wever, in principle, there is very
little difference between the two transactions.
Most margin traders do not put up sufficient margin. If you put up only
the minimum margin, your broker has the right to call on you for more
margin if the price of the stock declines at all. Unless you are fully
prepared at all times to put up an additional margin when called upon,
you should make smaller purchases and put up a heavy margin when you
buy. The amount of margin depends upon the transaction, but we advise
from 30% to 50%, and at times we advise not less than 50% margin on any
purchase. In fact there are times when we advise not to buy stocks on
margin at all.
Those who wish to be entirely free from worry should buy stocks when the
prices are very low, pay for them in full, get their certificates, and
put them away in a safe deposit box. However, when stocks are low the
risk in buying on a liberal margin is very small, and the possibilities
of profit are so much greater, we do not see any objection to taking
advantage of this method of trading.
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 preceding chapter, when the market is active most of
the trading is done on margin. Your broker buys a stock for you, but as
he has to pay for it in full, it is customary for him to take it to his
bank and borrow money on it. A bank usually lends about 80% of the
market value, but if some other broker wants to borrow this stock, he
will lend the full value of it. If that particular stock is very scarce
and hard to get, the lender of the stock may get the use of the money
without any interest.
Therefore, there is an advantage to the broker in lending stock, and for
that reason it is nearly always possible for a broker to arrange
delivery of stock for you if you wish to sell short. When you instruct
him later on to buy the stock for you, he will do so and deliver it to
the broker from whom he borrowed it, who will return the money he
received for it.
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