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

Commerce and Finance - Chapter XLIII

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


The stock broker acts as the middleman in negotiating con-
tracts between buyer and seller, but in a legal sense is the agent
of only one party to the transaction. Since the trader must rely
very largely upon the advice of his broker, it becomes of first
importance that the broker should be a cool-headed man, whose
judgment concerning all matters relating to the stock market

can be taken as accurate. The broker is supposed
Broker Ck ^ ^ ee P n i mse ^ thoroughly posted as to passing

events in the financial and commercial world, both
at home and abroad. His view must be a comprehensive one,
and he must be able to recommend a wise course of action for his
client, based upon his mature judgment of the future. The
established brokerage charge is one-eighth of one per cent, upon
the par value of the stock bought or sold, for either buying or
selling, or one-fourth of one per cent, for what is called a "round
trade," consisting in both buying and selling the stock. Some
brokers do a strictly commission business, while others combine
this with trading on their own account.

A "short" is one who has sold stock that he does not own,
but which he hopes to buy, before time for delivery, at a price
below that for which he sold. Since it is now to his advantage

to depress the market in order that he may be able
Bulls and Bears to fill his contracts at a lower price, he is a "bear"

in the market, and his efforts are devoted to
"bearing" or pounding the price downward. When a "short"
has been able to buy enough stock to fill his contracts he is said


to have "covered/' If he finds himself unable to cover except
at a loss, he may "liquidate/' which consists in paying the dif-
ference to the other party. A "long" is exactly the opposite of
a short, one who has bought more stock than he had contracted
to sell, and is therefore anxious that the market should advance,
in order that he may dispose of his holdings at a profit. He
is, therefore, interested in tossing the price upward by every
means within his power, and hence is called a "bull/ 7 A "bull
market" is one in which prices are advancing. A "bear" market
is one in which prices are declining.

A "put" is the right which a broker has by contract to
deliver to another a specified amount of a stock at an agreed
price within a specified time. If the market declines, the broker
Puts who has a "put" may buy the stock and deliver it

Calls at a higher price, realizing the difference as a

Spreads ^^ A u^, . g ^ pight f() demand? or caU for

a specified amount of stock at an agreed price, within a fixed
time. The owner of a "call" is a bull. It is to his advantage to
have the price advance, for then he may call his stock and sell
it at an advance. A "spread" is a combination of a put and a call.
The holder of a spread has the privilege of delivering the stock
at one price or calling it at another. For the privilege of a put,
call or spread, a fee is paid by the broker who buys it, varying in
amount, according to the value of the privilege as estimated
according to the condition and probabilities of the market.

Numerous terms in addition to those already mentioned have
been coined especially for the stock market. A "point" is one
per cent, in the price of a stock or bond. The market is "steady"
Lan ua e when it holds its own, "firm" when it advances,

of the stock and "weak" when it declines. A "pool" is a com-
bination of operators acting together for a com-
mon end. A "blind pool" is one in which all the operators are
kept in ignorance of its operations except the one person who
manages it. The object to be attained is absolute secrecy. A


"wash sale" is a fictitious transaction made by two or more mem-
bers who act in collusion merely for the purpose of giving the
appearance of a rise or fall in the price of a certain stock, or
swelling the volume of its apparent sales and thus influencing
others to buy or sell.

Listing securities consists in placing them upon the records
of the stock exchange so that they may be traded in by members.
Securities not thus recognized or listed cannot be the object of
transactions upon the floor of the exchange. Listing stocks or
bonds does not make the exchange a guarantor of their value,
but is an evidence of their genuineness. Buyers
must judge for themselves the value of the securi-
ties which they purchase. By the operation of
listing, however, the securities are required to pass an investiga-
tion which in a measure establishes their character as reliable,
and thus to a certain extent protects the buyer. A corporation
desiring to have its stock or bonds listed, must file a written
statement with the Listing Committee of the Stock Exchange,
setting forth the fullest details concerning the company and -its
securities, its name, date and place of organization, authorized
capital, amount of stock, preferred and common, amount actu-
ally paid in on the stock, amount of liability of stock holders,
name and address of the Kegistrar, description of the assets of
the company, detailed statement of the nature of the company's
liabilities, gross and net earnings for the past year if the com-
pany has been in business that long, or a copy of the company's
balance sheet for the previous year, also a description of the
bonded indebtedness outstanding of the company, if any, names
and addresses of the officers and directors, etc. Thus a full his-
tory of the past, and a description of the present condition of the
company is placed on record with the Stock Exchange Commit-
tee, who, after due consideration, vote to refuse or admit the
securities to the privilege of the Stock Exchange. With these
safeguards, thrown around the market, together with the re-


quirements usually added by the listing committee that a Trust
Company shall act as trustee of the mortgage and registrar of
the bonds, if bonds are to be floated, investors may deal in securi-
ties with a large degree of confidence and safety. Banks will
accept listed securities as collateral more readily than others.

No one but members are allowed upon the floor of the ex-
change. All buying and selling, or agreements to buy and sell
are made by oral contracts. The member making the offer
specifies the number of shares, the fractional part of the price,
(such as f in case the quototion is 103) and the terms of the
Buying and sa ^ e - When no amount of stock is named in an
selling offer 100 shares of the par value of $100 each is

understood. The terms of the sale are either
"cash," that is for delivery and payment upon the day of sale,
"regular" that is, delivery and payment upon the next business
day following the sale; "at three days," which is for delivery and
payment upon the third day following the sale, or for "buyers
option" or "sellers option," which is after three days and within
60 days after the date of making the contract, at the option of
the party holding the privilege or option. Under this form of
contract the buyer, or seller as the case may be, has the right
to call for the consummation of the transaction at any time he
chooses within the limit of sixty days.

