Continuations Are "New" Bargains

It should be carefully noted that continuations are thus in reality the creation of new bargains; the old ones being closed by the processes just described, and fresh ones contracted for the new account - these fresh contracts being based upon the "making-up" prices on which the differences were assessed.

Contango And Backwardation

A consideration has obviously to be paid for these rearrangements. In the case of an original buyer the charge is called a Contango,1 and its amount depends partly upon the current rate of interest, for if the capital generally available for loans be scarce, the higher interest thus demanded will naturally tend to increase the contango; if, further, at the time the particular stock be plentiful the jobber (who sold it) will prefer 2 to deliver to the original buyer rather

1 Contango: the term is apparently an arbitrary or fortuitous formation from the word "continue." This payment is obviously of the nature of interest upon the money which the buyer has, in effect, borrowed for the fortnight than consent to a continuation of the bargain and incur the risk of the stock becoming less available and, therefore, dearer: hence, if he agree to continue, he exacts' a higher consideration; and the rate is also partly determined by the sound or risky nature of the security, and the financial position of the speculator. If, on the contrary, the prevailing rate of interest be low and the particular stock be scarce, the original buyer may receive a payment termed a Backwardation,1 instead of making one, as the selling jobber may find it more advantageous to defer delivery on account of the present scarcity of the stock. This latter state of things is termed a "Bear account" (to be more fully described hereafter), or a speculation which is founded upon the calculation of a decline in price. (The ordinary practice appears to be in the case of the carrying over of purchased stock, that the broker himself pays for the stock on delivery, and raises the required funds by depositing it or other securities with a bank.) It is needless to describe the corresponding process where the speculator is a seller. Thus, in bargains for continuation, the speculative buyer (or bull), instead of finding the money to pay for the stock he has purchased, pays interest (contango) upon the amount of such money; while the speculative seller (or bear), instead of finding the stock for delivery which he has sold, pays interest (backwardation) on the value of such stock which, in effect, he borrows for the purpose. When the stock consists of Consols or other Government securities, the deferment or continuation is for a month.

2 For if the stock be now abundant its price will be cheaper, and the jobber, by delivering at once (purchasing for the purpose from another jobber or broker), is more likely to close his account at a profit, since after a time (that is, while the supposed bargain is continued) the stock may become less plentiful (a reduced quantity being offered for sale), and the jobber accordingly, by assenting to the continuation, thereby runs the risk of having to purchase at an enhanced price, and thus receiving a diminished profit, or even incurring a loss.

1 Backwardation: derived from the verb "backward" (now obsolete), to put or keep back, or retard; the latest use, "to backward us," occurred in 1660; the termination -ation (as in "retardation") converts it into a noun.

A continued bargain not always a speculation.

It should be remembered that a continued bargain does not necessarily imply a definite intended speculation. It may occur in some instances that the stock sold is not immediately available; a death may first require to be proved or the bonds (which are contracted to be sold) may have to be received from abroad, where they had been retained by an owner residing out of England.

Defaulters

Where a member cannot fulfil his obligations, - if, for instance, he has sold stock which he finds himself unable to deliver, or cannot arrange the continuation of the bargain to the next account, - he becomes a defaulter: the official assignee of the Exchange, in that event, fixes the current price of the stock or stocks in which he had dealt (this price being that which existed immediately prior to the Declaration of default), and all members who possess accounts open with the defaulter must close their transactions with him by, as the case may be, buying from or selling to the assignee (acting as the liquidator of the bankrupt's estate) the amounts of stock which the defaulter had respectively contracted to accept or deliver. If the defaulter had sold stock at 95, and the price settled by the assignee be 93, the purchaser must sell the stock back at the lower figure, and become a creditor on the bankrupt estate for the 2 per cent.; and similarly, if the defaulter had bought stock and the respective prices were those just stated, the seller must buy back the stock at 93 and transfer the difference to the estate.

All Stock Exchange bargains involve the ultimate actual acceptance and delivery of stocks and shares bought and sold.

I have been induced to describe the preceding modes of procedure, not so much on account of the mechanical or intrinsically valuable knowledge conveyed to the investor, as for the more important purpose of showing that no speculative bargains, however extensive and ruinous, consist simply of book entries, - of mere payments or receipts of differences; but that according to the constitution of the Stock Exchange all transactions, whether for genuine investment or based solely upon the calculated or guessed chances of the future, are real contracts involving the acceptance and delivery of the ultimate actual stocks and shares purchased and sold. The process of carrying over is in reality, as I have stated, the creation of new and equally real bargains of a contrary nature to that of the bargains which they replace. Hence the practical lesson in connection with the variations of the values of all securities is, that every transaction of this character produces the same effect upon the actual market prices of the stocks and shares in which they occur as that which would result had every speculative bargain of purchase and sale been a genuine investing operation of the outside investor. The object of the speculator may be a mere grasp of profit as soon as it appears, based upon skilful calculation of chances or upon simple guesswork; no intention may be his to secure a source from which a permanent income may be derived; but since the entire course of the speculation, far from being the mere receipt or discharge of "differences" of value, is founded upon actual transactions, the result upon prices generally is definite and real.

The results of speculative transactions, though real, are transient.

Thus the significant knowledge for the public to recognise - since it will prove of service when fluctuations of prices originate in speculative causes - is the fact that no depreciation, especially of any permanent duration, in the intrinsic worth of the securities which they hold, has been produced. Although it is clear and certain that purely speculative transactions as really affect (raising or depressing) market values, as do genuine investing bargains, yet their effect is transient; the result upon general prices produced by genuine investments is stable and permanent, while the influence of speculative dealings, though as real for the time being, is fleeting and vanishes.

We may justly deplore the existence of any excessive and demoralising speculation, which in an extreme form virtually merges into gambling - but the reader will perceive the impossibility, by the creation of rules, of prevention. When a bargain is attempted, who can explore the mind of the bargainer and determine whether the proposed transaction is genuine investing or trusting to chance? No external regulation can ever fit the possibilities of the case; the only standard must be an internal one of entering into no bargain, speculative or otherwise, which the operator feels he may not be able, under all reasonable conditions, honourably and minutely to fulfil. And even could it be decided at the outset that a suggested bargain were purely speculative, who can accurately draw the dividing line between a reprehensible gamble and that form of speculation which will hereafter be shown to be legitimate and beneficial to the public? The statement is startling, but it has been estimated by competent judges that only about 5 per cent, of the entire transactions upon the Stock Exchange consist of genuine investment bargains.