Successful Stock Speculation

Written April 1922 Published December 1922 Published by NATIONAL BUREAU OF FINANCIAL INFORMATION 395 Broadway, New York City This Book Is Not Copyrighted National Bureau of Financial Information...

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CHAPTER I. THE PURPOSE OF THIS BOOK

This book is written for the purpose of giving our clients some ideas of the fundamental principles that guide us when we select stocks for them to buy, but these principles are valuable to every person who trades in listed stocks or in any other kind of speculative stocks. First of all, we want you to get a clear conception of the meaning of the word speculation, which is explained in the next chapter. Our purpose is to protect you against losses as well as to enable you to make profits, and it

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CHAPTER II. WHAT IS SPECULATION?

To speculate is to theorize about something that is uncertain. We can speculate about anything that is uncertain, but we use the word "speculation" in this book with particular reference to the buying and selling of stocks and bonds for the purpose of making a profit. When people buy stocks and bonds for the income they get from them and the amount of that income is fixed, they are said to invest and not to speculate. In nearly all investments there is also an element of speculation, because the

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CHAPTER III. SOME TERMS EXPLAINED

There are certain terms used in connection with stock speculation that are very familiar to those who come in contact with stock brokers, and yet are not always familiar to those who do business by mail. Undoubtedly the majority of our readers are familiar with these terms, but we give these definitions for the benefit of the few who are not familiar with them. Trader: A person who buys and sells stocks is usually referred to as a trader. The word probably originated when it was customary to tra

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CHAPTER IV. A CORRECT BASIS FOR SPECULATING

We maintain that there is only one basis upon which successful speculation can be carried on continually; that is, never to buy a security unless it is selling at a price below that which is warranted by assets, earning power, and prospective future earning power. There are many influences that affect the movements of stock prices, which are referred to in subsequent chapters. All of these should be studied and understood, but they should be used as secondary factors in relation to the value of

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CHAPTER V. WHAT STOCKS TO BUY

In deciding what stocks to buy, it is well to consider first the classes of stocks, and then what particular stocks you should buy in the classes you select. We would first of all divide all stocks into two classes, those listed on the New York Stock Exchange and those not listed on the New York Stock Exchange. As a rule, it is better to buy stocks listed on the New York Stock Exchange, although there are frequent exceptions to this rule. Then, the stocks listed on the New York Stock Exchange ma

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CHAPTER VI. WHAT STOCKS NOT TO BUY

A great deal more can be said about stocks you should not buy than about stocks you should buy, because the list is very much larger. Stocks not listed on the New York Stock Exchange, as a rule, should not be bought by a careful speculator, but as stated in the previous chapter, there are exceptions to that rule. Billions of dollars have been lost in the past by buying stocks that have become worthless. A few years ago a list of defunct securities was compiled, and it took two large volumes in w

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CHAPTER VIII. WHEN NOT TO BUY STOCKS

There are times when stocks should not be bought, and that is when nearly all stocks have advanced beyond their real values. It is doubtful if there ever is a time when all stocks have advanced beyond their real values, but when the great majority of stocks have so advanced, there is likely to be a general decline in all stock prices. The stocks that are not selling too high will decline some in sympathy with the others. Therefore, there are times when we advise our clients not to buy any stocks

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CHAPTER IX. WHEN TO SELL STOCKS

You should sell stocks when the market price is too high. That is a general rule, but it is necessary for you to study all the influences affecting stock prices to be able to decide more accurately when you should sell your stocks. We give you, in future chapters, much more information on judging the markets. Another general rule, is to sell stocks when nearly everybody is buying them. It is a well known fact that the great majority of people buy stocks near the top and sell near the bottom. Nat

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CHAPTER X. MOVEMENTS IN STOCK PRICES

It is due to the fact that stock prices constantly move up or down that speculation is possible. Sometimes certain stocks remain almost at a standstill for a long period of time, but at least a part of the stocks listed on the Exchanges move either up or down. If one always could tell just what way they were going to move, it would be comparatively easy to make a fortune within a short time. In the last twenty years, a great deal of time and money has been spent by statistical organizations in c

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CHAPTER XI. MAJOR MOVEMENTS IN PRICES

Stock prices move up and down in cycles. These are the major movements in prices, but there may be many minor movements up and down within the major movements. These stock price movements nearly always precede a change in business conditions; that is, an upward movement in stock prices is an indication that business conditions are going to improve, and a downward movement in stock prices is an indication that business conditions are going to get worse. At the present writing, we are in a period

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CHAPTER XII. 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. You will see, therefore, that the Federal Reserve Bank has it i

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CHAPTER XIII. MINOR MOVEMENTS IN PRICES

Within the major movements of stock prices, there always are several minor movements, which are caused by various influences. One of the important causes is the technical condition of the market. Another cause might be called a psychological one. When stocks are moving up steadily in a bull market, people closely connected with the market expect a reaction and watch for it. The newspapers predict it. Consequently, there is sufficient let-up in buying to allow the pressure of selling by the bears

