IN THE previous chapter it has been suggested that bonds, like direct mortgages, represent liens, which means a claim, or hold, on property. This is an important point, because beyond question the chief requisite of a good investment is safety, or the certainty that the principal sum will be returned when agreed upon or when demanded, or that it can be converted into money. And, as the leading reference book on bonds, The Principles of Bond Investment, by Laurence Chamberlain, says, "There is one and only one word in the language to designate the employment of funds in accordance with these requirements, and that is the word 'Lien.'" Bonds and mortgages are, therefore, the securities that are best suited to the needs of the inexperienced investor.

A bond is in essence a lien as distinguished from a share of ownership. Any one familiar with the financial markets might name offhand well-known stocks that are as safe, for all practical purposes, as are three-fourths, or perhaps ninety per cent., of all the bonds in existence. But two points must be noted:

In any given concern bonds are safer than stocks. If the thousands of investors who bought New Haven stock had owned bonds in the same company, they would not be going without income at the present time. No matter how sound a stock may be, it rep-resents the risk-taking, profit-taking part of an enterprise. It is the buffer between the creditor and loss. Interest can not be stopped on bonds (except income bonds, a relatively small class) without making actual trouble for the corporation. But the directors have a perfect right not to pay dividends.

As its name implies, a bond is an obligation, the same as a promissory note. The owner of a bond lends money to some one else to conduct business with. He is a creditor. But a bond should be, and often is, more than a mere loan. It is a secured loan. We speak of a bond being secured by mortgage, that is, by a pledge of the property in return for the money lent. You and I lend money to a railroad. In return, the property of the railroad is actually pledged to us, the pledge becoming void if the money is paid back to us as agreed. Such a bond is secured. We have a lien upon the railroad, a legal claim upon it, which we can enforce just as long as law exists.

Now, it is evident that a few persons, unless very wealthy, can not lend enough to carry on a large business enterprise. So the custom has grown up of lending great sums on one mortgage, which is taken by a third person, or trustee, in the interest of the many small lenders. Then the mortgage is split up, as it were, and portions sold as bonds to many investors.

In the long run the only safe bond is the one that has large earnings, relatively speaking, behind it. The owners of any issue of bonds directly secured by a mortgage can take over the property if the corporation does not keep faith with them. But what good is the property to them unless it earns something?

But, while the worth of a bond always analyzes back into earnings, it does not follow that the bonds of any company with large earnings make sound investments. A pill manufacturer might borrow a million dollars and earn the interest on the bond issue five times over, without the bonds being much good, whereas a telephone company might earn its bond interest only two or three times over and have its obligations considered of the highest grade. Companies whose earnings are fairly stable and regular, like steam railroads, street railways and electric power and gas plants - all those whose property can be and preferably must be employed for public necessities, irrespective of changes in public tastes, inventions, customs, tariffs and so on - are the ones that should issue bonds. These are the underlying general principles that must govern the investment in corporation bonds.

In this connection, it is well to note that the laws of the most careful states forbid public and private trustees to put the money they control into industrial bonds; whereas railroad bonds are pretty generally admitted, and in many cases those of the public service corporations. Of course, this is not to say that there are no safe industrial bonds. It is merely one way of emphasizing the fact that purchases in that class of investment require care and investigation beyond those in almost any other class.

By "industrial" we mean manufacturing, mining, trading and mercantile. "Public service" includes electric light, power, telephone, gas and traction companies.

There are almost innumerable types and grades of corporation bonds. The name in itself may be of little, if any significance. From what has already been said, it follows that a stock whose dividend is secured by earnings of the most ample description is better than a poorly secured bond. There are exceptions to all rules. For sheer safety, the preferred stocks of railroads like the Union Pacific and Chicago and Northwestern companies for example, are indescribably better than thousands of bonds. But well secured bonds are undoubtedly safer as a class than well secured stocks. There is always a moral and even a legal obligation to pay bond interest which does not hold even with the best of stocks.

But every investor ought to know in a general way at least the meaning of the more familiar names that are used to designate the different types of bonds. Such knowledge is especially necessary in undertaking to determine the relative desirability of the different issues of any given corporation. A good working list of these would include first, second, third mortgage, etc.; general mortgage, refunding mortgage, equipment, terminal, collateral trust, adjustment, convertible and debenture. The terms, "first mortgage," etc. are of course, self-explanatory.