Bond and brokerage houses prefer to sell large issues at small commissions rather than small issues at larger commissions. The expense of investigating a small issue is nearly as heavy as a large issue; the selling expense per share is likely to be smaller in the case of the large issue as it can be sold in larger blocks; and the large issue probably comes from a larger, better known institution and will therefore sell more easily. The commission rates vary widely, the general range being 1 1/2 to 10 per cent; the chief factors determining the rate are the size of the issue, the condition of the market, the borrowing corporation, and the publicity that will be required. In addition to the commission, the borrowing corporation must pay legal expenses and fees to accountants, intermediary brokers, and others, which expenses may run to a high figure.
Some bond houses have developed a clientele to whom they sell by mail; some sell through local independent bankers on a commission basis; some have developed a great sales organization and reach old and new customers by advertisements, circulars, and traveling salesmen. A selling campaign may be very extensive and highly organized; the more underwriters the more widely dispersed will the sales be. The buyers are insurance companies, banks in smaller cities, secondary syndicates, individual trustees and estates, trust companies, savings banks, and individuals.
The bond house or syndicate manager undertaking to market an issue of securities may, particularly if the issue is a large one, have the securities listed on the stock exchange and try to sell part of the issue through that avenue. Thus a ready market is at once established and many people whose names do not appear in the lists of prospects of the various bond houses, or who prefer to buy or sell through the exchange rather than "over the counter," may be attracted and buy the securities. The sellers then proceed "to make a market," by creating a volume of transactions sufficiently large to draw the interest of brokers and speculators. The syndicate buys and sells the securities and otherwise manipulates the market, in this way controlling the price and gradually unloading the securities on the investing and speculative public. Meanwhile a campaign of publicity is being conducted in the financial press and daily newspapers.
Having investigated carefully the history, physical property, earning capacity, present and prospective business policy, and organization of the corporation before undertaking to market its securities, the bond house is in a position to recommend them to its customers. The good-will of a representative bond house achieved by conservative practice, good counsel, and painstaking service, would, of course, be endangered by recommending securities which prove to be of poor quality, and therefore customers come to put implicit confidence in its advertisements, circulars, and daily news sheets. Bond houses thus function as advisors and directors of investment.
Though the policy of the bond houses in protecting their customers varies greatly, it is not unusual for them to contract explicitly to make good their counsels and recommendations as to purchases, and if the price of securities recommended declines below the selling price, the house stands ready to repurchase and thus protect the buyer. The buyer is often protected, however, quite as much by the moral responsibility which the house feels towards its client as by an explicit contract.