Books Opened

When the transfer books of the company are opened the ownership of a security can be changed on the record, and at no other time. In other words, while certificates can change hands at any time, they cannot be formally transferred from one holder to another during the period between the closing or the opening of the transfer books of the corporation. See above under Books Close.

Book Value

The book value of a stock is based on the net profits or deficit of the corporation which has issued it. The term book value is more frequently used in relation to bank stocks than to the stocks of any other particular kind of corporation. To ascertain the book value of any particular bank stock the following process is adopted: If the official statement of a bank shows net profits (surplus and undivided profits) equal to say 75% on the stock outstanding, then the book value of the stock is the original amount of the stock, 100%, plus the equivalent in net profits, 75%, or 175. If, on the other hand, the bank shows no net profits, but instead shows a deficit equal to say 10% on the stock, the book value of the stock would be only 90. The book value of stocks of other corporations is ascertained in the same manner, but is not nearly so simple for the reason that it is not usually easy to ascertain the uniform facts regarding assets, liabilities, surplus, and so forth, and when the information is obtainable it is usually too complex and involved for uniform and intelligent use.

When a speculator sells stock short or gives his broker an order to sell stock short, the stock must be borrowed to make delivery to the purchaser. This is usually a simple matter on the exchanges, as there are generally plenty of holders who are long of stock and possess certificates, who are just as anxious to loan it as the one who has sold the certificate short is anxious to borrow it. The lender of stock on the exchanges receives from the borrower the market value of it in money, but except when the stock is loaning "flat" or at a premium, the lender of the stock pays to the borrower interest on the money paid for the stock by the borrower. On the New York Stock Exchange, brokers who have stocks to borrow and to lend assemble immediately after the close of business on the Exchange, and those who need stocks borrow the amounts necessary to make deliveries the next day. Those who neglect to borrow at this time must do so the next morning or before the delivery hour at 2.15 p. m. The same rules govern the receipt and delivery of stocks borrowed and loaned as govern stocks bought and sold. In returning borrowed stock the borrower must notify the lender before 1 o'clock on the day of delivery; the lender in calling or demanding the return of stock is required to do likewise.

When a stock is loaned "flat," the owner is relieved from the cost of carrying the stock. If loaned at a premium he is still better off, for the premium is clear gain. If a stock that has been borrowed advances in market price, the lender may require the borrower to pay to him the difference between the price at which the stock was loaned and the new higher price. On the other hand, if the stock declines in price, the borrower may require the lender to return to him the difference between the price at which the stock was borrowed and the new lower price.

When a corner is being worked in a stock, it is the practice of those engineering it, freely to loan the stock in order to encourage the creation of a short interest in it. When this short interest has become large enough, or in other words, when the stock has become sufficiently oversold, a demand for the return of the stock brings the corner to a culmination.

An apparent borrowing demand for stocks is sometimes created by the efforts of money lenders to obtain higher interest on their money than is obtainable in lending it in the money market. If the lending rate for a particular stock is 6% when money is loaning at 4 1/2% in the money market, the money lenders will borrow the stock in order to obtain the extra interest.

Bucketing

As distinguished from the manner in which a bucket shop operates (see Bucket Shop), bucketing of stocks consists in sales by a broker for his own account and risk, against a customer's purchase or purchases by the brokers, against customers' sales. The purpose of the broker is sometimes to avoid the employment of money in carrying stocks, but more often it is to speculate against his customers' trades. In either case the broker wins if his customers lose or he loses if his customers win. For example, if the customer buys 100 shares of stock at 120 the broker sells 100 shares at the same price. A cross trade is thus made by the broker; the transactions balance and the broker does not have to pay Out the money representing the cost of the stock purchased for the customer. If the customer has put up 20% margin, the broker has the use of that entire margin for other purposes. If the stock goes down to 108 and the customer sells while the broker buys, the transactions again balance, and the customer loses 2% which the broker gains. On the other hand, if the stock goes up to 112 and the customer sells while the broker buys, the customer makes 2%, which the broker loses. The broker, however, reduces his loss by the extent of the commission which he receives from his customer. If the customer loses and the broker wins in the above illustration, the broker's gain is really 2 1/4% instead of 2%, while if he loses and the customer wins his loss is actually only.

There are cases of frequent occurrence where some customers of a broker have bought, while others have sold a given stock on the same day and at about the same price. If more has been bought than has been sold the broker will sell enough to effect a balance; if more has been sold than has been bought the broker will buy enough to effect a balance.