Everybody's Guide to Money Matters / With a description of the various investments chiefly dealt in on the stock exchange, and the mode of dealing therein

by of Exeter F.S.A. William Cotton

CHAPTER VIII. THE STOCK EXCHANGE.

THE Stock Exchange is a market for the sale and purchase of all kinds of securities. The buildings, wherein business is transacted, occupy a triangular plot of ground near the Bank of England, and comprise the Hall where the various markets are held, and other rooms and offices for the use of the numerous officials. There are 2,500 members, and the management is vested in a Committee selected from their number. Admission to membership is open to any person not engaged in another business, and who is properly proposed and seconded; but very strict regulations and guarantees are enforced before entry, so as to exclude any one whose circumstances and character will not bear the strictest investigation. The hours of busi- ness are eleven to four o'clock on all days except Saturday, when they are until two o'clock. The members of the house are divided into Jobbers and Brokers, the former being dealers in stocks and shares. It is contrary to practice for brokers to deal with brokers, and all trans- actions are between brokers and jobbers.

What are known as "markets" are groups of jobbers distributed about the house, each group having its own particular dealings, one in Government Stocks, another in English rail- ways, a third in Foreign securities, and so on. A broker having received an order from a customer to sell £1,000 Great Eastern Railway Stock, would go to the English railway group and inquire of a jobber the price or quotation for Great Easterns, without disclosing whether he wants to buy or to sell. The jobber replies, "115 1/4 to 115 1/2"; whereupon the broker says, "I sell at 115 1/4," when the bargain is completed, without any memorandum or written contract, the verbal communication being alone in use, and the jobber is bound by it. It will be observed that the lower price, 115 1/4, is accepted by the broker on behalf of his customer, as a sale is always effected at the lowest quotation, and a purchase at the highest. Another broker pre- sently goes to the jobber and asks the same question receiving the same reply, 115 1/4 to 115 1/2 the broker says, "I buy of you at 115 1/2," being the highest quotation. The difference of 5s. between the sale and the purchase is the Job- ber's profit. The broker charges his customer his own commission or brokerage on the trans- action, which ranges from 2s. 6d. per cent. on the Government and Colonial Stocks up to 10s. per cent. on railway stocks. This is the elementary stage of the business of the Stock Exchange, but the variety of the securities dealt in, under constantly changing circumstances, the number of transactions, and the amount of money changing hands, involve intricate accounts and arrangements, which need not be particularised here. Accounts are settled fort- nightly, the precise dates being fixed some time before by the Committee of the house.

Many speculators, however, especially those who have bought stocks and shares with the expectation that they will speedily rise in price, do not find it convenient to pay the purchase- money on the appointed settling day; so pay- ment may, by arrangement, be carried over to the next settling day. For the accommodation a certain charge, which is called "contango," is made, the amount varying with the value of money and the quality of the stock. "Back- wardation," on the other hand, is a commission paid in order to postpone the delivery of stocks or shares which a speculator contracts to sell, but which he never possessed. He is a specu- lator for the fall, hoping by the delay to be able to purchase the same stocks and shares at a less price than he bargained to sell them for, and so make a profit out of the transaction. Specu- lations for a rise are known on the Stock Exchange as "Bulls," and their object is by every manner of means to get the prices of the stocks they are dealing in pushed up as much as possible. Speculators for a fall are called "Bears," and they are equally anxious to send prices down. So sensitive is the stock market that prices are easily affected; the rumoured prospect of an important dividend from a rail- way company will at once probably influence the price of its shares, whilst a report of a disastrous accident will have the contrary effect. A "boom" in the money market is a cheerful desire on the part of the speculative public to be purchasers at advancing prices, and this betokens good business for the brokers and jobbers. A "boom" in any particular stock is a buoyancy in prices, caused by some favourable rumour, whether founded or unfounded, more often the latter, and set agoing in the interest of persons who desire to get rid of surplus stock. A "boom" in railway shares is often brought about by increased traffic receipts; a "boom" in mining shares is caused by one or two com- panies having produced more gold this month than last; and a "boom" in foreign stocks is due to the settlement of some political or other difficulty, &c., &c. A "slump" is just the reverse, being an unaccountable depression which sometimes fastens upon the specula- tive world, and betrays distrust in everything. Unless this feeling is checked in time it degenerates into "panic," when prices fall to a ruinously low figure.

Each fortnightly settlement includes three days — the first being continuation or "con tango" day, when all transactions of a specula- tive description are arranged to be carried over to the next settlement day. The second is the ticket day, when the names of purchasers and sellers are handed over. The third is pay-day when all amounts or balances due for stocks bought or sold are paid or received. The great bulk of business being purely speculative, the first day is the busiest; after noon on that day all new transactions entered into are for settle- ment at the next account day, unless otherwise specially arranged.

