home | authors | books | about

Home -> Orville Marcellus Powers -> Commerce and Finance -> Chapter XLII

Commerce and Finance - Chapter XLII

1. Chapter I

2. Chapter II

3. Chapter III

4. Chapter IV

5. Chapter V

6. Chapter VI

7. Chapter VII

8. Chapter VIII

9. Chapter IX

10. Chapter X

11. Chapter XI

12. Chapter XII

13. Chapter XIII

14. Chapter XIV

15. Chapter XV

16. Chapter XVI

17. Chapter XVII

18. Chapter XVIII

19. Chapter XIX

20. Chapter XX

21. Chapter XXI

22. Chapter XXII

23. Chapter XXIII

24. Chapter XXIV

25. Chapter XXV

26. Chapter XXVI

27. Chapter XXVII

28. Chapter XXVIII

29. Chapter XXIX

30. Chapter XXX

31. Chapter XXXI

32. Chapter XXXII

33. Chapter XXXIII

34. Chapter XXXIV

35. Chapter XXXV

36. Chapter XXXVI

37. Chapter XXXVII

38. Chapter XXXVIII

39. Chapter XXXIX

40. Chapter XL

41. Chapter XLI

42. Chapter XLII

43. Chapter XLIII

44. Chapter XLIV

45. Chapter XLV

46. Chapter XLVI

47. Chapter XLVII

48. Chapter XLVIII

49. Chapter XLVIX

50. Chapter L

51. Chapter LI

52. Chapter LII




From the time when the first company was formed and its
capital represented by shares, which were offered to the public,
or the first responsible government issued its obligations in the
form of bonds or promises to pay, the buying and selling of
such securities may be said to have existed. Dealing in such
forms of wealth is as natural, proper and legitimate as dealing
in dry goods, or any other class of property. From buying and
selling securities for the purpose of investment.

securiti 0nin ** was on ty a ste P * ^ e P erio< * f speculation in
them. When the prospects of large gains made
shares desirable, as in the case of the East India Company, the
South Sea Company or Law's Mississippi Company, the price
rose and speculation was active. When a time of commercial
depression prevailed, or frequent and prolonged wars and inter-
nal strife, unsettled or overturned governments, destroyed com-
merce and made obligations unsafe, trading in securities natur-
ally declined or ceased altogether. But as society advanced, and
governments became more stable, with rights of property secure,
companies began to multiply, and as securities increased, specula-
tion became more common until, like every other employment,
it became the principal or sole trade or occupation of a particular
class of citizens.

In his History of England, Macaulay says: "It was about the
year 1688, that the word 'stock- jobber' was first heard in Lon-



don. In the short space of four years a crowd of companies,
every one of which confidently held out to subscribers the hope
of immense gain, sprang into existence. Extensive combina-
tions were formed and monstrous fables were circulated for the
purpose of raising or depressing the price of shares." The
London stock mania for speculation increased until in 1697 Par-
Exchange liament passed an Act to regulate the business of

speculation in stocks. In 1773 the London Stock
Exchange was organized and now occupies an old-fashioned
building in Capel Court, opposite the Bank of England. It
has a membership of nearly 5,000, with an entrance fee require-
ment of 250 guineas. Its scope is broader than any other ex-
change, since its location at the world's financial center gives it
a pre-eminence. Stocks in companies scattered all over the
world are traded in, American, South African, and Australian
stocks being especially numerous and prominent. It is the inter-
national market for stocks, and bears the same relation to the
world of securities that the Bank of England holds to the finan-
cial world. The Bourse, the great stock market of Paris, was
founded in 1726. Its operations embrace chiefly European
securities. Its agents are not allowed to trade on their own

The great trading center of America is Wall Street, in and
near which are grouped the financial interests which in a large
measure support the New York Stock Exchange. Securities
from all parts of the United States are here listed and dealt in.
There are stock exchanges in Boston, Chicago, St. Louis and
other cities, but they possess chiefly a local character, being lim-
NewYork ^ e ^ a l mos ^ wholly to the securities in their re-

stock spective localities. Each exchange has its rules

and methods of doing business, but in a general
way, they are similar and all are patterned more or less closely
after the New York Stock Exchange. Many brokers in these
cities are also members of the New York Stock Exchange, and


through this connection are enabled to execute orders for securi-
ties not listed in their local exchanges. The membership of the
New York Stock Exchange is limited to 1100 and the price of a
membership or "seat" is very high, ranging from $30,000 to
$80,000, depending upon the general condition of the speculative

