Margin trading

“ 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. ”

“ The speculating public gets action, likes it, and invests money that might have been used in margin-trading on the New York Stock Exchange or for "investment" in the constantly fluctuating low-priced industrials or higher-priced mining stocks that are sponsored by big interests with New York Stock Exchange affiliations. ”

“ Any trader who trades for any great length of time is likely to make large profits sometimes, and yet the majority of them have greater losses than profits. It is said that more than 80% of all margin traders lose; but we do not consider that an argument against trading on margin, because these losses are mostly due to ignorance, greediness, and the taking of too great chances. ”

“ The old distinction between investors and speculators, the former those who buy for the yield, and the latter those who buy for an anticipated rise in capital value, no longer corresponds to the distinction between those who buy outright and those who buy on a margin. The investor, buying a 6 or 7% preferred stock, carrying it on a forty point margin, with money from his bank or broker at 4 or 5%, is making 6 or 7% on his own forty dollars, and is making the difference between 6 or 7% and 4 or 5% on the sixty dollars lent him by his banker or broker. ”

“ 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. ”

“ Most people who trade in stocks buy on margin. The ordinary minimum margin is about 20% of the purchase price, because banks usually lend about 80% of the market value of stocks.
If you put up 20% of the purchase price of your stocks with your broker, he has to pay the other 80%, but he can do that by borrowing that amount from his bank, and putting up the stock as security. In this way brokers are able to handle all the margin business that comes to them, as long as money can be borrowed. ”

“ It may be noticed, too, that sales of "rights," of puts and calls and straddles, and other contract rights, are regular factors in the organized exchanges. Wherever profits are to be made by leveling values as between different places or different times, speculation arises, and, with dynamic change, this means everywhere, in every business, and all the time! The shifting of labor and capital from industry to industry, leveling returns to capital and labor, involves an enormous amount of trading that would not occur in a "normal equilibrium." Much of this the Stock Exchange does. ”

“ In preference, therefore, to recommending legislation, we urge upon all brokers to discourage speculation upon small margins and upon the Exchange to use its influence, and, if necessary, its power, to prevent members from soliciting and generally accepting business on a less margin than 20 per cent. "‘Pyramiding,’ which is the use of paper profits in stock transactions as a margin for further commitments, should be discouraged. The practice tends to produce more extreme fluctuations and more rapid wiping out of margins. ”

“ Buying and selling “on margins” is very common. In some exchanges the most of the business done is of this class. The method is easily understood. A man wishes to buy for speculation, a thousand barrels of oil. He pays into his broker’s hands a hundred dollars, more or less, and the broker buys the oil. The hundred dollars is a “margin.” The phrase of trade is “putting up margins.” The margin is the broker’s security. In case the market falls, and the oil remains on his hands, it secures him from loss. So much for the vocabulary and methods of speculation. ”

“ If it wants to get the price which you promised to pay, and you fail on demand to take up the stock, it sells the stock which it has been holding as security. The bucket-shop, on the other hand, though it takes your order to buy, does not actually buy the stock; it simply settles with you when you want to settle, or when it wants to settle, because the margin is not sufficiently kept good, by calculating the difference between the price at which the stock was supposedly bought and the price at which it is supposedly sold, those prices being fixed by the ruling market quotations at the time. ”

“ 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 extend420 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. ”

“ As most merchants are content with much less than 30 per cent., he will be able, if he wishes, to forego some of that profit, lower the price of the commodity, and drive the old-fashioned trader—the man who trades on his own capital—out of the market. In modern English business, owing to the certainty of obtaining loans on discount of bills or otherwise at a moderate rate of interest, there is a steady bounty on trading with borrowed capital, and a constant discouragement to confine yourself solely or mainly to your own capital. ”

“ The facilities offered by the open markets on the exchanges and the practice of dealing in futures are taken advantage of by many who, without any special training or opportunities of knowing the market, simply bet on the price movements. Brokers are willing to buy and sell produce or stocks for their customers if the latter will put up with them a margin of about 10 per cent to protect them from loss. It is therefore possible for a person with little capital and no knowledge to speculate on a margin, buying what he does not want and selling what he does not own. ”

