All transactions on the New York Stock Exchange itself are for cash. There is no margin-trading. The broker must pay for his purchases in full. Members must settle all differences between them for the transactions of the previous 24 hours before or at "Hammond's Time" or 2:15 p. m. At that time all securities must be delivered. All stocks bought on the previous day must then be accepted, and all stocks sold, delivered, except that stocks or bonds purchased on Friday or Saturday are not deliverable until Monday, as Saturday is a non-delivery day. Otherwise a purchase or a sale is not good.

If a member cannot settle, he is declared insolvent, and the secretary announces his embarrassment from the rostrum of the exchange. His accounts are then closed. The exchange assumes no responsibility for the liabilities of a bankrupt member. They fall entirely upon the members who are unfortunate enough to be the creditors of the insolvent member.

Whatever value a member's seat possesses, however, reverts according to the rules of the exchange to his creditors. While failures on the exchange are unavoidable, the percentage is no larger than in other lines of business.

Exchange Clearing House

The exchange operates a clearing house, much on the same plan as the clearing house for an association of banks. This clearing house enables the members to settle their obligations to one another with the least delay.

It would prove a slow and cumbersome process were it necessary every time a member bought stock for a client to draw a check to the member from whom it was purchased, or, if stock was sold, to deliver the certificate to the buyer and in turn receive a check. Through the clearing house such details are simplified. Each member has an account which is credited with stocks bought and debited with stocks sold, and settlement made accordingly.

Methods Of Trading

But the mechanism of the clearing house is not of such importance as are the methods of trading employed by the members of the exchange in relation with their clients. These methods may be broadly divided into two forms, outright purchase and trading on margin; after this they may be subdivided.

First there is the purchase of securities outright. This is the simplest form. All that is necessary in this case is to give a member of the exchange an order to buy a certain amount of stock at a given price, or at the market price. The broker has the order executed and he delivers the security, charging the usual commission of ⅛ per cent. His transaction is completed when the stock is delivered.

When stock is to be transferred to a customer's name, the certificate received by the broker is sent to the transfer office of the company and a new certificate is made out which may take two or three days after regular delivery. Stocks cannot be transferred while the books of the company are closed for dividends or for any other reason. Stock must be paid for in full before a broker will have it transferred to the customer's name, because after the stock is deposited at the transfer office it is use-less to him as security until the new certificate is indorsed by the customer. Therefore, if any unforeseen circumstances should prevent the customer from indorsing the certificate, the broker would be left without security for the amount loaned.

Market orders are much the more easily executed, as they give the broker full liberty to buy at whatever the market price may be at the time the order is given, but such orders are not always to the advantage of the customer. In an active session a stock may jump a number of points in price before the broker can fill his customer's order. Sometimes, in a declining market, a market order is filled at a lower price than a customer expected. Still, it is not usual among shrewd traders to place market orders, especially in inactive securities or those stocks in which there is very little trading, when it can be avoided.

Trading On Margin

The more complex form of trading in securities is that of trading on margins. This, as already explained in the previous section, is a method of doing business by which brokers finance the purchase or sale of securities in part for their clients. Say, for example, a customer wishes to purchase one hundred shares of Union Pacific stock. Suppose at the time this stock is selling at $150 a share. The buyer does not wish to purchase the stock outright, which would cost him $15,000, plus $12.50, the broker's commission. The customer makes a deposit, say, of $1,500, or 10 per cent of the purchase price. Members, unless they are thoroughly satisfied with the financial responsibility of a client, will not accept a deposit of less than 10 per cent of the market price of securities, and will often demand more if the securities desired have an inactive or feverish market. Some brokers dealing in inactive stock will not buy for customers except by outright purchase, since such stocks have no ready market and the brokers do not wish to be caught with them on their hands in case their customers cannot take them up.

But since the majority of stock exchange members will buy active stocks for clients on a 10 per cent margin, the illustration will serve my purpose in explaining in detail how such orders are handled. After the customer deposits his margin and gives his order, the broker, upon executing it, arranges with his bank for a loan for the greater part of the purchase price. It is the usual custom for banks to lend on active securities up to 80 per cent of their market value, always with the proviso that the borrower must deposit additional collateral if the market price declines to where the bank's equity in the loan is impaired.

With a loan from his bank for approximately 80 per cent of the market price of a stock, with his customer having deposited 10 per cent margin, there remains for the broker, therefore, only 10 per cent, which he must provide out of his own capital. On some securities he must put up more, while others he must finance wholly out of his own capital, as the banks will make no loans on them. Here we have a succinct illustration of what is called margin-trading in its simplest form. Now, if Union Pacific stock advances to $160 a share, the customer then has a profit of $10 a share, or $1,000 on his one hundred shares, less, of course, commission and the interest he owes on the balance due on the stock.