Widely different opinions prevail regarding the stock ex-
change. It has been condemned as a gambling institution,
which unsettles values and injures legitimate business, and on
Different views the other hand, it has been praised as a necessary
fh^stoci 116 and commendable institution. Both of these
Exchange opinions are, in a measure, right, and both are

partially wrong. As a market for securities the Stock Exchange
is unobjectionable is a great convenience to both buyers and
sellers. Capitalists who do not wish to loan their money or
invest in real estate may here buy securities which will produce
a desired income, and others desiring to convert securities into
ready money are brought into immediate communication with
buyers through this instrumentality. The Stock Exchange pro-
vides a place for the investment of savings. Not every person
can invest in land or mortgages. These are limited in quantity
and besides are beyond the financial capacity of most of those
with small savings. Corporations are now numerous, and secur-
ities, both stocks and bonds are so plentiful that they consti-
tute the chief form of investments. Bonds and stocks of ap-
proved quality have the advantage over real estate
^ being easily hypothecated as collateral for loans,
or converted into cash by sale. The Stock
Exchange, therefore, in so far as it affords facilities for making
legitimate investments, is an undoubted benefit to the business
world, and an aid to the progress and development of the coun-
try. Were stocks and bonds not readily salable, investors would
not buy them, and were this the case, great enterprises such as
railroads, large manufacturing establishments, and the like could


not be constructed. In a recent treatise entitled "The Work of
Wall Street," Mr. Sereno S. Pratt very aptly says:

"A stock market is an income market. It is a place where
incomes are bought and sold. No one, it is true, goes to the
Stock Exchange as he might to an insurance company, and,
paying over the requisite amount of money, buys an annuity.
Yet, essentially, the stock-market operation is the same. The
stocks and bonds traded in on the Stock Exchange would be
worthless unless they represented value, either present or pros-
pective. Bonds and preferred stock generally represent fixed

income. Common stocks represent speculative
incomes 6 income, that is, income that may vary from year

to year, according to the earning capacity of the
corporation issuing them. If a company has no income and no
prospect of earning one, its securities are worth no more than
so much waste paper. It is true that the stocks of an insolvent
company are often quoted in the market, but their value consists
in the control of the charter, the franchise, or some other privi-
lege from which it is believed an income may sometime be de-
rived. Several months ago a list of 48 non-dividend-paying
stocks was published whose average market price was 41, but
every one enjoyed the prospect, immediate or remote, of future
dividends. There could be no stock market if there were no
incomes. In Paris an inA^estor will say to his broker, "Buy me
enough rentes to pay me an income of, say, 50,000 francs a year."
He goes into the market to buy, not rentes, but income. In New
York the investor does not express himself so directly. He says
to his broker, "Buy me $500,000 of bonds." Now, what he is
actually buying is not bonds, but the income the bonds will yield.
Before placing the order he ha& calculated exactly what will be
the income, taking into account the premium paid, the interest
promised, and the duration of the bond. All investments are
thus made on the income basis.

From an investment to a speculation is only a short step. A.


buys a share of stock or a bond, pays for it, and lays it aside in
order to derive an income from it. That is an investment. B.
buys a stock or bond and holds it, expecting a rise in its value,
when he may sell it at a profit. That is a speculation. B.'s
transactions are perfectly legal, moral, and in every
Speculation way legitimate. Every dealer in dry goods, gro-
ceries, or farm products, and a large proportion of
those who buy land, buy with the expectation of selling again at
a profit. Then again, one who buys property as an investment
may find its market value so increased within even a very short
time, that he concludes to turn his investment into a speculation,
and sells, intending perhaps to buy another kind of property or
investment. Thus we see by analysis, the operations of the
investor, the merchant and the speculator are essentially the
same in principle, and to condemn one is to condemn all.

Is speculation a benefit to the business world? Would the
business world be benefited if speculation were entirely prohib-
ited and all stock exchanges and produce markets either wiped
out of existence or restricted to purely investment transactions?
Eadical and unthinking persons have declared emphatically an
affirmative to this latter question. They have even introduced
bills into legislative bodies for the abolishment of produce
and stock exchanges. All advanced and progressive nations have
their exchanges in which speculative transactions form a large
part of the business done. By means of the trading, both specu-
lative and for investment purposes, these exchanges act as bal-
ance wheels upon prices. When prices advance,
is Speculation holders begin to sell, and when prices fall, abnor-

a Benefit? r .

mally low, buyers are attracted, and their pur-
chases tend to raise the market price to its normal condition.
Thus extreme fluctuations are in a measure prevented by specula-
tion.* Then again, the experienced speculator having a prophetic

*This law is trodden under foot, when in the case of a "corner" a single
individual or a coterie of operators temporarily buy up and control a particu-
lar commodity and force its price up abnormally.


vision, may see in the future a season of favorable conditions
which will increase the market value of stocks. Accordingly,
he buys now, thus raising, in a measure, present prices, and in
the future he sells, his sale tending to supply the demand, and
lower prices. His mission then as a speculator has been a benefit
to others. Henry Clews, before a Legislative Committee in New
York, said: "Speculation is a method of adjusting differences of
opinion as to future values, whether of products or of stocks. It
regulates production by instantly advancing prices when there
is a scarcity, thereby stimulating production, and by depressing
prices when there is an overproduction/'

