Methods Of Trading In Securities. Transactions On The Exchange. Part 3

Description

This section is from the "Investment And Speculation" book, by Louis Guenther. Also see Amazon: Investment And Speculation.

Methods Of Trading In Securities. Transactions On The Exchange. Part 3

Methods Of Quoting Prices

On the stock exchanges, the dollar mark is the sign of values and it is divisible into fractions of eighths. Each % stands for 12% cents of the dollar. To illustrate more clearly the proposition, take as an example such a popular stock as United States Steel and suppose it is reported in the opening quotations as selling at the even mark of $70 a share. The next quotation is at 70%: this means the stock has been bought for $70.12½ If the quotation is 70¼, it represents $70.25; at $703⅜, it is $70.37½; at $70%, it is $70.50; at $70%, it is $70.62%; at $70¾, it is $70.75; at $70⅞, it is $70.87½; and then $71. Conversely, every eighth fraction less in the reported price of a stock represents a loss of exactly 12% cents in its market value, and so on.

On the board of trade or the produce exchange the transactions in grain are on the basis of bushels. On the cotton exchange cotton is bought and sold in bales. On the grain exchange the dollar is the mark of value and it is also divisible into fractions as small as 1/16. In cotton it is divided into points.

Units On Stock And Produce Exchanges

On the stock exchanges are to be found shares and bonds only. On the grain exchanges agricultural products are the staples in which the public barters, including live stock and the various farm products. The popular staples forming the bulk of the business are wheat, corn, oats, rye, and barley. From a trading standpoint the lesser staples are live stock, under which head are cattle, hogs, lard, and tallow. Live stock is sold by the pound; lard and tallow by the tier. On the cotton exchange all the dealings are confined to cotton and its principal constituent, cottonseed oil. In New York City there is an important coffee exchange and a metal exchange, but neither one has much of a public following. Important as are our dairy products, such as milk, eggs, and butter, in point of aggregate money value very little trading is done in them on the exchanges. Whatever speculation there is in them is carried on directly among the dealers who, under favorable circumstances, sometimes attempt a coalition in their interests to maintain higher prices. Towards that end the storage houses prove an important ally, as they enable the dealers to store their purchases until they can market them at profitable prices.

Value Of Margin-Trading

Certain reformers have heaped a great deal of abuse upon margin-trading. They regard it as a malevolent influence upon the country. How inconsistent is the assertion can easily be demonstrated. A man of wealth, or even one in comfortable circumstances, may feel perfectly justified in the purchase of a block of stock on margin. He may not wish to tie up the entire purchase price by paying for it outright, although if necessary he could advance the whole amount, take the securities out of the market, and put them away in his safe. Has he not the right to make such a purchase? To deny him the privilege and permit a tradesman to use his credit for the purchase of goods would be unfair and unjust.

Suppose he were cut off from the privilege of trading in this manner through a member of the stock exchange, he could not be prevented from carrying out a similar operation though more cumbersome, in another form. If he has credit at his bank he could borrow the money to buy the stock outright, and when it has been delivered to him take it over to the bank and pledge it as collateral for his loan. When the stock showed him a profit he could then sell it, pay the loan, and so close the matter. Assuredly banks could not be prevented from making loans upon good collateral. That is their business. It is one of the principal mainstays for the profitable employment of their deposits.

Between the two methods there is no difference, save that the one operation is more mobile than the other. There is nothing fundamentally wrong in margin-trading. It is not an evil. The evil lies in the abuse of the system by persons whose circumstances and knowledge do not justify their trading in this manner. Such people attempt to do the impossible on a "shoe-string".To some extent it is the fault of the brokers, but it is fair to say on behalf of the majority of the members of the stock exchange, that they do not encourage speculation among those whose financial resources are limited, or by the ignorant, while speculative accounts of women are regarded as particularly offensive by the stock exchange itself.

It is well-nigh impossible to exclude these people altogether from speculation. Gamble they will in some form or other, and find a means to satisfy their cravings. The Government put a stop to the Louisiana lottery, yet the people kept on gambling. Racing was stopped by various states, but the restrictive measures failed to check betting on the races. So it is with card-playing; it is illegal, but gambling rooms continue to thrive.

There are other abuses of the machinery of the stock exchange, as I shall try to point out later, but they can in a large measure be controlled without striking a suicidal blow at the function it performs for the country - of providing it with a great central market for the mass of its securities.

Selling stock on margin is regarded as a greater evil than even buying on margin. No one should sell what he does not own, is generally the claim made to justify this contention. How inconsistent this is can also be easily shown. All our millers sell flour long before they know what the harvest is to be. They bank on the correctness of their judgment as to the size of the crop, expecting to buy their wheat cheap enough from the farmers to make a good profit out of the difference. The contractor agrees to build a house for a certain price, relying on his judgment of the market for labor and material to net him a good profit, although in the meanwhile prices may go up above his estimate. Even the laborer sells his labor "short," and theoretically, when he finds he cannot make his living expenses square with his wages, he has lost money.

Where then is the difference between the examples just cited and selling securities ? If a person believes a security is commanding too high a price, he is morally justified in selling it, even if he does not own it, as much as the miller has the right to sell flour he expects to grind from next season's wheat harvest, or the contractor estimates on constructing a building from material he has not yet bought or labor he has not yet hired.

Nor can the lay mind fully realize what a great bulwark the selling of securities which are not owned at the time they are sold is in times of stress when everyone seems to be anxious to unload securities. In such times these "short" sales are the only mainstay of the market. What has been sold and is not owned, must be bought back sooner or later by the sellers so that they may turn their profits into cash. Were it not for these "short" sales buttressing the market, prices would not only decline perpendicularly but fall all to pieces, and the widespread fear aroused would have a most disastrous result.