Margin (finance)

“ The amount of margin which a broker requires from a speculative buyer of stocks depends, in each case, on the credit of the buyer; and the amount of credit which one person may extend to another is a dangerous subject on which to legislate. Upon the other hand, a rule made by the Exchange could safely deal with the prevalent rate of margins required from customers. ”

“ Deposits of cash margins may be required mutually by members at the time of making contracts, and subsequent additional ones if market fluctuations justify.
Dealings for outsiders are usually upon a 10 per cent. margin; obviously, if this margin were increased generally, say to 20 per cent., a considerable part of the criticism due to losses in speculation, particularly as to the Cotton Exchange, would be eliminated. ”

“ A 'straddle' is a double privilege, entitling the purchaser to either 'put' or 'call' a stock. The bonus is generally the amount paid for the single privilege of 'put' or 'call.' A 'margin' is the money deposited with the broker through whom the stocks are purchased, as a security against a sudden depreciation. The amount is generally about ten per cent of the par value of the stock. 'Margins' are the rocks on which many adventurers on the uncertain waters of speculation are utterly wrecked. 'Carrying' means holding stock in anticipation of higher prices. ”

“ We therefore find existing conditions to be, in fact, low relative prices, high relative wages, coupled with a lessened margin of profits in ratio to our total product as compared to each decade of the last fifty years. But, on the other hand, our aggregate product has been so vastly increased that even at the lessened margin on each unit the aggregate of profits is greater than ever before. The rich have become richer. The people of moderate fortunes have become much more numerous. ”

“ And this in turn shows the extreme importance of grasping clearly the conception of the margin. Just as it is the marginal purchase, so it is the marginal purchaser who matters. It is the man who, before he buys a motor bicycle, weighs the matter up very carefully indeed and only just decides to buy it, whose demand affects the price of motor bicycles. It is the utility which he derives that constitutes the marginal utility, which is roughly measured by the price. ”

“ The reason why you use a margin is that you can do much more with the money that way than if you bought outright. It protects your broker against a depreciation in the security purchased, which is all he wants. In this case you theoretically owe us $61,000, but the bonds are in your name, and they are worth $96,000, so that if you want to pay us back, all you have to do is to order us to sell the bonds, return the money we have advanced, and keep the balance of your margin ”

“ Purchasing securities on margin is as legitimate a transaction as a purchase of any other property in which part payment is deferred. We therefore see no reason whatsoever for recommending the radical change suggested, that margin trading be prohibited. ”

“ As competition becomes keener and the margin of return per unit of product becomes smaller, he has to increase his volume of business to secure the same amount of profit as when he did a lesser volume of business.
To produce goods it is necessary to use the saved wealth of former periods to pay the expenses of materials, labor, management, etc., of the present period. One must consume wealth to produce wealth. After his product is made, he must seek the best market for its exchange or sale. ”

“ Assuming that the Trust is planning a new business and determining the most profitable output, it will limit that output not necessarily at the point where the selling price gives the widest margin of profit upon the expenses of [160] production, as might be the case at the point B in the diagram, but at the point F, where the margin of profit bears the largest proportion to the expenses of production, or in other words, where the area of absolute takings shows the largest surplus over the area of aggregate expenses. ”

“ Of course, if a man can buy on margin he can launch into a much more extended venture than where he must pay the whole price at once. If he pays the whole price he gets the purchased article, whatever its worth may turn out to be. ”

“ This is often done in reorganizations when fewer shares of the new stock are given than were held of the old. The effect, then, is to set up a book profit against which may be charged the existing deficit, and so secure a balance between the real net worth and the par of the new stock issue. [Pg 409]
Stock Donation. Another source of margin is a stock donation. This may result in only a book profit. It is exceedingly difficult and generally impossible to determine the true value of many speculative ventures, such as mining enterprises. ”

“ The margin of utilization in the case of a single piece of wealth is called the intensive margin. Any form of indirect wealth, anything kept to use, may be considered as containing a series of uses. Using one thing more and more while uniting other things with it, is using it more intensively. ”

“ When we know what the rates of wages and interest are, we can tell what any capitalist-manager should have by knowing how much capital he furnishes and how much and how well he works as a manager. If the business is yielding a net profit, over and above the interest on its capital, we can tell what part of this net income any one stockholder will get—in the form of a rate of dividends in excess of the rate of interest—if we know how much of the common stock of the company he owns. ”

“ The margin which he is called upon to advance, is one dollar per share, and he may limit his transactions to five shares, if he sees fit. It is a matter of indifference to the proprietor whether he elects to buy or sell; that obliging individual will accommodate himself to his wishes, whatever they may be. Suppose that he buys five shares of the stock in question, at a moment when it is quoted at 161⁄4. If it rises to 171⁄4, he may, if he chooses, close his deal, receiving back the five dollars which he advanced as margin, together with another five dollars, the latter representing his profit. ”

“ The money in the hands of lenders, in common with all other money, will be enhanced in value, that is, there will be a greater amount of real capital seeking borrowers; while the real capital wanted by borrowers will be only the same as before, and the money amount less: the rate of interest, therefore, will tend to fall. ”

“ In the interest of conservatism and as producing certain other desirable results which will be brought out as each asset is examined in detail, cost price, if lower than market, is deemed the desirable basis for the valuation of this group. By way of explanation, it should be said that working capital as used here is the difference between current assets and current liabilities and so represents the portion free to be put to the further pursuit of business. ”

