Unlisted Securities
IN the Financial Counselor department of the Atlantic for December, Mr. Herman Gastrell Seely gave this advice to small investors: Don’t buy unlisted securities if you may need them in an emergency. I should like to offer some observations on this advice, which does not seem to me altogether .justified. I have been a dealer in high-grade unlisted securities for the past twenty years, and before forming my own firm was associated with several Stock Exchange firms, so that, my experience and knowledge have not been confined to Over-the-Counter business.
To warn small investors away from unlisted securities on the ground that they may not be marketable in an emergency creates a false sense of safety with regard to listed securities, by attributing to them, as a whole, a degree of marketability that they do not in fact possess. It also conveys a wrong impression with regard to unlisted securities themselves.
IT is easy to show that the mere listing of a stock on a recognized exchange does not of itself improve the market for it. To my personal know ledge many issues formerly traded in in the Over-the-Counter market do not enjoy as ready a market, once they are listed, as before. The reason is simple. While they wore unlisted, many dealers competed to bring buyers together by negotiation. Once a stock is listed, no further effort along this line is made, and t he stock is left to take care of itself unless some house or pool attempts to sponsor if,
A glance at the list of stocks on the New York Stock Exchange not traded in on December 1, showing a spread between the bid and asked prices of ihesc securities, proves that listing is no magic wand to create marketability. Moreover, the manner in which many listed securities acted in this year of distress, with breaks of several points between sales in many instances, and with no bids at all at other times when specialists could not open their books for hours on end, brought little comfort and sense of security to owners of the stocks involved.
I HAVE been through the current bear market as well as others that have occurred in the past twenty years, and I believe that I speak with knowledge when I say that the soundness, size, and degree of distribution of an issue have more bearing on its marketability than the question of whether or not it is listed. I can boar witness to the fact that there were bids for the stock of good banks, insurance companies, and industrials at practically all times during the period of distress that we have been through, and that no holder thereof suffered to any greater degree on the ground of marketability than the owners of seasoned listed securities. Also, the fact should not be overlooked that, since unlisted securities are to a large degree held for investment, the intense speculative pressure of weak holdings does not affect them in times of stress to the same extent as it does listed sccurities.
To advise investors not to buy unlisted securities on the ground, of marketability is, in my opinion, unfair both to the legitimate dealer and to the distributor, because such a categorical recommendation fails to distinguish between sound securities, both stocks and bonds, and the cat-and-dog ty pe. From the reports of transactions on the New York Stock Exchange and New York Curb, it does not appear that all of the latter type are confined to the Over-the-Counter field. My contention is that no different standards should be set up for measuring the worth and desirability for pure investment of issues in the unlisted field from those applied to the issues listed on the various exchanges. Whatever advantage the really active listed issue may have on the ground of marketability is offset by the absence of manipulation. pool activity, and propaganda as factors in its market action.
IN regard to the availability of unlisted securities for collateral loans it has been not only my experience, but, to my personal knowledge, that of many others, that banks do not discriminate against sound unlisted securities w hen offered as collateral for loans. Again the answer lies in their marketability and the factors which make for it — namely , size, ago, and character. Securities are now listed on the New York Stock Exchange and Curb which banks will not accept as collateral for loans, just as they refuse to accept unseasoned and highly speculative securities in the Over-tho-Counler field. To generalize and advise against unlisted securities without reservation is unfair to both the investing public and distributors of such securities.
Finally, the suggestion that the purchase of real estate bonds should be confined to those listed on the New York Real Estate Securities Exchange is not based on a real understanding of the status of this exchange. I can say without fear of contradiction that of the bonds listed there the volume of trading is greater in the Over-the-Counter market than on the exchange itself. This is also true of Liberty Bonds, Municipal bonds, and high-grade rails listed on the Now York Stock Exchange, and is the natural result of the fact that better markets are available outside than within the exchange itself.
IT is true that small investors should be well advised about any unlisted securities they wish to buy. The same advice applies to any form of investment which they think of undertaking. But to follow literally the counsel Mr. Seelv gave them would reduce the scope of their opportunities and work an injustice to reputable dealers in unlisted stocks and bonds.