9. Sale of speculative sec.urities.—Altho many railway and industrial stocks of a speculative nature are underwritten in the manner previously described and sold upon the stock exchange, there are many issues of corporate securities which are either too small or too speculative to be sold in this way. Mining stocks and small industrials, for instance, must usually be sold direct to the speculative public, because no special machinery exists for marketing them.
There is a certain class of brokerage house, it is true, which purports to market such securities upon a commission basis, but they are usually frauds. Their game is to obtain from the corporation a cash advance to cover the expense of imaginary salesmen and ad vertising. When the corporation refuses to advance further funds, the broker accuses it of quitting just at the critical time, when the efforts of his salesmen are about to be successful. The blame for failure is thrown back upon the corporation, and two entries are made to profit-and-loss accounts, one by the corporation on the loss side, and one by the broker on the profit side.
The reason why no marketing machinery exists for this class of security is that the losses are so great that no clientele can be obtained and held by any firm in this business. Plenty of enemies can be made, but few friends.
Speculative securities of this ,type are sold by news paper advertisement, mailed circulars and direct personal solicitation. The appeal is usually to the cupidity and imagination of the prospective buyer, and the prospectus is a work of art. The test of such a prospectus is to endeavor to select from it the abso lute statements of fact which pertain directly to the business of the company whose stock is being offered. Often dozens of pages may be read without finding one such fact. All representations are prefaced by some such phrase as "Competent witnesses declare," "No one can see this beautiful country without believ ing," "Leading engineers who have investigated the proposition report that in their opinion." Divi
dends of 100% or even 1,000% are freely predicted. Much space is devoted to pointing out the tremendous profits which other similar companies have made, with the inference that the present opportunity is equal to any of these others. Unfavorable facts are omitted, or given only superficial consideration.
"And opportunity knocks but once," we are told. If they get all your spare cash the first time, there is no need of knocking again. Some of our readers have probably already learned from experience or ob servation how anxious the "fakers" are to take their money from them. Those who are uneducated in business or finance, and some who are, appear to be unable to distinguish between facts and plain "op timism." 10. Alluring announcements.—It is not intended to infer here that all speculative stocks are fraudulent, or necessarily worthless. But a large majority of them are absolute losses and many are fraudulent. Notice the difference between the term "fraudulent" and the term "illegal." By carefully avoiding any in correct statement of fact, a swindling prospectus be comes legal, and yet may openly perpetrate upon ignorant persons the worst kind of fraud.
At the time this is written, the newspapers and mails are full of advertisements of this class. The writer has before him a newspaper containing the advertise ments of six companies, all of which are paying illegal dividends out of capital and then advertising the stock on the strength of dividends. The sole assets of each of these companies consist of one hole in the ground, one wagon load of pretty stock certificates, and one wise old owl for a promoter, in whose pocket is safely tucked away all the cash paid in by subscribers, which has not been paid out in unearned dividends or adver tising. The two actual advertisements which follow illustrate better the nature of such announcements. Of course the names have been changed to prevent hard feeling.