“ What, then, as to the size and aggregate amount of the profits? The margin of advantage is not the same on all exchanges; the exchange is made if there is a margin to both parties, no matter how small it is; but the generous "profit" on one transaction where the conditions of the two parties are very different may be greater than the total of petty margins on a dozen exchanges between two traders of evenly matched powers. Can it safely be assumed that every trade with a foreigner is less advantageous than one with a fellow-citizen? ”

“ Securities purchased in the six-year period quoted were, in the majority of instances, bought on margin, that is, they were only partially paid for by the purchasers,109 the balance required being furnished by the broker from his capital and by the banks from their loanable funds.
There is a popular fallacy as to the amount of actual cash required to finance these enormous Stock Exchange transactions; persons who are not well informed often entertain the impression that it is much larger than it really is. ”

“ A margin trader on the New York Stock Exchange, unless he has sufficient capital behind him to hold out against 'inside' manipulation, which has for its purpose the 'shaking out' of the speculator, has not got any chance! ”

“ 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. ”

“ When stocks have attained a reasonably high level of value as a result of the recovery [105] of a country’s industry, the chances for the speculator to profit by a continuous rise are of course gone, and he seeks in other directions to turn his capital to account; but the example we have given illustrates perhaps the most legitimate of all forms of speculation in Stocks, provided always the operator knows his business, and allows a sufficient margin for contingencies. ”

“ THE MONEY MARKET AND STOCK PRICES
Perhaps no other one thing influences the movement of stock prices so much, in a large way, as money conditions. It is impossible to have a big bull market without plenty of money. During a bull market nearly all stocks are bought on margin, which is explained in Chapter XVI. This makes it necessary for brokers to borrow large sums of money. When money is tight, it is impossible to get enough to carry on a large movement in stocks. ”

“ 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. ”

“ According to this principle, operations conducted on options are more certain to result in profits in the long run than margin operations. If I assume to make a profit in only one out of every three operations, and each option costs me 11⁄4 per cent., I will make a profit, if the third option only yields me a profit of more than 33⁄4 per cent., which is nothing unusual. ”

“ 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. ”

“ This broker's shop was the resort of scores of people of small means, trades-folk, clerks, salaried dependents and some women, keen to acquire from the fluctuations of the speculative markets a few crumbs of the huge gains garnered by the magnates of Wall Street, of which they read emulously in the newspapers. To put up one's thirty dollars, and to have one's margin of venture or profit wiped out within twenty-four hours, was the normal experience, sooner or later, of ninety per cent. ”

“ Exchange, as it is called, because, in the minor Exchanges, margins are notoriously small, and the smaller the margin the greater the number of “victims.” Indeed, if it were not for this practice it would be difficult for members of smaller Exchanges to exist at all. In so far as speculation in securities may merit criticism, this tendency to attract poor people by the bait of slim margins is undeniably a very52 real evil, and one which can only be corrected by the brokers themselves. ”

“ 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 ”

“ Suppose you had, instead of buying it outright, taken an option, say, on a million, you would already have made a hundred thousand dollars on the rise. Our brokers will arrange the financial details and you can secure the stock you now possess and the half million block as well, with ample margin to spare. Then, when you have taken your profits, you can do as you please: reinvest if you like, or wait until the inevitable reaction comes and buy in at a lower figure a much larger amount than you now possess. ”

“ If the market ratio shifts slightly in either direction, one of them will drop out of the exchange. It is evident that a buyer [Pg 35] who is taking ten units may be on the margin with reference to the tenth unit, and yet may continue to be one of the most eager buyers to secure one unit. Thus, the marginal buyer is to be thought of as that person who, logically considered, is the least eager, or on the margin, with reference to a particular unit of supply, however eager he may be with reference to any other unit of supply. ”

“ For if at any point great increases in economy of production are achieved, while the large elasticity of demand maintains a price nearly the same as before, the wide margin of profit which might fix the actual price at that point for a monopolist only serves to stimulate such increased output on the part of trade competitors as will continue until the flexibility of demand weakens, and prices are lowered to such a point as will yield the normal margin or market rate of profit. ”

“ There is scarcely any dealer or producer on a considerable scale, who confines his business to what can be carried on by his own funds. When trade is good, he not only uses to the utmost his own capital, but employs, in addition, much of the credit which that capital obtains for him. When, either from oversupply or from some slackening in the demand for his commodity, he finds that it sells more slowly or obtains a lower price, he contracts his operations, and does not apply to bankers or other money dealers for a renewal of their advances to the same extent as before. ”