This class of bonds is issued by railroad, public service and other corporations for the purpose of procuring funds for constructing or extending the company's system or plant. Such bonds are secured by the credit and earnings of the corporation, in addition, generally, to a mortgage on the property of the company.
In considering corporation bonds as investments, a sharp distinction should be made between bonds and stocks. Corporation bonds evidence a loan to a company, whereas stocks are certificates of ownership of the company itself. In the case of bonds the interest rate is fixed and does not vary, whereas with stocks there may or may not be an income, depending on whether the company's business is profitable or not; and when stocks do pay dividends, both the income and the price of stocks may fluctuate widely. Inasmuch as stocks are not promises-to-pay and often are bought to sell at a profit, they are frequently subject to great speculation. On the other hand, properly secured bonds are purchased by investors because of their time-tried safety of principal and steady income.
Railroad Bonds form a somewhat distinct class by themselves among corporation bonds, because most of the better known systems have been in business so long that their future earning capacity, on which money for the payment of bonds depends, can be determined accurately, and the safety of the bonds, therefore, easily established. These usually are issued to provide funds for building, extensions or equipment, and are secured in one way or another by the revenues and properties of the road issuing them.
Public Service Corporation Bonds are chiefly characterized by the fact that they are issued by corporations which render some much needed service to a community, and operate under a special grant or franchise from a city, town, state or similar division of government. Water, gas, electric light, heat, power, street railway and telephone service are among such public utilities. Bonds issued by companies of this character in well established communities have an exceptionally good record for safety, for even in periods of general business depression, the company's earnings maintain a high level because the service supplied is necessary to the community served.
Industrial Corporation Bonds issued by corporations with long records of successful operation, supplying public necessities such as food products, steel, electric light equipment, dynamos, telephone instruments, locomotives, freight cars, boilers and similar products, are among the safest investments when properly protected. The kinds of industries involved are so varied in character that it would take too long to enter a technical discussion of the safeguards to seek in this class of bonds. The wisest plan is for the investor to select an investment banking institution of conservative character and be guided by its judgment.