Perhaps to this list should be added the state and national banks, and the chartered banks of Canada which assist speculation in securities by making loans upon them as collateral. Were it not for the assist ance of these banks, the operations of brokers would be greatly curtailed, for they would then have to de pend upon their own capital, or that of their custom ers, and thus practically eliminate margin trading. The process of dealing on margin consists simply in purchasing securities with borrowed funds, the securi ties themselves being pledged as collateral to the loan. The borrower invests some of his own funds, but de posits all the securities as collateral to the balance bor rowed, thus maintaining an adequate margin of safety to the lender. The margin must be made good if the security prices decline, or the collateral will be sold out by the bank to pay the loan.
3. Investment prospectus.—Whatever the method of marketing may be, the security must be presented ultimately in such a way as to induce investors to buy it. Unless sold to inside interests, who are thoroly acquainted with the affairs of the company, a pro spectus is needed to explain to the investor the nature and purpose of the issue.
The prospectus is supposed to contain such infor mation as will enable the investor to judge the merits of the proposition. It must be drawn with particular reference to the nature of the security and the type of investor to be reached. If the issue is a high class stock or bond, strictly in the investment class, the pro spectus will naturally be conservative. Facts will be presented in a brief dignified manner which appeals to conservative investors.
If the issue announced is that of a new and highly speculative venture, facts may be dispensed with in favor of picturesque language, clever inferences and talk of big profits.
The investment prospectus is a brief document, prepared in a neat but simple style, without adorn ment or apparent exaggeration. The attempt is made to present concisely the essential facts relating to: 1. Description of the stock or bond being marketed 2. Security for the issue 3. The purposes of the issue 4. Extent and nature of the company's business 5. Description of the company's properties 6. Brief history of the company and its growth 7. Statement of the company's earnings several years back.
When the company is widely and favorably known, the prospectus may not even present all the items above listed. On the other hand, if the offering is made at a time when investment funds are scarce or the company is not favorably known, the prospectus may elaborate, and perhaps occupy four or five pages of a neatly printed pamphlet or folder. On page 277
is a typical investment prospectus, such as is issued by well-known investment bankers to their clientele, announcing the sale of an investment security: 4. Advantages of having securities underwritten. —To underwrite means to insure. In the security market, underwriters are bankers who insure to the corporation that the entire issue will be sold. Under writing is fully described in the Text on "Organiza tion and Control." The corporation obviously benefits from the under writing of its securities, in most cases, for the follow ing reasons : 1. It has not the skill, organization nor clientele which will enable it to sell securities quickly, cheaply and to the best advantage 2. The certainty of having the funds in hand at the proper time is valuable 3. The credit of the corporation may be impaired if efforts to sell its own securities fail.
There are also distinct advantages to the investor in purchasing from investment bankers. These bank ers will not underwrite an issue, nor recommend it to their clientele, unless a thoro and expert investigation has been made. The investor feels that the reputa tion of the banker is a safeguard to him, since this rep utation is largely founded upon past good judgment in selecting securities. The investor himself is not in position to make any searching inquiry which perhaps requires the exhaustive scrutiny of legal, engineering and financial experts.
Among the comparatively few large underwriting houses in the United States, are J. P. Morgan and Company, Speyer and Company, Kuhn, Loeb and Company, Blair and Company. Some of them are not only underwriters, but also engage in directly in the business of promotion. In the for mation of the Consolidated Lithograph Company, for instance, altho Mr. Grant Hugh Brown acted in dividually as promoter, it was well understood that he represented Kuhn, Loeb and Company, even tho their name did not appear. These large underwriting banking houses are not commercial banks of deposit and discount; they are primarily engaged in the pur chase and sale of securities.
As underwriters, they purchase entire issues from large corporations, a number of them perhaps com bining in a syndicate to share the risks and profits. The securities are then marketed thru the members of the syndicate, usually over the Stock Exchange. In the case of high grade bonds, the large investment banking houses may share in the underwriting. These bond houses should not be confused with the strictly underwriting bankers, altho closely allied with them.