The best way in which savings can be invested is to use them in the extension of the business in which they were made. The wage earner and the individual on a salary cannot, of course, do this, but any self-employed person -- i.e. the small tradesman, the farmer, the mechanic -- may be able to. Therefore, before looking abroad for a field in which to invest their capital, such individuals should consider how best the money may be used right where they are.
One of the safest forms of investments is bonds, though, as with other forms of security, the rate of interest declines as the margin of safety increases.
If a well-established stock company should wish for any reason to increase its available cash, it may issue bonds, or certificates of indebtedness, bearing from four to five per cent interest and payable semi-annually. These bonds may be transferred in the same manner as stock. They are a good form of security when it is desired to borrow money from the bank, and for many purposes they are as available as so much cash.
Such bonds are issued for a specified number of years and have coupons attached, which are cut off when interest is due and presented to the treasurer of the company for payment. These bonds are secured by a mortgage or deed of trust on all the property of the corporation they represent. To redeem these bonds, when due, the company annually sets apart a sum, known as a "Sinking fund," for their redemption.
Such bonds are far safer than any form of the company's stock, for they bear interest that must be met, whether or not dividends are declared.
Every railroad in the country has been built and equipped by the sale of its bonds. In such cases, amounts of stock of the same, or approximately the face value, of the bond have been given to the purchaser as a bonus or inducement. Of course, the controlling stock is always retained by the promoters; and it is through the representation of this stock that all the business of the corporation is carried on. The cases are few where any money was paid directly for the original issue of any railroad stock.
Bonds sold to build a road are usually known as "construction" bonds. There may be another bond issue for equipment -- with a stock bonus -- and still other bonds, each series stating the property pledged and the purpose for which the money from sales is to be used.
The "Christian Herald," in one of its recent financial articles, clearly defines this species of bonds, as follows:
"Railroad bonds are usually pledged by the President and Treasurer of the railroad and by the Trustees, to whom the bonds are made out, and who must defend the rights of bondholders, should the company fail to meet any of the obligations it undertook in the mortgage deed.
"In other words, a bond is the Corporation's promissory note for the money originally paid by the investor, with interest for the same, to be paid to the investor in stated amounts at stated intervals; and to guarantee its good faith in the matter, the Company pledges the bondholder an interest in certain property in its possession.
