Buying securities is somewhat like buying an automobile. The decision to buy something is relatively easy. What, specifically, to buy is an altogether different problem. Before you drive your new car home, you have to choose a certain make, a certain model, certain upholstery, a certain color scheme. You decide between six cylinders and eight, between regular shift and automatic transmission, and say yes or no to white walls, radio, heater, and a dozen other optional extras.

So with securities. Although there are only two major categories—bonds and stocks—to select from, the variations and refinements and optional extras are as numerous as they are confusing.

For many investors, one factor may be sufficient reason to determine a choice. The man of modest means will very likely find corporate bonds at $1,000 apiece too steep and their 3 per cent interest payment too small for what he is trying to achieve. A wealthier investor might be fascinated by the potential in common stock but find that he would obtain a greater yield from tax-exempt municipals. All investors, however, will do well to become familiar with the various kinds of securities represented in corporate capital structures in order to understand their effect on each other and their bearing on the choice he eventually makes for himself.

The corporation is an entity marvelously adapted to the re­quirements of all parties involved. It developed in response to the needs of the business community for funds over and beyond its own resources to enable it to build, expand, and grow.

The basic, one-celled form of business life is the individual entrepreneur—the store owner who merchandises goods, the artisan supplying services, the small manufacturer—whose capital needs are met out of savings or through a modest bank loan.

Somewhat more complex is the partnership, the pooling of the resources of several individuals to share in a joint venture. Presumably the credit of the group is somewhat stronger than that of the individual. The partners also assume responsibility for management of their company, participate in all profits accruing, and are legally liable for all debts outstanding.

As long as firms remain relatively small, either type of or­ganization is adequate. As opportunities for expansion present themselves, however, when new plant and equipment are required, when greater amounts of raw materials must be stockpiled, and branch offices and distributors underwritten, and personnel increased, the individual and the partners are hard pressed. Their surplus generally is too small, their normal lines of credit too limited to do the job.

Enlargement of the partnership is no answer. Outside in­vestors willing to take on the mutual responsibilities of partner­ship, or to immobilize their funds in a partnership agreement, are hard to come by. In any event, the range of financial needs at this stage usually is so great that only by increasing the partnership to ridiculous proportions could they be met.

The solution? A public stock corporation. Ownership there­by is spread among as many hundreds or thousands of people as are willing to buy in, their proportional part of the firm being represented by the amount of stock—or number of shares—they hold. Their reward is likewise a proportional share of their firm's profits. Their control is exercised through the board of directors they elect. And because their stock is a standardized, known quantity—and because there are stock exchanges—they can readily withdraw from the company and sell their piece of ownership to someone else.

The corporation, once established and in being, is an im­personal thing of indeterminate duration. Directors and of­ficers may come and go, investors may buy in and sell out, but the corporation has a momentum and life force which may enable it to run on indefinitely.

Bonds: The Case For and Against

The capital requirements of a corporation may be few or many. A solid, old-line company, with big earning power and adequate productive capacity, may be able to handle most of its needs with surplus—net income not distributed to stock­holders. A young company, expanding in several directions at once, may require new financing every few years. It can ac­quire some new money by issuing more stock. It may be able to float short- or long-term loans from banks, insurance com­panies, or other lending institutions. Or it may issue bonds.

The bond is the senior security in any corporate set-up. It represents not ownership, not equity, like stock, but debt. The bondholder has made a loan to the corporation on which he must be paid interest at a stipulated annual rate, and which must be repaid in full within a stipulated period of time. He is, therefore, a creditor. He has no vote in the affairs of the com­pany and gets no share of earnings beyond his interest due. Bond interest takes the first cut of the pie, however, and should the company default on its payments, the bondholder has a lien, in proportion to his investment, on its physical assets—plant, equipment, patents, raw materials, finished prod­ucts in inventory, cash, receivables, and whatever else is lying around. Because of the inexorable, unavoidable nature of the bond obligation it is considered a "fixed charge."

For the investor, the attraction of the bond is its stability and security. If anything gets paid, it does. Even so, the in­vestor must select his bonds on their merits. Strength in bonds, as in stocks, derives from the essential soundness and proved earning capacity of the issuing corporation. There are and always have been weak, unstable, no-good bonds, as well as gilt-edged ones. Priority position, fixed obligation, and all the rest were of little use to holders of bonds in the failing rail­roads of the Thirties. And even today there are premier com­mon stocks, particularly those with no bonds ahead of them, such as Eastman Kodak, Sears Roebuck, duPont, National Lead, Coca Cola, and Abbott Laboratories, that would have to be rated as preferable to many bonds.

