How to Buy Investments

THIS is a “how to” story—how to buy bonds and how to buy stocks.

Bonds and stocks are just like other merchandise. You don’t buy shoes at a factory; you buy through an intermediary merchant. Investment bankers are merchants who deal in investment securities. Some bankers are also manufacturers. They are the originating houses. Hundreds of “dealers” (merchants) sell the securities for them. On the other hand, some of these merchant-dealers are brokers only. They do not carry any merchandise of their own, but pick and choose in the investment market for their customers on a commission basis.

One of the great questions is whether it is better for an investor to ally himself with a large issuing house or one of its dealers, or with several dealers, rather than with any one, or to rely on a broker who has no particular relationship to the original sources of securities. Included in this latter merchant-broker type is the newer investment counsel, who is neither a broker nor a banker. This is each investor’s most important problem and he solves it as he thinks best for himself.

You need either a bond merchant or a bond broker to begin with. You locate him in the same way you find a reliable jeweler. You are going to make a considerable investment in a watch or a diamond and you want to be sure to buy from a merchant whose word means something. You don’t deal with someone who just happens along. It’s the same in buying bonds and stocks. One’s investments are too important to risk with any house which is not well and favorably known. This is the point Judge Gary stressed in his will. The first step, then, is to select a bond house which is well and favorably known. In dealing with a merchant-salesman when he calls on you, put it up to him to establish the “well and favorably known” part in your mind. Don’t hesitate to do some of the talking. How long has the house been in business? Does it belong to the Investment Bankers Association of America? After the salesman establishes his position, then you buy by the old-fashioned way of selecting your merchandise with some native intelligence and paying the price.

In buying stocks, there should be still greater vigilance and even more intelligence. Here you are becoming a partner in an enterprise. In buying a concern’s bonds, they owe you money. In buying their stock, you just become a coowner, with the chance of sharing their prosperity, if any, if and when the directors decide to disburse profits. Some have a long dividendpaying record. Ask about that. The more serious questions you ask about stocks the safer you are.

The question of from whom to buy stocks is more important than from whom to buy bonds. Your merchant in this case should be a member of the New York Stock Exchange, as well as of the Investment Bankers Association; at least, one or the other. Out of some 700 houses in the Investment Bankers Association and the 600 odd firms in the New York Stock Exchange one should always be able to find a proper and agreeable bond and stock merchant. The more there are in these two organizations the better it is for investors. Such houses are under more or less control, and that is what firms which don’t “belong” are not. There are exceptions in everything, and in this case we know there are exceptions, but in general, investors cannot be too careful. Most of the time they are not “hard boiled” enough.

A study of bank and investment advertisements in this magazine will assist investors in selecting reliable sources of good securities.

No. 3 in this series will be “Selling Investments”