If the issue consists of bonds, the large bond houses, who are associated with the underwriters, may par ticipate in the underwriting. Most corporate bonds sold in the United States are marketed by them. They have long lists of customers who are regular buyers of bonds, and who depend upon the bond house for advice and protection. Owing to their rather steady prices, speculation in bonds is not great, and the investment demand thru the exchanges is uncer tain. The underwriters, therefore, turn eagerly to the investment bankers.
7. Handling stock issues.—If it is a stock issue which is being underwritten, the stock exchange market is relied upon mainly. In this case, it be comes necessary for the syndicate manager to arouse speculation in his stock upon the exchange. The first step is to have the stock listed, so that it will appear in the daily quotations of the exchange, which are published thruout the United States. It is said that the New York Stock Exchange receives more free advertising than any other privately-owned profit making institution in the world. The underwriters also see that their associates and customers are in formed of the issue and that a suitable prospectus is available for distribution.
The speculators, discounting the fact that the underwriting syndicate will be under the necessity of sustaining the price of the stock until it has all been sold, will probably purchase heavily in the beginning to take advantage of the probable rise in price. It will be arranged with the bank to accept the stock as collateral for loans. As the stock becomes better known, it will gradually be absorbed by permanent investors who have faith in the future of the company. The length of time required by the syndicate to market the issue depends somewhat upon its attrac tiveness, the condition of the market, and the skill with which the market is pushed and manipulated. Speculators themselves absorb very little of the stock, since they buy only on the expectation of selling again soon, but their activities are a great advertise ment for it and thru their stimulating activities the actual investor becomes interested.
When the whole issue has been disposed of, the syn dicate will be dissolved, and the stock will probably be left to its fate in the market. The investment de mand now takes the place of the syndicate operations in sustaining quotations.
8. Sale of bonds.—Altho bonds are listed and sold upon the stock exchanges of the United States and Canada, their principal market is thru the large in vestment banks that have built up a clientele of con servative investors. Some of these houses have as many as 25,000 customers, who purchase in the ag gregate over a hundred million dollars' worth of bonds each year. Some houses are able to boast that no cus tomer has ever lost a cent in principal or interest thru the default upon any bond which they have sold to him.
They carefully investigate the issue before purchas ing and watch it very closely afterwards in the inter ests of customers. The business of such bond houses is founded upon their reputation for sound judgment and integrity. The individual buyer relies upon his bond house to inform him correctly, and it is only by so doing that the bond house is able to thrive. Hence such houses frequently retain an active in terest in the management of the corporations whose securities they have underwritten, and even purchase back at a loss bonds which have not turned out as well as expected.
Weekly or monthly letters, and special announce ments of new issues are mailed by each house to its list of customers. Bond salesmen are employed who travel over the country calling on customers, advis ing them on market conditions and selling bonds. Altho there are not many bond houses, it is said that some four hundred such salesmen, mostly university graduates, are employed by them in the United States.
Bond houses will handle none but the very best bonds, taken on after the fullest investigation, which seem to bear no possibility of default in princi pal or interest. This practically confines them to the best railway, municipal and public utility issues.
Some houses specialize in certain types of bonds, but nevertheless sell a general line in order to meet the requirements of customers. Altho many of them do business thruout the United States and Canada, each house is strongest in some particular territory, where the bulk of its sales are made. Bonds purchased from such houses carry very little risk to the investor, whose individual judgment is rarely as sound as that of the investment banker.