If I had only held fast and sat through the decline I would have been all right." Delusions again. There were many others who bought and sold under the same conditions. The decline would have been continued until all or most of the stock in question had been liquidated. The purchases of the margin speculators caused the manipulated decline. Their forced liquidation was necessary before the rise could be resumed. His sale of the stock induced the rally, or was at least a prerequisite. His purchase at the "top" helped check the rise and furnished fuel for a decline profitable to the manipulators. And yet in his own reasoning he has not considered himself as a factor contributing to the decline and aiding the subsequent recovery. In other words his judgment is wholly at fault; his conclusions were in error when the commitment was made and again following its consummation. He deceives himself so cleverly that the sophism of the manipulator is hardly necessary to add attractiveness and fascination to the struggle for money.

To stand in the office of a commission firm all day and hear the market opinions expressed and the reasons for making commitments is to understand why so much money is lost. The man who "guesses," who has a "fancy for a particular stock," "who wishes to make a bit," who has "a tip," is in the majority. He has the speculative fever, and having contracted the disease he has not the time nor the mood to adopt the reasoning dictated by ordinary common

sense.

"Buy," says a customer to his broker, "100 shares of Metropolitan at 150."

The stock is bought at a cash cost of $15,000. The customer's equity in the stock is $1,000. The stock is capable of wide fluctuations.

"What did you buy it on?" the customer is asked.

"My friend Smith told me that it is going up." "Who is Smith ?"

"Oh, a neighbor of mine. He heard it was a good thing from Jones, whose cousin is a director in the company."

Would this man, who is a type, have invested $15,000 (equity $1,000) in his own business (mercantile) without a most careful investigation of conditions, and consequences, profits and losses, present and prospective? Would Smith and Jones influence him in such a transaction? Certainly not. And yet thousands of stock market ventures are made annually without any more justification.

Therefore if about to speculate in stocks, it behooves you to ask yourself if you possess the temperament and accurate and swift reasoning powers necessary to cope with the ablest money getters in the world. If you do, you will find that hardly a day passes that Wall Street does not present great opportunities for your skill in money making.

CHAPTER XXIX.

AN INTERESTING INQUIRY.

A correspondent asks for an explanation in detail of the meaning of "a large short interest," "a squeeze of shorts," "loaning rates for stocks," etc.

This inquiry implies some lack of comprehension of the principles involved in short selling, and as it comes from a banker, it is possible that others may be interested in a statement of how it is practicable to operate for a fall. The present form of operating for a fall is a modern device. It was preceded by a system of "buyers and sellers options" by means of which a buyer or seller acquired a right to deal at specified prices at dates more or less distant from the date of the contract. This, however, was a rather awkward method of trading and has ceased to exist in this market, except when it is unusually difficult to borrow stock.

In operating for a rise, only two parties are necessary for the contract. One buys and one sells. Delivery of the stock is made by the seller to the buyer; payment is received and the transaction is closed.

An operation for a fall, as carried on in the New York Stock Exchange, require three parties for its completion. Let us suppose that People's Gas is selling at par. A, although not the owner of any People's Gas, believes that

the price will go lower. He, accordingly, offers a hundred shares of the stock at par. B accepts this offer and acquires the stock. A thereupon goes to C, who owns People's Gas, and borrows 100 shares, which A then delivers to B. B pays A $10,000, the price of 100 shares, and the transaction, as far as A and B are concerned, is at an end. But A, in order to obtain the use of the stock owned by C, has to deliver to C $10,000 as security for the return of the borrowed stock. Time elapses when it may be supposed that People's Gas has fallen to 95. A then buys of D 100 shares at 95, and, receiving the stock from D, returns it to C, the previous lender, and receives back from C the $10,000 deposited as security for the loan of the stock. A has, therefore, made $500 as the result of the operation for a fall begun with B.

A number of questions may be anticipated. Can A with certainty borrow stock from C? If C has the stock, and some one always has it, he is willing to lend it because there is little risk in so doing and because C gets the use of A's money, deposited as security, at lower rates of interest than C would have to pay for the use of the same amount of money if borrowed from a bank. Furthermore, if C borrowed $10,000 from his bank, he would be obliged to give as collateral securities valued at perhaps $12,000, whereas by loaning his stock to A he, in effect, procures a loan of $10,000 from A by the use of only $10,000 collateral.

The practice of borrowing and lending stocks is so universal that it is as much a part of the business to borrow stocks as it is to borrow money at the banks. The customer

of an office has no trouble or difficulty on this account. He merely gives the order to sell, margins his account, and the broker arranges the terms of borrowing with his fellow brokers.

If there is a general impression that a stock is going to fall many people may sell it short at the same time. In this case, the borrowing demand may exceed the current supply. When this occurs the loaning rates fall. That is to say, A gives C the $10,000 as before described; but, on account of the demand for the stock, C does not pay as much interest. Assuming the money rate to be 4 per cent., the rate on borrowed stock under normal conditions might be 32 per cent., but if the demand to borrow were quite large, the lender of the stock would have to pay only 2 per cent. or even less for the money received as security.

If the demand to borrow were still greater, the stock would loan at what is called "flat," which means that no interest would be paid on the money deposited; or, with a still greater demand, A would be compelled not only to give C the use of the $10,000 without interest, but would have to give C an arbitrary sum, called premium, in addition for the use of the borrowed stock. Premiums range all the way from 1-256 up to 1 per cent. or more a day-the latter, of course, only in very extraordinary cases. A premium of 1-16 of 1 per cent. per day is as high as premiums often go even in a bear market. This means that A not only gives his money without interest, but pays C $6.25 per day for the use of 100 shares of stock. This premium is, of course, charged by the broker to the customer who is short of the stock.

Generally speaking, it is cheaper to operate on the short