“ It is this effect of free and mutual banking upon the rate of interest on capital that insures, or rather constitutes, the realization of the Cost principle by economic processes. For the moment interest and rent are eliminated as elements of price, and brisk competition is assured by the ease of getting capital, profits fall to the level of the manufacturer's or merchant's proper wage. ”

“ There is one, who furnishes a part of the capital or lends a part of the money by which it is carried on, and another, who carries it on with the addition of his own capital. Out of the surplus which remains after defraying expenses, an interest is paid to the money lender, for the portion of the capital furnished by him, which exactly agrees with the rent paid to the landlord; and the residue of that surplus constitutes the profit of the undertaker or manufacturer and agrees with what is denominated the ordinary profits on the stock of the farmer. ”

“ After paying the expenses of their business, all the rest of the interest they receive is clear gain. But as the circumstances of banking, as of all other modes of employing capital, will on the average be such as to afford to a person entering into the business a prospect of realizing the ordinary, and no more than the ordinary, profits upon his own capital; the gains of each banker by the investment of his deposits, will not on the average exceed what is necessary to make up his gains on his own capital to the ordinary rate. ”

“ Variable capital, v, is the annual wages bill. Surplus, s, is annual rent, interest, and net profit, so that v + s represents net national income. (In this introduction surplus is used interchangeably with rent, interest and net profit.) Constant capital, c, represents at the same time the contribution which materials and capital equipment make to annual output, and the cost of maintaining the stock of physical capital in existence at the beginning of the year. ”

“ Thus we see exchange value and price following the law of margins like value in use, with this qualification, that they are determined directly, not by marginal utility but by marginal equivalence, in which, not only supply and demand, but also the wealth of the purchasers is taken into account. Rare articles of luxury, e.g., precious stones, fetch very high prices, because the rich contend for them with the poor and the richest with the rich. Stock goods supplied for imperative needs command very low prices, corresponding to the purchasing power of the lowest strata of the population. ”

“ The profit is shared between the banker, who receives interest, and a succession of borrowers, mostly for short periods, who, after paying the interest, gain a profit in addition, or a convenience equivalent to profit. The capital itself in the long run becomes entirely wages, and, when replaced by the sale of the produce, becomes wages again; thus affording a perpetual fund, of the value of $200,000,000, for the maintenance of productive labor, and increasing the annual produce of the country by all that can be produced through the means of a capital of that value. ”

“ He must study every factor which does, in fact, bring about changes in the value system. We do not find the market-letter of a brokerage house, or the calculations of a captain of industry, or trust promoter, troubling themselves about marginal utilities or labor-pains! Notions of supply and demand, and the relations of the prevailing interest rate to the capital values of securities, they do employ. Notions of money-costs of production they make use of. ”

“ These considerations would suggest that the elasticity of the demand for the use of money is greater than the elasticity of demand for the use of capital in almost any other form. Production is, indeed, limited by labor supply and natural resources, in considerable degree. Trade, [244] however, even from the standpoint of mechanical causation, is limited chiefly by the relation between the profits to be made in commercial transactions, and the "price" that must be paid for the money and credit that are required to put them through. ”

“ Whether a bank lent one million, ten millions, or a hundred millions, they would not permanently alter the market rate of interest; they would alter only the value of the money which they thus issued. In one case 10 or 20 times more money might be required to carry on the same business, than what might be required in the other. ”

“ Under the operation of a shrinkage in the volume of money this enormous mass of borrowers, at the maturity of their respective debts, though nominally paying no more than the amount borrowed, with interest, are, in reality, in the amount of the principal alone, returning a percentage of value greater than they received—more than in equity they contracted to pay, and oftentimes more, in substance, than they profited by the loan. To the man of business this percentage in many cases constitutes the difference between success and failure. ”

“ Bargain-making strategy, the "higgling of the market," may yield an imperfect result, and the lender of real or commodity capital may or may not get the exact real earnings of marginal capital of the same kind. In translating the earnings of real capital for the earlier or test year into terms of money, the appreciation of the coins has unerringly entered as an element. ”

“ The profits of stock in different employments, having been shewn to bear a proportion to each other, and to have a tendency to vary all in the same degree and in the same direction, it remains for us to consider what is the cause of the permanent variations in the rate of profit, and the consequent permanent alterations in the rate of interest. ”

“ Now it is conceivable that there might exist, in the hands of persons disinclined or disqualified for engaging personally in business, a mass of capital equal to, and even exceeding, this demand. In that case there would be an habitual excess of competition on the part of lenders, and the rate of interest would bear a low proportion to the rate of profit. ”

“ For, as is now well established by economic theory and reinforced by the observations of practical men, while any increase in the supply of loanable funds on the call-money market temporarily [Pg 642] reduces the "money rate," an increase in the general supply of standard money in the community, on the contrary, raises not only the price level of all commodities, but the price for the use of capital, which we call the general rate of interest. The increase of money as the standard of value inevitably tends to increase the general rate of interest. ”

“ For, if wages depend upon the ratio between the amount of labor seeking employment and the amount of capital devoted to its employment, the relative scarcity or abundance of one factor must mean the relative abundance or scarcity of the other. Thus, capital must be relatively abundant where wages are high, and relatively scarce where wages are low. Now, as the capital used in paying wages must largely consist of the capital constantly seeking investment, the current rate of interest must be the measure of its relative abundance or scarcity. ”