But the bonds of such powerhouses as Dow, National Dairy, Minneapolis Honeywell, American Tel & Tel, Firestone, Pacific Gas & Electric, Con Edison, and Scott Paper would have to be considered, in an uncertain world, about as secure as a security can get.

For the issuing corporation, the bond has both advantages and disadvantages. In stringent years, when earnings are down, the burden of bond interest and amortization may be heavy. And the interest rate payable may be uncomfortably high if the bonds are issued when money is tight. But balancing this is the important fact that bond interest is deductible from income. The lower the company's tax bill, the larger the net income available for plowing back into the company and for distribution to stockholders. Bonds also have a terminal date and in many cases can be called in or redeemed—at a price advantage to the holder—short of that time. In other words, bonds need not be a perpetual obligation, whereas stock can­not be retired except by the extreme step of purchasing it in the open market.

Bonds frequently are issued to retire other bonds coming due, because the company does not want to lay out the large sum required to pay back the $1,000 principal originally loaned, or because money rates may be cheaper and a bond paying 3.33 per cent can be replaced by one paying only 2% per cent. In such cases, debt financing—more bonds—is the only practicable method available. The sum involved may be more than a bank or insurance company is willing to loan, and the issuance of stock, while possible, might be an attach­ment on earnings that the company would not want to assume.

The usual bond has a face value of $1,000, although de­nominations as high as $100,000 and as low as $100 are not unknown. Interest is usually payable twice a year, although quarterly or yearly payments are sometimes the case. Most bonds have a block of coupons attached, one of which must be clipped and presented to a bank before the interest due is paid. These are the so-called "bearer" bonds which are not made out in anyone's name, but are assumed to be the prop­erty of the bearer, or person holding it. While this simplifies transfers in the event of sale, it also means they must be safe­guarded, for these are the "negotiable" bonds which every so often are stolen by thieves with a taste for high finance, and sold on the market—by the bearer, of course—before they can be traced or recovered. These days an increasing number of bonds are being registered in the owner's name and interest is being paid automatically by check instead of on surrender of a coupon.

Bonds have rather long and imposing titles, usually in­volving the name of the issuing corporation, the kind of bond it is, the interest rate it pays, and the maturity date. Illinois Central Railroad Equipment Trust 3s of 1964 were issued to enable the IC to acquire more rolling stock; they pay 3 per cent and mature in 1964. Commonwealth Edison First Mort­gage 3½s of 1986 offer a mortgage hen on this solid utility property in return for the privilege of borrowing money at 3½ per cent until 1986. Bethlehem Steel Corp. Consolidated Mortgage Sinking Fund 2¾s of 1970, in spite of the im­pressive word "consolidated," are junior to a first mortgage bond, but the sinking fund provision means that a certain sum will be set aside each year to retire some or all of the issue before the terminal date of 1970. Meanwhile, they pay 2¾  per cent.

The characteristics assigned to a bond issue are intended to make it attractive to the investor. It should be said right here that not all bond issues—or stock flotations either, for that matter—are a smashing success. If the company's prospects are regarded with a dull eye, if the terms of the issue are not tempting, if money is tight and investors are sitting on their wallets, the crisp new certificates will be stacked on under­writers' shelves like day-old bread. (This is not an immediate concern of the company. It got the capital it was seeking from the underwriters—and in time the issue may move. But long-memoried underwriters will be chary of accepting the com­pany's next offering or will penalize it by exacting a higher commission, or "spread," for marketing the issue).

A higher interest rate is better for the buyer than a lower one, although too high a rate would have to be viewed with suspicion. A near maturity date is preferable to one far off, because it is easier to gauge the prospects. (Some railroad bonds, for example, now have maturity dates in the twenty-first century—2022, 2044, 2054, 2056—and one bond does not pay off until 2361). And a priority position in the bond hierarchy is better than one lower down.