Any sums of money may be invested in, or any particular amount of stock purchased of, the Government Funds, through a broker or banker, and there is practically no limit to the quantity that may be held. In the books of the Bank of England an account is opened, and the name, address, and description of the investor care- fully registered. A memorandum is given of the transaction, but it is of value only as such, not being in the nature of a certificate or receipt, and it is not required to be given up or produced in the event of a sale or transfer of the stock or any portion of it. Accounts may be opened in one, two, three, or four names, but not more, and four different accounts may be open at the same time in the same name or names, but they must be distinguished as accounts A, B, C, and D.

In order to sell stock the holder may attend at the Bank of England himself accompanied by his broker, and then and there have the transfer made and the money paid. But this would be unusual and held to imply mistrust, without perhaps occasion for it. The safest plan is for the holder to instruct his bankers to carry out the transaction, and give them a Power of Attorney to enable them to do so. A special form of power is provided by the Bank of Eng- land, the cost of which is 11s. 6d. The Inscribed or Registered Stocks of most of the Colonial Governments are dealt with in the same way, as well as Indian stocks and the stocks of many of our larger towns. The account of an investor may be added to or diminished at any time with- out difficulty or delay.

The stocks and shares of railway and other companies may be purchased through a broker or banker, and the holder passes them over to a buyer by a formal deed of transfer. The purchaser's name, address, and description are carefully registered in the books of the company, and he has then accepted all the responsibilities that may attach to the shares. For instance, the shares he has bought may be only partly paid up. The shares in railway companies are usually paid up in full, but it may so happen in an issue of new shares that they are paid up by periodical instalments; in which case what has already been paid is known as "scrip," and retains that name until developed into fully-paid shares. A company formed of £20 shares may have called up only £5 on each, and with no intention of demanding more, yet the holder is liable for £15 on every share he holds, and before he invests his money he should be careful to ascertain the full extent of his liability. Some little time after the transfer of the stock or shares has been completed, a certificate will be issued by the company, giving full particulars of the holding, and this certificate must be care- fully preserved, as it will be required to be given up before all or any portion of the property can be sold. The Colonial, foreign, and other bonds payable to the bearer, which have been pre- viously described, are purchasable through a broker or banker, and handed over without any transfer or other formality. Bonds of this description should be left in the safe custody of a banker, who would cut off and collect the interest coupons attached, as they became due.

As an example of the hazard incurred by keeping securities of this kind in one's own house, the writer remembers a case where a gentleman was examining in a room of his house, by the light of a candle, some bonds which he afterwards locked up in an iron safe. It was dark outside and the blind was drawn up, so that any one from the garden could see all that was going on in the room. Next morning the empty safe was found in the grounds and the contents had been carried off. All the par- ticulars of the bonds were at once telegraphed to the Stock Exchange, the London banks, and the Police authorities. Some months afterwards the bonds turned up in the hands of a banker in London, who had received them from an agent abroad. An action was brought by the original owner for their recovery, but it was of no avail, as the securities had come into the hands of the banker in the course of regular business, and so the loser could get no redress and, moreover, had to pay a large amount in costs.

The broker, who is a member of the Stock Exchange, from the precautions taken on his admission, should be a responsible person, whom it would be safe to entrust with any business which might be put into his hands. His deal- ings, however, are chiefly on behalf of the bankers and outside brokers, acting for them- selves and the public. There are numerous outside brokers (that is, brokers who are not members of the Stock Exchange) in London and all over the country. In every profession there are some doubtful members, and stock- broking has its fair share, but with ordinary vigilance on the part of their customers, well- established brokers will carry out their com- missions faithfully and reasonably. As to the advice, however, a broker may have to offer in the way of investments, it must be remembered that he is no more than mortal, and would at times be prone to submit such securities as he him- self, on behalf of a client, would most desire to dispose of. In this way, too, the country broker is liable to be pressed by his London agent to get rid of particular stocks or shares which hang heavy on hand. However, bearing this well in mind, an investor may gain much useful infor- mation from his broker, although for sound advice his banker is to be preferred.

Members of the Stock Exchange are not allowed to advertise themselves or their firms, but most of the daily newspapers in London have an agent in the house, either a jobber or broker, who furnishes to his principal for publi- cation a daily report of the state of the markets and the current prices of the day, which in that way reach the eye of the public. It may be assumed that in the better class of journals the information thus afforded is perfectly trust- worthy, although some years since one of the leading newspapers was imposed upon by its agent, who took advantage of his position to manipulate certain matters for his own ends. Less scrupulous publications, however, are freely made use of to influence the public, to cry up or prejudice the markets and particular concerns. The provincial broker, as a rule, limits his ad- vertisement to the name and address of his firm, with a quotation of the prices of a few of the stocks mostly dealt in, and monthly, or quar- terly, sends an extended list to his customers. The outside broker who advertises himself freely in the newspapers, as well as by pamphlets and circulars, is to be avoided. He will invite you to participate in his system — always an in- fallible one — of operating. He will suggest "options," "put and call," the "cover" system, and other devices by which the inexperienced may be mystified and beguiled into losing their money. However astute a man may consider himself, experience proves that, with amateurs, this kind of gambling is sure to result in loss.