Speculators usually buy on a margin. Instead of paying for
the stock in full, they virtually buy the stock on credit, leave it
in the broker's possession, and pay enough cash on the purchase
to cover any possibility of a loss to the broker. Thus instead of
buying fifty shares of stock at $100 each and paying $5,000 for it
in full, the buyer pays down, say $10 on each share, or 10 per
cent, of the par value as a margin, and is thus able to buy ten
times as much, with a corresponding increase in profit if the
market proves favorable. Since he expects to soon sell the stock,
it is not essential that he should buy wholly for cash. Neverthe-
less, it is an actual sale, and delivery of the stock to him is con-
templated unless he otherwise disposes of it before delivery.
The broker charges interest on the unpaid balance
of the purchase money. Were buyers required to
pay in full for all stock purchased, their transac-
tions would be restricted to a comparatively small volume. They
have the same moral right to use the credit system, as the retailer
who buys of the wholesaler and pays part of the purchase price,
the balance, perhaps, to be paid after a portion of the goods have
been sold; or as the buyer of real estate who makes his first pay-
ment and sells the property before the next payment falls due.
It is true the buyer on a margin takes a greater risk than either
of these, for his purchase is larger in proportion to his capital


invested,, and if the market should go against him, he might lose
his entire investment. But he is a buyer on credit, the only dif-
ference being that a greater degree of credit is extended to him
on account of the custody of the property remaining with the
broker as security.

There is a point, however, where speculation degenerates into
gambling. The feverish desire for sudden riches, and the fas-
cination that attends the uncertainty of speculative operations,
often lead men away from strictly legitimate transactions and
they become reckless, mere gamblers upon the turn of the mar-
ket. The speculator is one who studies the condition of finance
and trade, both present and future, with especial reference to
their effect upon the stock market, and bases his action upon well
drawn and conservative conclusions, shaping his course so as to

meet conditions of the money market as he antici-
stodfs 102 1D P ates them. He exercises the same judgment and

discrimination that a wholesale merchant or
banker employs in the conduct of his business. The gambler
in stocks, on the contrary, makes no calculations, but "goes it
blind/' buying and selling merely on his impulse, and "trusting
to luck" for the result. His operations are not based upon a
study of the future, but upon "tips." He makes no effort to
control or meet future conditions. In short, he does not differ,
so far as the intent is concerned, from one who puts money on a
horse race or a throw of dice. No wonder such operators almost
universally "go broke" sooner or later.

Since the intrinsic value* of any given bond or stock remains
practically unchanged from day to day, or gradually increases in
value according as the company is prosperous or otherwise, why
should the market value fluctuate so rapidly and radically, on
'Change, is a mystery to many persons. Some of the most stable

*Stocks and bonds hare three values, viz.: par value, or normal value;
intrinsic value, or real and inherent worth; and market value, or what it
will bring when sold. These three values may be widely different.


and reliable stocks in well established companies, paying nearly

uniform dividends from year to year, flucturate in price on the

market, to a surprising extent. Thus St. Paul

fv! uc ^, nsin railroad stock has been known to fluctuate $50 a

the Market

share within a few months, with little or no change
in its real earnings. A stock which earns five per cent, fre-
quently sells for less than one which is earning four. This
seeming inconsistency can only be explained as one of the results
of speculation and the manipulations of the market by shrewd
operators. Mr. S. S. Pratt, in illustrating this feature of the
stock market, says: "A man owns a house from which he derives
a net income of $1,000. The house is worth, say, $20,000, and
the income of $1,000 is 5 per cent, on the investment. But if he
had to sell the house quickly he might not find a ready pur-
chaser, and would have to sacrifice the property, say, for $10,000.
There has been no change in the actual worth of the house. It
is in as good condition as before, and the income continues, but
the price is 50 per cent, of its true value. Or, the owner of the
property may find that a corporation wants it for some important
purpose, and is willing to pay a big price for immediate posses-
sion. In this case an urgent demand has advanced the price,
although there has been no change in income. Let us carry the
illustration further. Suppose the corporation wants the prop-
erty, but wants it cheap, and is willing to wait a while for it.
Thereupon it begins to manipulate the market for real estate in
that vicinity. By various expedients it impresses the owner with
the belief that the prices of property on the street are likely to
decline, and that he had better sell for what he can get now,
than wait and perhaps do worse."

Now, transfer the foregoing illustrations to the transactions
on the stock market, and the reasons for many of the fluctuations
in stocks will be apparent. The stock market is filled with
shrewd men who study the present and future conditions of the
market. They know in a general way, who hold certain stocks,


and they endeavor to create conditions which will affect the
market in their favor, enable them to buy cheaply or sell
dearly. If they can create an impression that will depress the
price of a given stock in future it tends to depress it now. Some-
times they sell stocks to create the impression that they are "un-
loading" on account of an expected fall in price, while at the
same time they are buying the same stocks secretly through
another broker, taking care to buy more than they are selling.
Just how far deception in stock manipulation can be carried
without becoming dishonesty is difficult to determine, but open
lying, such as spreading a false or malicious rumor in order to
affect the market is considered disreputable, and beneath any
gentleman both on the stock, as well as produce markets. A
"corner" is the extreme of manipulation, and consists in controll-
ing practically all the stock of a kind, with the result of forcing
those who are short to buy the stock at a fictitious price in order
to fill their contracts.

© Art Branch Inc. | English Dictionary