The amount of security a bond offers through mortgages or liens is somewhat arbitrary when the issuer is as strongly situated as, say, American Tel & Tel. On the other hand, de­pressions have shown that even highly respectable companies are mortal, and if your bond has safety features that place it near the top, this is not to be blinked at. It is not that you will get ten more mauve telephones than the next man in the un likely event of AT&T's dissolution, but that, if there should be a reorganization, your claim may be satisfied at something closer to full value. Following are some of the many possible categories of corporate bonds:

Mortgage Bonds

These are a lien on the property of the company. First mortgage bonds are at the top of any bond structure. They usually provide, incidentally, that all prop­erty acquired by the company after the bonds are issued is also covered by the mortgage.

Junior bonds may be second-mortgage bonds, otherwise known as general, consolidated, or first refunding bonds. They can become senior issues only as and if the bonds ahead of them are retired.

Other assets of a corporation may also be used as security for bond issues.

Equipment Trust Obligations

These are like a chattel mortgage; the item being bought is security for the loan which buys it. You may have bought your automobile this way, the finance company loaning you most of the purchase price on condition that it could repossess the car if the contract were not paid off. In industry, bus and taxi companies, truck fleet operators, and, particularly, railroads use equipment trust obligations in similar fashion. Illinois Central, mentioned ear­lier, probably paid a certain amount down on a number of new cars or locomotives, issued bonds to acquire cash to pay the remainder, and secured them with the equipment.

Equipment obligations may be certificates or notes, the former if the equipment is leased from a trustee at a rental sufficient to pay off the debt, the latter if it is bought from the trustee, the sale being conditional until the obligation is met.

Equipment obligations generally are high-class securities, one reason being that the debt will be cleared up more rapidly than the equipment depreciates.

Collateral Trust Bonds

These are covered by other se­curities owned by the issuing corporation. (As you examine the balance sheets of various corporations, you will find that many of them have holdings of associated or subsidiary companies, or simply income-producing stocks and bonds held as invest­ments. DuPont's large holding of General Motors is a case in point. Owens-Illinois Glass and Corning Glass each own 33 per cent of Owens-Corning Fiberglas. Allied Chemical & Dye has holdings of U.S. Steel, American Viscose, and Libby-Owens-Ford. Kennecott Copper owns pieces of Molybdenum Corp. and Kaiser Aluminum & Chemical. The safety of a collateral trust bond, of course, depends entirely on the rating of the securities behind it. These companies have not neces­sarily issued collateral trust bonds, but such outside holdings are typical of the holdings often used to secure such bonds.)

Debentures

Pronounced with the accent on "ben" A de­benture is not secured by property or collateral of any sort, and is simply a general claim against the issuing corporation. In ordinary circumstances, with pledged bonds ahead of it, the debenture would have to be considered the lowest-ranking bond. A number of outstanding corporations—Standard Oil (New Jersey) among them—issue nothing but debentures, however, which means that for them these are the senior securities.

Each kind of bond may also be subject to various provisions concerning its maturity, the method of paying it off, and whether it may be called or converted.

Today most bonds mature in 20 to 40 years. Railroads and utilities may offer them over longer terms; industrial bonds tend to have a shorter life.

Sinking-fund bonds, as noted, mean that the company is paying periodically into an earmarked account the funds with which it expects to redeem the bonds at maturity. "Serial" bonds, also encountered frequently today, are retired in batches, according to a predetermined schedule of installments.

The call provision found in most bonds today permits the company to call in, or redeem, the issue at its convenience by paying the principal plus a premium. This varies, but it is usually several per cent and declines as the bond approaches maturity. This is no delight for the investor who would just as soon keep his money invested over the long term at what he considers a decent rate of return. But it is a large advantage for the corporation that, in fat years, wishes to seize an op­portunity to get out from under a load of debt or, when money is easy, to replace one bond issue with another carrying a lower interest rate.

Among the more famous of high-grade corporate bonds are the Atchison, Topeka & Santa Fe Railroad's "Gold 4s." They were issued in 1895 with a life of 100 years, and no provision for redeeming them at any price. The risk for holders of a redeemable bond is that the call may come at an inflationary point, when the dollars he receives may have depreciated in value. Not so the Gold 4s. Owners may hold on until 1995, or pick any one of the 35 years ahead as the selling point at which the originally invested principal will be returned intact and in dollars worth more than 47.3 cents each.