An ingenious mode of practising on the cre- dulity of the public may be noticed in some financial publications. An editorial notice or subsidised paragraph will be inserted in the paper, extolling the merits and predicting the certain success of some concern which it is desired to bolster up or to foist upon the public. This is done in such a way that the reader is expected to believe that it is the genuine ex- pression of a truthful opinion by the editor, who has obtained his information from unimpeach- able sources. Of course, this peculiar kind of advertisement has to be paid for, but it has its advantages to the advertiser, for it can (for a consideration) be quoted by the country papers as unbiassed news, and attention called to it in a money article or leaderette. The pamphlets issued by the advertising outside broker are sometimes amusingly artless in the endeavour to sell shares and attract custom. On the first page will be found some paragraphs setting forth the merits and prospects of certain named companies, and advising the reader to buy shares in them without a day's delay, as a con- siderable and speedy rise in value is assured. One may be permitted to wonder why the broker and all his friends do not rush in and secure every share that is to be had. At the end of the paper the reason will be discovered; in every one of the concerns referred to shares are offered for sale, which cannot be got rid of in the regular market. It must be inferred that some credulous persons are taken in by this transparent artifice, or it would not be so con- stantly practised. The object of these publica- tions is chiefly to puff up doubtful securities, in the hope that some fatuous speculator may be tempted to buy. It is delightful when two of these gentry fall out and expose each other's knavery. The reader is assured that "Codlin's his friend, not Short"; the latter is denounced as a fraud and retaliates, but no action for libel is brought, because both know that on either side the imputation is justifiable.

It may excite surprise in some who are favoured with circulars and prospectuses which are, through the Post Office, sown broadcast over the whole country, how the name and address of a comparatively obscure individual should be known. Prospectus and circular distributing is a business conducted on a regular system. When it is desired to invite subscrip- tions to float some new company or to bolster up some concern, the share lists of the same sort of companies already in existence are drawn upon for names and addresses; and court directories also furnish a wide field for operations.

At the present time the rage appears to have set in for forming limited liability companies out of private industrial concerns or trading firms. Most of these companies, we are told by an authority, "are brought out under the same auspices" — that is they are started and floated by a skilled personage known as a "promoter." The stereotyped prospectus must now be familiar to most people, and the public respond freely to the invitation to subscribe for shares, without consideration or inquiry. The prospectus is usually replete with statistics, showing the suc- cess which has attended the business whilst in private hands, and the enormous profits made; and one is apt to wonder why they did not keep it to themselves, instead of inviting the public to share in the gains. But there are good com- panies and bad companies, and it is to be feared that the latter largely preponderate. A good company may have a genuine reason for its existence, such as the desire of a last surviving partner to retire from active life, or the growth of the business to such an extent that more capital is required than could be obtained from a private person, or upon some other equally valid ground. A bad company is often the make-shift to save a decaying firm from insol- vency, or to dispose of a business at a price quite out of proportion to its real value. The prospectus affords no opportunity of discrimi- nating what is genuine and likely to succeed from what is false and sure to fail. If, as it has been said, eighty per cent. of companies floated sooner or later go to the wall, then, indeed, inquiry and much circumspection are needed before entering upon a speculation of the kind. It must be said, however, that many companies formed from trading concerns have become well established and profitable, and if permanency could be relied upon, they furnish a field for lucrative investments. Those adventures which are unduly pressed upon the notice of the public should be regarded with suspicion. If a thing is really good in itself, it will not require much persuasion to commend itself; and if bad, no purchased laudation will make it better. A subtle mode of advertising is just now coming into vogue, which, though expensive, will for a time be successful. There need be no reflection on the companies which adopt it, though calcu- lated to beguile the innocent and confiding in- vestor. A leaf or two introduced in some of our illustrated papers, in no wise differing in the printing from the remainder of the publica- tion, and appearing as though it formed part of the regular pabulum offered to the public. This leaf or leaves contain well-executed pic- tures of the works and machinery and other interesting objects connected with the industry of a company to which it is desired to call attention, and a descriptive account is given of its magnitude and success. To the casual reader all this would appear to be a matter of public interest, offered to the public as part of the regular business of the paper, but it is only an ingenious form of advertisement and has to be paid for as such, but that is of no consequence if the effect is produced, of a rise in the price of the shares. There are some companies whose shares are quoted at such enormous premiums, and which pay such high dividends, that the investor is sorely tempted to embark in similar undertakings, apparently, that are brought be- fore the public. But these prosperous concerns are in most cases first taken up by a syndicate — that is, a certain limited number of persons behind the scenes — who finance and float the company, and when success has been attained, the public are granted the privilege of purchas- ing shares — but at such a price as the syndicate choses to put upon them, and, not seldom, that is the highest they ever attain. This is particu- larly the case with mining companies, the successful ones having certainly only benefited the few. This syndicate system has given rise to a bogus imitation, which, however, appears to have met with but limited success. Circulars in lithographed writing, marked "private and con- fidential," and implying a friendly interest in those addressed, are sent to persons whose names are obtained in the manner already indi- cated. An invitation is given them to join a syndicate about to be formed to float a certain company, the profits arising from the operation being certain and enormous. Again, if it be such an excellent and certain venture, why offer a share to an entire stranger? These circulars are very speciously worded, and there is an air of candour about them likely to allure. Anyone foolish enough to subscribe would probably, after an interval, be informed that owing to un- foreseen circumstances the adventure had turned out a failure, and that all the money had gone in expenses. Successful gold mines have yielded large fortunes to their proprietors, but it must be remembered that mines have but a limited existence, and once they are worked out the money invested in them is lost; for when they cease to yield ore there is nothing more to be obtained from them. Promiscuous dealing in mine shares is nothing more or less than gambling, or taking part in a lottery in which the blanks are overwhelming and the prizes next to nothing. If an enterprise has in it any degree of soundness or promise, there are plenty of the knowing ones ready to step in and take all the advantages to be gained; it is the des- perate ventures and unscrupulous swindles that the public are mostly pressed to support — only to lose their money. It is to be hoped that the dupes are at length awake to the pit-falls dug for them by the mining company promoter and speculator, whose seductive paragraphs are everywhere in evidence in the advertising sheets of the day.

