This section is from the "Everybody's Guide to Money Matters" book, by William Cotton. With a description of the various investments chiefly dealt in on the stock exchange, and the mode of dealing therein. Some account of the pitfalls prepared for the unwary, and suggestions to the cautious investor.
Speaking generally, taking shares in this class of property is like purchasing tickets in a lottery in which the prizes are not numerous. It may fairly be said that at least three-quarters of these companies are formed for the purpose of relieving private owners of concerns which were on the verge of failure through some cause or another.
It would be palpably foolish for a man or a firm doing a prosperous business to give it up into other hands, unless such a price could be obtained for it as would be almost ruinous to the purchaser. True it is that in the remaining quarter may be found perfectly legitimate undertakings formed into companies, owing to the death of the owner, deficient capital, or some other valid reason. Some of these flourish and take root, others are prosperous for a time and gradually die out. After a time it will be found that few remain which could be recommended for a permanent investment; and much information has to be sought and acquired before the venture should be made.
There are, of course, many persons who have the means of acquiring reliable information about a company, and are able to form a sound opinion as to its prospects, but the information is derived from personal knowledge and not from kind friends or from public prints, which are not always to be trusted. These persons purchase shares either for investment or as a speculation -- in this latter case with a knowledge or, at all events, a safe presumption that they will go to a premium, that is, rise in value to considerably more than their nominal amount, either from their own merits, or from an active demand for them on the part of the public, or by artificial stimulation. The holders know pretty well when the highest price has been reached, and then sell out with great advantage to themselves. It is often at that moment that the "tyro" is recommended to buy, or is seized with a desire to have a share in so good a concern, and parts with his money. The knowing speculator has taken his profit, and sees with grim satisfaction the shares gradually declining in value, until they arrive at the position of more than onethird of existing companies which are now quoted at a discount.