thru established bond or brokerage houses to investors 4. Direct sale by the corporation to investors.
The first method needs little comment. If the stock of a corporation is closely held, the present stockhold ers will probably contribute new capital when re quired, or, if the shares are widely held, the present stockholders may be given the opportunity of sub scribing upon some preferential basis. This has the effect of selling the shares and at the same time dis tributing a profit to shareholders. The shareholders of the Pennsylvania Railroad, for instance, had the opportunity to subscribe to additional shares at 120 when the stock was selling thirty or forty points higher. A stock dividend, also, is substantially a forced subscription to additional capital stock, and illustrates the inside distribution of shares.
The second and third methods are briefly described in this chapter. The established machinery of the security market and the principal channels thru which corporate securities reach the ultimate investor are more fully considered in the Modern Business Texts on "The Exchanges and Speculation" and "In vestment." The fourth method will be illustrated in this chap ter and also in the Text on "Investment." It is employed, as a rule, only to market issues which are too small or speculative to be sold by any of the other methods. It must not be thought, however, that all the extremely speculative securities are marketed direct, since many large speculative issues, such as copper stocks and industrials, are sold upon the ex changes.
2. Machinery of the security market.—The sav ings of the people constitute a continuous fund available for investment. Since most of our indus trial wealth is controlled by corporations, savings necessarily create a large and growing demand for corporate securities. The demand for securities may come from the investor direct or thru institutions such as savings banks and insurance companies, to which he has intrusted his savings. The demand, further
more, is for all kinds of securities, ranging from the most speculative mining stocks to the safest of government and railroad bonds. The volume of such investment in corporate securities is enormous, amounting in the United States to several billions of dollars each year.
Supplementing this investment demand and as a natural result of it, there is also a very large specu lative demand by those who desire to profit from the fluctuations of the market. These speculative sales are much greater in amount than the investment transactions. They tend to steady the market by foreshadowing the rise and fall of security prices, ex cept in a panic, when speculative holdings are dumped upon the market and add to the demoralization of prices.
Corporations which have securities to sell are not in touch with investors. Consequently, a class of traders has sprung up to bring supply and demand together. They have established markets known as stock ex changes where bonds may be bought and sold.
Omitting the lawyers, promoters, accountants, en , gineers and other necessarf evils attending a new pro motion and confining our description to the marketing machinery, we find four principal elements: (a) The brokers who execute buying and selling orders for customers, whether for investment or spec ulation.
(b) The stock exchanges, which are voluntary as sociations of brokers, organized to conduct a market place for the purchase and sale of securities, a place where those who are members may meet and transact business.
(c) Investment bankers who purchase, after in vestigation, large blocks of securities which are then sold retail to investors who compose their clientele.
(d) Underwriting bankers, composed of banking houses which purchase from corporations, or agree to sell for them, whole issues of securities, which the cor porations have not the facilities of marketing direct. The securities are sold thru members of the syndicate to their clientele, or thru brokers upon the stock ex \change.