Bonds offering a conversion privilege may be exchanged for the company's common stock whenever the holder wishes. Many investors like this double-barreled opportunity because it gives them a full measure of safety plus the chance to im­prove their return if the company's dividends should increase or if inflation should make cheaper, but more plentiful, dividend dollars desirable. Such bonds usually state the number of shares into which they are convertible, and the number usually declines  as the years wear on.

What Is a Bond Worth?

Figuring the yield on a bond, which, of course, bears on its value as an investment, may seem complicated at first, but it is not difficult once you get the hang of it. First off, a $1,000 bond paying 3½ per cent interest yields $35 a year. The 3V5 per cent—the percentage of the face value producing the yield—is known as the coupon rate, or nominal yield.

But supposing you have been able to buy your bond at $950 and that there are 20 years to go before maturity. What percentage will you receive on your investment during that time? What is your "yield to maturity?" Regardless of the price you paid, the bond will return 3½ per cent of face value, or $35, annually. In addition, in 20 years it will return the $1,000 principal, or $50 more than you paid. Your bond, therefore, is appreciating $2.50 a year. Your total annual gain, therefore, is $37.50.

The average investment in the bond over the 20 years is considered to be the halfway point between what you paid ($950) and what the bond will be worth ($1,000), or $975. Thus, the total annual gain ($37.50), divided by the average investment ($975) gives you the yield to maturity: 3.84 per cent.

If you had paid a premium for your bond, say, $1,080, it would depreciate $4 per year to maturity. This must be sub­tracted from your annual gain, leaving you $31. Your average investment—the mid-point—is $1,040. Your yield to maturity is 2.98 per cent.

When you look up the bond transactions on the New York Stock Exchange you will find the prices quoted as per­centages of 1,000, the par value. Your $975 bond would be listed at 97½, your $1,080 bond at 108. The Atchison Gold 4s of 1995 were recently quoted at 91 or $910. (Yield to maturity: about 4.4 per cent, or a bit over the coupon rate). American Tel & Tel 2¾s of 1980 were 72% or $726.25. (Yield to maturity: 4.7 %).

Bonds are traded "and interest," meaning that the price refers only to the principal of the bond. If you wanted to buy the Atchison bonds just before six months' interest of $20 fell due, the accrual would be tacked onto the seller's price, making a total of $930.

After the names, rates, and dates of some bonds on the list, you may see a lower-case "f". This means the bond is traded "flat," or without interest, usually because it is in de­fault, or because its upcoming payment is not likely to be met.

Over-all corporate bonds are considered a conservative investment, and in relation to many stocks they are. At the same time, in a period like the present, when inflation cheapens dollars, the bond is constantly under the threat of devaluation. If the original $1,000 investment was made with $.80 dollars (as far as purchasing power was concerned) and the pay-off is in $.50 dollars, there is a net loss of $300 on the principal, not to mention the fixed number of shrinking dollars returned as interest along the way.

The bond, for all its stability, is also subject to price fluctua­tions induced by shifts in money rates. Unlike stock, whose market value is determined largely by the earnings and pros­pects of the issuing company, the bond represents money borrowed and is therefore responsive primarily to the pre­vailing price of money. When dollars are cheap to borrow, a bond paying 4 per cent interest will seem relatively attractive and its market price will be bid up by investors eager to have their money earning at a favorable rate. In time, the bond's market price may rise to a point where the yield is no longer 4 per cent, but something much closer to the prevailing money rate. Conversely, when dollars are dear—when interest
rates are high—a 4 per cent return on a bond will seem less desirable. The bond will begin to sell at a discount, so that the interest it pays, in relation to its market price, is closer to current money rates.

Bond Criteria

Because of their basic conservatism and relatively high de­gree of safety, bonds make up a large part of the portfolios of insurance companies, savings banks, trust funds, college endowments, foundations, and wealthy individuals. There is an interaction between the bond and stock markets which gives the professionally managed fund flexibility to maneuver wherever the advantage is greatest. Large investors seek an edge whenever they can find it—in stocks when prices are low and yields high, in bonds when the price level of stocks reduces their yield to that of bonds, but without the same degree of safey.

Like most techniques, this one works when the underlying strength of the various securities traded has been carefully assessed. Strength derives from the vitality, or at least stability, of the industry and the company the security represents. And vitality and stability are reflected first in a company's earning pattern. One rule of thumb for bonds is the "interest times earned" figure. This is calculated by dividing the annual in­terest payment into net earnings before taxes. Railroads and utilities should earn their interest 4 times, industrials 6 times or more. The more times earned, assuming a normally conserva­tive capitalization, the better the security is protected. Do not be satisfied with the pattern of one or two years; go back at least a decade, so that performance in lean or average years, as well as fat ones, can be analyzed.

