Successful Stock Speculation Part 1

Successful Stock Speculation.

by John James Butler.

_PART ONE_

INTRODUCTORY CHAPTERS

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 is very important that you understand how to provide for safety in your speculating.

It is a well known fact that there are tremendous losses in stock speculation, but we claim that almost all of these losses would be avoided if all speculators were guided by the principles expounded in this book.

"What" and "When" are two very important words in stock speculation, and we cannot urge upon you too strongly to study carefully Chapters V. to IX.

Chapters X. to XV. tell you much about the influences that affect the prices of stocks, a knowledge of which should also be a guide to you in making your selections.

Perhaps the most important chapter in the entire book is XXV., on Market Information. A careful reading of this chapter should convince you that much of the prevailing information about the stock market is misleading.

That fact alone accounts for many of the losses in stock speculation.

It has been our aim to state all facts briefly. The entire book is not long, and it will not require much of your time to read it through carefully. We are sure you will get many ideas from it that will help you.

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 market price of investments is subject to change. "Investment" also conveys the idea of holding for some time whatever you have purchased, while speculation conveys the idea of selling for a quick profit rather than holding for income.

To the minds of most people, the word "speculation" conveys the thought of risk, and many people think it means great risk. The dictionary gives for one of the meanings of speculation, "a risky investment for large profit," but speculation need not necessarily be risky at all. The author of this book once used the expression, "stock speculating with safety," and he was severely criticized by a certain financial magazine.

Evidently the editor of that magazine thought that "speculating" and "safety" were contradictory terms, but the expression is perfectly correct. Stock speculating with safety is possible.

Of course, we all know that the word "safety" is seldom used in an absolute sense. We frequently read such expressions as: "The elevators in modern office buildings are run with safety." "It is possible to cross the ocean with safety." "You can travel from New York to San Francisco in a railroad train with safety." And yet accidents do occur and people do lose their lives in elevators, steamships, and railroad trains. Because serious accidents are comparatively rare, we use the word "safety."

In like manner it is possible to purchase stocks sometimes when it is almost certain that the purchaser will make a profit, and that is "stock speculating with safety." When Liberty Bonds were selling in the 80's, many people bought them for speculation. They were not taking any risk, except the slight risk that the market price might go still lower before it would go higher, and that did not involve any risk for those who knew they could hold them. The fact that the market prices of Liberty Bonds would advance was based upon an economic law that never fails. That law is that when interest rates go up, the market prices of bonds go down, and when interest rates go down, the market prices of bonds go up. When Liberty Bonds were selling in the 80's, interest rates were so very high, it was certain that they would come down. That the market prices of Liberty Bonds would go up was also certain, but n.o.body could tell how much they would go up in a given time. It was that element of uncertainty that made them speculative, and not that there was any doubt about the fact that the market prices of them would go up. Buying Liberty Bonds at that time was speculating with safety. If you read this book with understanding, you will know much about speculating with safety.

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 trade one stock for another and later was used to refer to a person who sold one stock and bought another. He was a trader; but the person who buys stocks for a profit and sells them and takes his profit when he gets an opportunity, may not be a trader in the strict sense of the word.

However, for convenience, we use the word "trader" in this book to refer to any one who buys or sells stocks.

Speculator: This word refers to a person who buys stocks for profit, with the expectation of selling at a higher price, without reference to the earnings of the stock. He may sell first, with the expectation of buying at a lower price, as explained in Chapter XVII. on "Short Selling." In many cases where we use the word "trader," it would be more correct to use the word "speculator."

Investor: An investor differs from a speculator in the fact that he buys stocks or bonds with the expectation of holding them for some time for the income to be derived from them, without reference to their speculative possibilities. We believe that investors always should give some consideration to the speculative possibilities of their purchases.

It frequently is possible to get speculative profits without increase of risk or loss of income.

Bull: One who believes that the market price of stocks will advance is called a bull. Of course, it is possible to be a bull in one stock and a bear in another. The word is used very frequently with reference to the market, a bull market meaning a rising market.

Bear: The opposite of a bull is a bear. It refers to a person who believes that the market value of stocks will decline, and a bear market is a declining market.

Lambs: "Lambs" refers to that part of the public that knows so little about stock speculating that they lose all their money sooner or later.

The bulls and bears get them going and coming. If the lambs would read this book carefully, they would discover reasons why they lose their money.

Long and Short: Those who +own+ stocks are said to be long, and those who +owe+ stocks are said to be short. Short selling is explained in Chapter XVII.

Odd Lot: Stocks on exchanges are sold in certain lots. On the New York Stock Exchange, 100 shares is a lot; and on the Consolidated Stock Exchange, 10 shares is a lot. Less than these amounts is an odd lot.

When you sell an odd lot you usually get 1/8 less than the market price; and when you buy an odd lot, you usually pay 1/8 more than the market price; that is, 1/8 of a dollar on each share where prices are quoted in dollars.

Point: It is a common expression to say that a stock went up or down a point, which means a dollar in a stock that is quoted in dollars, but a cent in a stock that is quoted in cents, as many of the stocks are on the New York Curb. In cotton quotations, a point is 1/100 part of a cent. For instance, if cotton is quoted at 18.12, it means 18 cents and 12/100 of a cent per pound, and if it went up 30 points the quotation would be 18.42.

Reaction: Every person who has traded in listed stocks probably is familiar with this word. It means to act in an opposite direction, but it is used especially to refer to a decline in the price of a stock that has been going up.

Rally: "Rally" is the opposite of the sense in which "reaction" usually is used. When a stock is going down and it turns and goes up, it is called a rally.

Commitment: This term is used referring to a purchase of stock. It is more commonly used by investment bankers when they contract to buy an issue, but the term sometimes is used by traders.

Floating Supply: The stock of a company that is in the hands of that part of the public who is likely to sell, is referred to as floating supply.

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 a.s.sets, 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 the stock in which you are trading.