Immediately after a transaction has been made between two
members upon the floor of the exchange each is supposed to jot
down a synopsis of it upon a small pad, which he carries for
the purpose. From this imperfect record the entries are carried
upon the books of the members and afterwards compared. It
is very seldom that a member disputes his liability under the pad
entry. If the stock is not delivered as per agreement, or not
paid for upon delivery offered, the matter is reported to the
proper officer of the exchange, who buys or sells the stock at the
market price, in other words endeavors to carry out the agree-
ment of the member who is in default, and whatever loss is


entailed thereby, or whatever the difference between the agreed
price and the market price, the one party has a claim against the
other for its recovery. Stocks sold "ex-dividend" do not carry
the dividend to the purchaser. When the books of a corporation
are closed and a dividend declared, the dividend no longer goes
with the stock, but just prior to the declaration of another divi-
dend, that dividend does go with the stock unless it is again sold

As previously stated, with the exception of purchases made
for the purposes of investment, the bulk of the business of
buying and selling stocks and bonds is done upon margins. The
buyer does not pay for the securities in full, but buys them

largely upon credit, paying probably ten or twenty
Margins per cent, of their value to the broker as a margin

to cover any possible adverse movement of the
market. The broker furnishes the capital necessary to purchase
the securities and charges his customer interest upon their cost,
over and above the amount of the margin in his hands. Thus,
suppose A. desires to buy stocks worth $100,000. He deposits
$10,000 with his broker, together with instructions to buy the
specified stock. The broker is merely the agent of the cus-
tomer and must carry out his instructions. The broker may
advise his customer as to the best course to pursue, and his
advice is usually valuable, since it is founded upon intimate
association with the stock market, but the customer issues the
actual orders to buy or sell. The broker protects himself from
loss through fluctuations in the market by requiring a sufficient
margin to be deposited. The amount of the margin will vary
according to the character of the stock. While ten per cent,
is ample margin in the case of most stocks, a larger margin may
be necessary in some cases, and of this the broker is the judge.
In case the market fluctuates to the limit of the margin, the
broker calls upon the customer for more margins. If the cus-
tomer fails to respond, the broker sells the stock immediately in
order to save himself from loss by a still further fluctuation.


Stocks or other securities purchased by a broker for his cus-
tomer must be paid for on delivery. But the customer has
placed only a margin of perhaps 10 per cent, of the cost of the
securities in the broker's hands. The remainder of the purchase
money the broker must, and does, furnish. Suppose a broker
buys 1,000 shares of stock at 120, the whole amounting to $120,-
000. The customer has deposited $12,000 as mar-
S" 1 - The broker must furnish the remaining
$108,000. Brokers are not rich men, and even if.
they were, they could not possibly furnish sufficient capital to
buy all of the securities which a large brokerage business would
require. The broker arranges with his bank for a loan large
enough to supply the needed funds, the securities about to be
purchased to be deposited as collateral. He extends credit to his
customer and in turn gets credit from his bank. He extends a
credit to his customer equal to, say 90 per cent, of the cost of
the stock, and the bank extends a credit to him of, say 80 per
cent, of the cost of the stock. Thus, the customer furnishes
$12,000 of the purchase price, the broker furnishes $12,000 of
his own capital, and the 'bank furnishes the remainder, $96,000.
But the securities are not yet delivered to the buyer, and the
condition of their delivery is the simultaneous payment of the
money. The matter is arranged in this way: The broker has
an understanding with his banker that the bank will over-certify
his check temporarily. After certification the check is passed
over in exchange for the stock, which is then sent to the bank
as collateral for a loan large enough to make the account good.
It is true, however, that banks will not over-certify checks in
this way unless the character and standing of the broker are
such as to warrant implicit confidence in him. The broker must
also carry a constant balance in the bank large enough to entitle
him to such favors.

It will thus be seen that over-certification of checks is an
absolute necessity in stock transactions under the custom of buy-


ing securities on credit or under the system of margins. A
clause in the National Bank Act forbids the over-certification of
checks by National banks, and on account of this restriction
(and others) Trust Companies and private banks have been or-
ganized in considerable numbers to meet the public needs.

Call loans are a feature of stock trading, and are extensively
made from day to day, subject to "sharp call," which means that
upon notification from the bank, to the borrower, such loans
shall be repaid before the close of banking hours of the same

business day. These loans are secured by stock
can Loans collateral, and when stock loans are terminated by

such notification the debtor is very likely com-
pelled to borrow other money in the open market, (which tends
to advance the rate of interest on loans upon that particular
security) or to sell such securities in the open market, which is
apt to depress its market price, especially if it should become
known to have been discredited as collateral by the trust com-

In hundreds of offices in Chicago and other cities throughout
the country may be seen little telegraphic instruments called
"tickers," through which runs a narrow paper ribbon on which

the instrument prints automatically the names
Tickers and prices of stocks and bonds in abbreviated

forms. These tickers, together with the service
which they furnish, are rented to offices by the Western Union
Telegraph Company, and as fast as sales are made on the New
York Stock Exchange the telegraph conveys the information to
the public by means of these instruments.*

*The same device is used for the produce exchanges.

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