Otherwise, the conditions implicit in the bond are the best guide to its value. How strongly is it secured, what is its posi­tion in relation to other bonds, how much new debt can be piled on top of it and with what effect on the assets already pledged, how favorable are the call or conversion features, what is its present price, how many top-grade institutions own it, how do the major statistical services rate it, and, of course, what does it yield? Even if you can find the answers for your­self, backstop your information with professional counsel. The bond market is not for amateurs.

Municipals

A second large category of bonds whose existence you should be aware of comprises the obligations of states, cities, towns, and public agencies, commonly lumped together as "municipals."

These are long-term, low-yield securities—traded over the counter, incidentally—of interest primarily to the investor in the high tax brackets who is seeking non-taxable income.

The purposes of municipal bonds are familiar to every citizen. States issue bonds for highway construction, veterans' pensions, institutional building, and conservation programs, to name just a few. Cities and towns have a variety of local needs. The large city with an elaborate financial structure may need public housing, new buses or subways, or simply one bond issue to replace another. The small town may be build­ing a library, buying new fire trucks, or planning recreational facilities, including a swimming pool. The school district needs money for a new school. Assessments may have to be levied for pavements or sewers. Public authorities may be building toll bridges or highways. Water departments want to develop a watershed or install new mains. Power departments need a generating station, or the extension of their lines.

The kinds of bonds issued to accomplish these purposes vary with the borrowers' sources of income. Highest grade— and lowest yield—obligations are the "full faith and credit" bonds of agencies empowered to levy taxes. As long as the property owners, businesses, and various licensees can meet their levies, interest payment and amortization are assured. Most of the purposes mentioned above would be met with this kind of security. Exceptions would be the toll bridges and highways, and transit and utilities systems, which would expect to pay back out of the income produced by the im­provement and, hence, would issue "revenue bonds." Another exception would be the "assessment bonds" for sewers and such, which would be met by the direct charge to each bene­ficiary of the improvement.

Otherwise, the features of municipal bonds vary little from those of corporates. Most municipals are debentures, un­secured by property or other assets of the issuer. Some, however, may be backed by specific tax revenues or other monies. Sinking funds may be provided for by state and city borrowers.

Regular maturities are the rule, although serials, which may be retired in installments, are also favored. These days many issues are callable.

Where tax revenues support the bond, the quality of the issue naturally will depend on the stability of the tax struc­ture. The long-range prospects of the community are not always easily determined, but bond analysts can provide a judgment on its past reliability, on the current condition of its "ratables" (the property eligible for taxation), the population trend, and the vigor of its business community.

United States Governments: The Best of All

Topping the bond list for any investor should be United States Government bonds, particularly the Series E and H savings bonds. This statement can be made without qualifica­tion. Every expert in the field will tell you the same thing. The E and H bonds are backed by the tremendous resources of the Government and are absolutely guaranteed against dollar loss. They do not fluctuate with interest rates or busi­ness conditions. The possibility of default is so remote as to be out of the question.

It is, of course, not difficult to find higher yields—although 3.75 per cent is pretty good. And there is some risk in what the accumulating dollars may be worth at maturity. But this risk is inherent in every bond and, in fact, in most invest­ments.

Actually, the privilege of redeeming E bonds at any time after the first 60 days (H, J, and K Bonds after six months) reduces the inflation risk by enabling funds to be switched into better-paying securities if circumstances dictate.

E Bonds

The Series E Bond, probably the most famous security in the nation's history, was first issued in 1940 as a Defense Bond, soon became a War Bond, and since 1945 has been a Savings Bond. It is issued in denominations of $25, $50, $100, $200, $500, $1,000, and $10,000, which are the face, or maturity, values. The bonds sell at 75 per cent of maturity value—$18.75 for the $25 bond, $37.50 for the $50, $75 for the $100, and so forth. They are sold only to individuals, and the limit on annual purchases is $20,000.

E Bonds do not pay interest, but the value at which they can be redeemed increases every six months after the first half-year. The 3.75 per cent yield is obtained only if the bond is held to maturity. It is progressively less the earlier the bond is redeemed along the way.