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CHAPTER XIV. TECHNICAL CONDITIONS

Technical conditions refer to the conditions that usually affect the supply and demand, such as short interests, floating supply, and stop loss orders. It is sometimes said that supply and demand must be equal or else there could not be any sales, but that is not so. There are always some people who are willing to sell at some price above the market who will not sell at the market; and when the demand for stock is greater than the supply, it goes up until it is supplied by some of these people w

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CHAPTER XV. MANIPULATIONS

Stock prices are influenced largely by manipulation. Years ago when the volume of trading on the New York Stock Exchange was small compared with what it is today, it was possible to influence the entire market by manipulation, but it would be very difficult to do that today. It is only certain stocks that are manipulated; but if conditions are favorable, many other stocks may be influenced by them. There are different kinds of manipulation. One is for the insiders of a company to give out unfavo

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CHAPTER XVI. MARGINAL TRADING

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. Of co

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CHAPTER XVII. SHORT SELLING

By short selling, we mean selling a stock that you do not possess, with the intention of buying it later. Short selling in general business is very common, and we think nothing of it. Manufacturers frequently sell goods that are not yet made, to be delivered at some future time. Selling stocks short is a similar transaction, except that in a majority of cases delivery of the stock must be made immediately. However, your broker can attend to that by borrowing the stock. As explained in the preced

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CHAPTER XVIII. BUCKET SHOPS

There has been so much publicity given to bucket shops, nearly everybody is familiar with the term. A broker runs a bucket shop when he sells stock to his clients on margin and either never buys the stock for their accounts, or else sells it immediately after buying it. The bucket shop simply gets your money on the supposition that you are more likely to be wrong than to be right. Of course, if you take the bucket shop's advice you surely are likely to be wrong. Bucket shops get their clients in

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CHAPTER XIX. CHOOSING A BROKER

It is very important that you choose a good broker. No matter how careful you are, it is possible to make a mistake. However, if you choose a broker who is a member of the New York Stock Exchange, you have eliminated a very large percentage of your chances of getting a wrong broker. Occasionally a member of the Stock Exchange fails and once in a while one is suspended for running a bucket shop or being connected with one, but these instances are very rare compared with the number of brokers who

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CHAPTER XX. PUTS AND CALLS

A "put" is a negotiable contract giving the holder the privilege to sell a specified number of shares of a certain stock to the maker at a fixed price, within a specified time. A "call" is the exact reverse. It is a negotiable contract giving the holder the privilege to buy a specified number of shares of a certain stock from the maker at a fixed price, within a specified time. The price fixed in a put or call is set away from the market price a certain number of points, depending upon the stock

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CHAPTER XXI. STOP LOSS ORDERS

A "stop-loss" is an order to your broker to sell you out if the market sells down a certain number of points. Many speculators place stop loss orders only two points from the market price. The idea is that when the market starts to go down it is likely to continue going down, and by taking a two-point loss you may save a much greater loss. It also can be applied to a short sale, when you give your broker instructions to buy in the stock for you if it goes up a certain number of points. We read s

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CHAPTER XXII. THE DESIRE TO SPECULATE

It is said that the desire to speculate is very strong in the American people. That is why our country has made greater progress than any other country in the world, because progress is the result of speculation. We are not referring merely to stock speculations, but to the word in its broadest sense. Every new undertaking is a speculation. An inventor speculates on what he is going to invent. Often such speculations result in losses, because many inventors, or would-be-inventors, never accompli

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CHAPTER XXIII. TWO KINDS OF TRADERS

There are two kinds of stock traders. One kind nearly always makes a profit, and the other wins sometimes and loses other times, but eventually loses all if he does not change his methods. The first kind buys stocks on liberal margin or outright and is not worried when the market goes against him, because he has good reasons for believing that prices eventually will go up. If he does have to take a loss occasionally, it is likely to be small compared with his profits. The second kind wants to ma

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CHAPTER XXIV. POSSIBILITIES OF PROFIT

What are the possibilities of profit in stock speculation? That question is frequently asked but it is difficult to answer. James R. Keene is quoted as having said: "Many men come to Wall Street to get rich; they always go broke. Others come to Wall Street to operate intelligently for fair returns; they usually get rich." While it is true that nearly all stock traders who try to make unusually large profits in a very short time in stock trading lose, yet unusual profits can be made if you exerci

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CHAPTER XXV. MARKET INFORMATION

Where do you get your market information? Perhaps most people get it from the daily papers. When you look over the financial news of one of the leading metropolitan papers and see how much there is of it, you can get some idea of the enormous volume of work necessary to get this matter ready for the press in a few hours. There is no time to confirm reports. It is necessary that many of the articles be written from pure imagination, based on rumors. Weekly and monthly periodicals can be more accu

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