After learning how to judge the value of every form of investment, a man may still be unsuccessful in the investment of money unless he acquires also a firm grasp upon the general principles which control the price movements of securities. In previous chapters a good deal has been said about general business conditions and their influence on the rise and fall of security prices. The careful investor must follow these business conditions in the same manner as the mariner uses the weather forecasts of the federal government.

Not so many years ago the proposal to have the government establish and maintain a bureau for the purpose of foretelling weather conditions was received with considerable ridicule. People think differently about it now; they have learned to use its forecasts. In the same manner intelligent business men use certain business signs to guide them in their business course. Certain phases of business have been so presented by the science of concentration and grouping that they may be read in the same manner as a barometer is read to forecast weather conditions.

Business barometers are most useful in foretelling the large swings in industry. The small daily fluctuations in security prices which are caused by such factors as the personal composition of the stock market, time or cash transactions, amount of marginal trading, and the amount of manipulation, cannot of course be foretold with any degree of certainty. Only the primary movements are subject to such careful statistical analysis.

At least a dozen important factors which influence the movement of security prices may be mentioned. They are commodity prices, bank clearings, labor conditions, foreign trade, railroad business, iron and steel production, bank statements, building and real estate transactions, business failures, condition of crops, gold production, and finally social and political conditions.

Commodity Prices

The general trend of commodity prices is usually indicated by what are known as index-numbers. The leading index-number in this country is issued by Bradstreet; that of the London Economist is equally as famous. These index-numbers are a sort of composite picture of prices as a whole, and are found by reducing the prices of all the important commodities to a common denominator and then striking an average. When the price of commodities is high, more money is required to transact a given amount of business, and consequently, other things being equal, higher interest rates are likely to prevail. From the standpoint of economics capital is being absorbed. As a business man sees it, it means that more money is needed to do the same amount of business. Capital gets tied up, supply begins to run short, and consequently interest rates go up.

If the index-number is near its high record and still rising, the conservative business man will hesitate, however favorable other conditions may seem, to allow himself to get into an extended condition. A new high record of the index number does not necessarily mean the approach of a panic, but it does serve as a warning.

Bank Clearings

Bank clearings are the record of the volume of bank checks presented at banks other than those upon which the checks are drawn. Since 95 per cent of the country's business is done in checks, it follows that such a record must be a close measure of the actual business transacted. So much is this true that some merchants compare their sales with the bank clearings in their locality in order to determine whether they are getting a fair share of business. Bank clearings show business conditions not only for the whole country, but for individual cities, states, and group of states. The importance of this territorial division of clearings is seen at once from the fact that a large increase in the clearings of New York City would probably simply indicate a great deal of speculation on the stock exchange.

Bank clearings are affected to no considerable extent by the level of commodity prices. It follows, therefore, that the same amount of bank clearings shown in two different years, does not necessarily indicate the same amount of business transacted. Allowance should also be made for increase in population and in capital investment within a given area. Bank clearings should, therefore, be adjusted to index-numbers, population, capital investments, etc.

Labor Conditions

The labor conditions of the country are usually determined by immigration statistics, unemployment figures, and strike conditions. The arrival of many immigrants indicates surface conditions good and prices high. A low immigration figure and the return of many steerage passengers shows the reverse condition. Labor has become so mobile that the general business conditions of our country are reflected in the immigration statistics. Large unemployment figures, of course, show dull business conditions, and vice versa. A great strike involving the major plants in such an important line of industry as coal-mining or the steel business would tend to have a very disturbing effect upon business.