Stocks And Bonds

A bank was described as a storehouse where this accumulated surplus is gathered together and loaned out to those who need it in carrying on agricultural, industrial and commercial enterprises. Not all capital is of the same kind; it is either "fixed" or "circulating." Fixed capital is represented by such things as buildings, tools, machinery, rolling stock, etc. It is fixed in the sense that it needs to be renewed only at long intervals. Circulating capital, on the other hand, must be constantly renewed and it is represented by the things for which money is borrowed from banks - raw materials, fuel, funds for wages, etc. Fixed capital may be defined as money that is invested; circulating capital is money that is loaned. These are not exact economic definitions, but they will serve to show the difference between the two from the banker's point of view.

With the supplying of fixed capital the commercial banker has nothing to do. The money entrusted to his care must be so loaned as to be available upon the demand of his depositors, or at least within a reasonable interval. Obviously money invested in the fixed capital of any business cannot be withdrawn at will. Stocks represent this kind of capital. The stockholder becomes part owner of the business in proportion to the amount of capital stock owned. He shares the risks incidental to the business and he also enjoys the profits if the venture is successful. Stocks have neither maturity nor a fixed return in the shape of interest. The only way the stockholder can recover his share of the capital is to sell it to someone else. For returns he must look to the dividends which are paid only if profits are made.

Indeed, the stockholder as part owner is liable to an assessment to make good when losses occur. Stockholders of national banks, for instance, may be assessed an additional amount equal to their stock if the assets of the bank become reduced through losses and are not sufficient to meet the liabilities.

Bonds, on the other hand, are loans. The bond-holder has loaned the "obligor," or the corporation issuing the bond, a sum of money represented by the amount of his bonds. The bond is a promise to pay. It has a fixed and definite maturity and yields a known rate of interest. Therefore bonds are suitable investments for banks, whereas stocks are not. The difference between bonds and ordinary promissory notes is one of dimensions. A bond issue is for millions, rather than hundreds, of dollars; the bonds fall due after a period of years instead of months or days, and they are issued by large corporations, municipalities and governments, rarely by individuals. The issue is split into parcels of $1,000 or less, so that the loan may be widely distributed. Capital is accumulated into stocks, bonds or bank deposits in much the same way, that is, by large or small amounts in proportion to the surplus-wealth-creating ability of the investor or depositor.

The study of the value of bonds is of a technical nature and closely resembles the study of credits. The bond expert is one who is familiar with the conditions surrounding every issue of bonds. He is able to appraise the value of the security back of them, he has exact knowledge of the business of the obligor, or, if issued by a municipality, he investigates the amount of taxable property, the interest on an issue of school bonds, for instance, being paid out of taxes upon property owners. In addition to purchasing bonds for investment, many banks also have a bond department. This department buys large blocks of various issues, which are then sold to regular customers of the bank at a profit or commission. The principal book of record in this department is the bond register upon which is entered a full description of the bonds held. Bonds take their titles from certain characteristics, as, for instance, "government,", "railroad," "school,"- character of the obligor; "extension," "refunding," "water-supply," - purpose of issue; "4's," "5's,"- rate of interest, etc.

A place where buyer and seller may come together and trade is known as a market. By the establishment of markets the seller is provided with a place where he may look for prospective purchasers and vice versa. Stocks and bonds are dealt in in stock markets or exchanges. Those who buy and sell stocks and bonds for others are "stock brokers." All securities are practically sold at auction, the broker being paid a commission for his services. The prices at which sales are made are published broadcast, so that the banker who accepts stocks or bonds as collateral security for loans is able to estimate their value even if he is unfamiliar with all the conditions that give value to them. All bankers should familiarize themselves with local issues of both stocks and bonds, and they should know where to get reliable information concerning other issues which may either be offered for sale or used as collateral upon loans. Such information is secured through investment specialists, who may be described as credit men who specialize in information regarding corporations, firms, or municipalities borrowing money through bond issues.