Maturity has been shortened from time to time. Currently it is 7 years and 9 months from the date of issue. If desired, the bond may be held as long as another 10 years after maturity with further accrual at 3.75 per cent.

Income from the bonds is subject to Federal income taxes but exempt from all state and municipal taxes. Payment may be made on each year's increment or deferred until the bond has matured. For younger persons whose salary does not yet place them in the higher tax bracket, and whose bond accumulation is modest, declaring the tax on each year's income is probably the best plan. The tax undoubtedly will be small and painless, and the face value will be tax free at maturity. For persons in the higher brackets, and only ten or 20 years away from retirement, deferral of taxes is the best procedure. Any addition to taxes hurts at this time, whereas in retirement, with earning power and tax bracket reduced, any payment on the face value will be less signifi­cant.

H Bonds

These come only in larger denominations—$500, $1,000, $5,000, and $10,000—and are sold at par, or face, value. The interest rate of 3.75 per cent is the same, but is paid in semi-annual checks, which increase as the bond progresses to maturity. Maturity is 10 years. H Bonds are also sold only to individuals, with a $20,000-a-year limit. They cannot be held beyond maturity, and Federal taxes on the interest must be paid annually. For the investor who prefers to get regular interest income instead of waiting to maturity—as, for in­stance, a man in his 50's or 60's—the H Bond is preferable to the E.

Preferred Stocks

Situated between the bond group above it and the common stock below is the so-called "preferred stock," an attempt to combine the best features of both. In most cases, it pays more than a bond, but is safer than stock because of its "preferred" position.

Preferred stock generally involves far fewer shares than the common, and far less money than is represented by bonds. The majority of companies do not even have a preferred issue, although some, particularly utilities, may have several.

Where it exists, preferred stock is entitled to its dividend after bond interest has been paid and before a dollar goes to the common. Many preferreds pay $6, $7, and even $8 a share; when issued at a $100 par value this would mean a 6, 7, or 8 per cent return. Today most of them are priced to yield closer to 5 per cent.    

Dividends, furthermore, are in most cases cumulative, which means that if the company skips one or more, it must pay off everything in arrears before a common dividend can be declared.

Some preferreds are "participating," which permits them, in the event an extra large melon is cut, to receive additional dividends. The formulas vary; sometimes it is share-and-share-alike with the common, sometimes there is a limit on the extras the preferred can receive.

Preferreds may also be convertible into common stock of the company at a stipulated ratio. Because this is an at­tractive feature for investors, it often means that the issue may carry a lower dividend rate than would otherwise be expected. If you should buy a convertible preferred, however, see whether it is protected against dilution of the common. Assume, for instance, that the common is selling at $90 and the conversion rate is two common shares for each preferred. Now the common splits, 3 to 1. Each share is now $30. And each preferred share, instead of being worth $180, is worth only $60 when converted. Stock dividends, rights, and mergers may also alter the conversion ratio. A convertible should provide that the holder will get not only a certain number of shares, but equivalent value as well.

Note, too, whether your preferred is callable and, before you buy, whether it is selling above the call price. This is a price, pegged by the company at the time the stock was issued, at which shares may be retired, regardless of the market price. Obviously, therefore, there is some risk in buying at 110 a preferred callable at 105, unless it is pretty clear the company has no intention of retiring the stock. Fortunately, company intentions are fairly predictable, for preferreds, being a fixed-interest item, are also tied to money rates. The risk to a callable preferred, therefore, is a period of cheap money. You may be sure that a company able to borrow money at 2.5 per cent will not hesitate to redeem as many shares of its 5 per cent callable preferreds as possible. During the past 10 years, when money was gen­erally cheap, a great many preferreds were called. Today—in 1960—with money as high as it is, the chances are that a preferred could sail above its call price without too much risk to the investor.

How Good are Preferreds?

Securities analysts are of two minds about preferred stock. While it is true that they pay more than bonds and are safer than stocks, it can also be argued that they do not have a lien on assets, like bonds, yet do not share as fully in earnings as stock. Preferred dividends are not an obliga­tion, like bond interest. They have been passed, and will be again; otherwise, why have a cumulative feature? If risk is inherent in the security, therefore, why not commensurate reward? But no, the preferred (unless it is participating) is limited to its stated 5 or 6 per cent.

