gets the stock from Broker D. The stock thus obtained is delivered to C, who thereupon returns the money which he has had as security and $9,500 of the amount goes to D, leaving $500, less expenses, as the profit of X on the transaction.

While X is waiting to see what the market is going to do C has the use of A's $10,000, and under ordinary conditions, pays interest on this money. This interest is called the loaning rate on stocks and is usually a little below the current rate for loans on collateral.

The lower these rates are, compared with the rate for money, the more demand there is to borrow that particular stock, and the loaning rate is the point to be watched by those who may be short, to see whether the short interest is large or small.

In case the demand to borrow a certain stock is very large, the loaning rate will be quoted flat, which means in the case cited that C would get the use of A's $10,000 without paying any interest. If the demand for the stock should be still greater, A might have not only to give C the $10,000 without interest, but pay C a small premium in addition. When the loaning rate of a stock is quoted at 1-32 it means that C gets his $10,000 from A, without interest, and in addition a premium of $3.12 a day for each 100 shares, which has to be paid by X, who must also pay all dividends that may be declared on the stock.

In ordinary lines of business, selling short with the idea of borrowing for delivery would be impossible. In the stock market it is impracticable to sell distributed bonds or investment stocks short because such securities are held

by investors, and are not carried in quantity by brokers, hence, could not be readily borrowed. But, in active stocks, there is no difficulty whatever in borrowing.

The reason is this: Every broker who carries many stocks employs a great deal more money than he possesses. In theory, a broker carrying for a customer 100 shares of Union Pacific at par would make up the money for the purchase by using $1,000 belonging to the customer, $1,000 of the money of the brokerage firm, and then borrow $8,000 from a bank on the security of the 100 shares of stock purchased.

An active broker, consequently, is always a large borrower of money, and when he borrows from a bank he is expected to put up 20 per cent. margin on his loan. But if he can lend stocks he gets the full value of the stock and does not have to put up any of his own money or of his customer's money. Hence, every broker is willing to lend stocks, particularly when the demand for stock is sufficient to make the rate of interest lower than the market rate, as the broker in this case makes a profit by charging his customer who is long 5 or 6 per cent. interest, while he perhaps secures his money without any cost through lending the stock flat.

This, from the standpoint of the short seller, is what makes his operation practically safe. Ordinarily, it is just as easy to borrow active stocks as it is to borrow money, and squeezes of shorts through inability to borrow are little if any more frequent than squeezes of "longs" through the difficulty of brokers in borrowing money.

Squeezes of shorts sometimes develop themselves and

are sometimes manipulated. When friends of a property see a large short interest they sometimes try to persuade holders of the stock to agree not to lend it for a day or two and thus scare shorts to cover by difficulty in borrowing. If this undertaking is successful brokers are notified to return borrowed stock, and when they try to borrow elsewhere they find little offering. The loaning rate possibly runs up to 14 per cent. a day, or perhaps higher.

Shorts are alarmed and cover, advancing the price of the stock and enabling holders to sell at a profit. Such a squeeze usually lasts only two or three days, as by that time the advanced price leads those who have the stock to either sell it or lend it, and the price then usually goes lower than before. Sometimes there is a short interest so large and so persistent as to keep a stock lending at a premium for some time. This is usually almost certain evidence of decline, but the expenses of premiums and the necessity of paying dividends sometimes eat up the profits so that but little remains even after considerable fall in price. Mr. Gould is said to have once remained short of New York Central over four years, and to have had a large profit as between his buying and his selling price, but to have had the greater part of it eaten up in dividends.

In picking out a stock to sell short, the first consideration ought to be that the price is above value, and that future value appears to be shrinking. It should be an active stock and, if possible, a stock of large capital. It should be an old stock by preference, which means having wide distribution instead of concentrated ownership. By

preference it should be a high priced stock with a reasonable probability that dividends will be reduced or passed.

Such a stock should be sold on advances and bought in on moderate declines, say 4 or 5 points, as long as the market seems to be reasonably steady. But, if the market becomes distinctly weak, only part of the short stock should be bought in with the hope that some short interest may be established at a price so high as to be out of reach of temporary swings. The best profits in the stock market are made by people who get long or short at extremes and stay for months or years before they take their profit.

CHAPTER XVI.

* SPECULATION FOR THE DECLINE.

The question is frequently asked whether in taking a bearish view of the general market it is expected that all stocks will go down together or that some will fall and others not.

The answer to this question takes two forms-the first is the speculative movement; the second the effect of values. When the market goes down, especially if the decline is violent or continued, all stocks fall; not perhaps equally, but enough to be regarded as participating fully in a general decline. Indeed, it often happens that a stock of admitted large value will fall more in a panic than a stock of little value.

The reason is that when people have been carrying various stocks, some good and some bad, and a time comes when they are obliged to suddenly furnish additional margin or reduce their commitments, they try to sell the stocks for which they think the market will be best, namely, their best stocks. But the very merit of such stocks prevents the existence of a short interest, hence when considerable amounts are offered in a panic there is no demand for covering purposes, and, in fact, no demand except from investors who may not know of the decline or who may not have money for investment at that particular moment. Consequently the good stock drops until it

*Dow's Theory.