This is nothing to be sneezed at, but if the underlying com­mon is a healthy and progressive stock—and there is no sense in buying a preferred for safety if the common is a dog— the chances of real appreciation and real profit would seem to be there, rather than halfway between it and the true safety level, which is bonds.

Unlike the bond, too, the preferred issue does not mature. If it should decline, the only chance of getting back the original investment is to hang on until prices rise. This, of course, may be said of any security. But the bondholder is in for the long haul. His frame of mind is different. If he has bought at par or less, he can reap his interest and even­tually receive full payment, regardless of the bond's market price at the time of redemption. The common stockholder knows he is taking a chance. Declines are part of the game, the usual detour en route to higher ground. But the pre­ferred stockholder is in the middle. His safety is impaired during a drop, and his fixed return limits his gains in good times. Appreciation in price is his only extra dividend, and this vanishes when the market drops.

The situation is not all black, of course. Convertible preferreds, in particular, provide a most advantageous position for the investor when the common starts to move upward. Since the preferred is equated with the common, a rising market gives a push to both securities.

The technique would be to ride the advance with the pre­ferred, thus retaining the shelter of its safety features and its good, well-protected dividend. Then, if the six and nine-month earnings reports appear to promise a fat common dividend, convert the preferred. Or, if the gain in the pre­ferred warrants it and the common is still at a reasonable level, sell the preferred and buy into the common. (This, of course, involves two commissions, while conversion does not).

As with bonds, however, the new investor would do well to seek professional counsel before diving into preferreds.

Common Stock

At the bottom of the heap, saddled with all the risk but bulging with great expectations, is common stock. This is ownership, in many ways an extension of the partnership that the corporate form originally superseded. The stock­holder has a voice, frequently a loud one, in the affairs of his company. When it does well, he basks in sunlight. When it does poorly, he suffers. No one has any obligation to pay him anything, although directors are mindful of him and happy to declare dividends whenever the prosperity of the corporation permits and maintenance of its health has been assured.

And when good times are upon it, ah, then come the dividend increases and the extras and the stock dividends. The shareholder is the prime beneficiary of stock splits, rights, and spin-offs, or distribution of assets. He can make a fortune in capital gains in a strong bull market.

The advantages of common stock are several. Some have been touched on before, but they bear repeating here, in the context of the discussion of bonds and preferreds. The com­mon stockholder in this generation generally gets a higher return on his money than any other securities investor. As has been pointed out earlier, even a moderate increase in a dividend rate can shoot the yield on the original purchase price of the stock to a most pleasing 10 or 12 per cent. Even at depressed prices and high interest or dividend rates, few bonds or preferreds could touch this. The common stock­holder also has a stronger chance for long-term capital gains, with their attendant tax advantages. Bonds and preferreds both may appreciate handsomely, but it is a statistical fact that neither moves as much, as far, or as fast as stock. And, finally, although stock certainly can move down as far and fast as up, the stockholder is not totally stripped of safety. More than a few stocks these days are as gilt-edged and rock-solid as any bond ever was.

Stocks are also extremely marketable. More people own stock than own bonds or preferreds, and more people trade in them. The very simple reasons for this are that there are more stocks, a greater diversity of stock, and that, by and large, they cost less.

Stocks can be a hedge against inflation, though this argu­ment can be overplayed and frequently is. Theoretically, if dollars are cheap, easy, and plentiful, more of them are reaped through the higher prices charged by corporations for their products. Hence, more of them are passed on to stockholders as dividends. Inflation, however, is not a thoroughly healthy economic condition. Higher prices are accompanied by higher costs, squeezes on profit margins, the failure of marginal companies whose inefficiencies passed unnoticed in less hectic times, resistance from buyers, and all manner of problems that do not automatically pour profits in to company head­quarters.

For those who make it—and some make it big, even during inflation—dividend dollars may be increased. Whether they increase enough to stay ahead of the inflation is still another question, but any increase at all is a help. Those who do not do well can be of no assistance to their dollar-hungry stock­holders.

On balance, the most that can be said is that certain, not necessarily predictable, stocks can be a hedge against in flation, but that the fixed-income provisions of bonds and preferreds make it impossible for them to be such a hedge. For the new investor with moderate sums to invest, com­mon stocks are generally the best securities investment he can make—after he has acquired a backlog of E Bonds.