A typical example — and not a fictitious one — of hundreds of knavish concerns foisted on the public may be quoted. A certain company, of which no prospectus has been issued, nor of which anything is publicly known, appears in the mining lists. One day, a paragraph in a financial paper reports that the agent for the mines, on the spot, has cabled that the promise of success exceeds all expectations, that samples of ore, yielding three ounces to the ton, have been found, and that the necessary machinery must be sent out at once. This is followed up by an editorial leaderette (of course, paid for), in which the writer expresses surprise that the shares of so promising an enterprise should be at so low a price, and predicting a rapid advance when the work is further developed. These notices effect their purpose to the extent of rais- ing the quotations of the shares a few shillings, but this is not enough for the promoter; a cir- cular is next issued, in the usual way, to the effect that the directors have been fortunate enough to secure additional property near their own, which furnishes wood and water, so essential to the proper development of the mine, and including, moreover, alluvial pits abounding in gold. An elaborate lithographed sketch of the property, with mines at work and a steam-engine, accom- panies the circular, and the whole presents an appearance of real business. The next move is the statutory meeting of the shareholders, which, however, is very sparsely attended, as the vic- tims are chiefly people residing in the country, who do not care to incur the expense of a journey to London. The man who presides at the meet- ing, an outside broker, begins a speech by apologising for the absence of the chairman of the company (of whom the shareholders hear for the first time), and then goes on to describe with tedious detail the technical working of the mine, the stopes and veins, and bunches of gold that there are, and the stamps, machinery, &c., that there are to be. He describes what has been done in the alluvial pits, and the prospect of wealth to be drawn therefrom as beyond the dreams of avarice, and winds up with warm con- gratulation of the proprietors on the valuable property they possess. Whether he has over- done his part or something prejudicial to the company leaks out, the shares which had changed hands at 10s. gradually drop to 5s. Then a circular goes the round in which some member of the ring of knaves invites the public to join a syndicate to buy up five thousand of these shares which he has, through peculiar circum- stances, been able to secure the refusal of at 4s. a share. A special meeting of the shareholders is next called, when it is announced that more capital is required, and that it will be necessary to pay up the one shilling per share which still remains outstanding. A last desperate effort to get rid of the shares at any price is then resorted to before the call of one shilling per share becomes payable, and some thousands are offered at one shilling and sixpence each. After the time has expired for paying the call, a last circular is issued, intimating briefly that the eminent engineer, who has originally given such a glowing account of the mine, now reports that there is no present indication of gold on the property, but that possibly some might be found if they dug deep enough!

The name of the company has disappeared from the mining share list, and it will be heard of no more. It is doubtful if there ever was any property, or engineer, or board of directors, or, in fact, anything more than the outside broker and his confederates.

Of the bona fide speculative undertakings in South Africa and Australia, the exploration and finance companies, or some few of them, have made the largest profits. Their system, broadly speaking, is to acquire certain tracts of land in a gold-bearing district, and then let small portions on lease to different subsidiary companies, which have been floated to develop gold or whatever else these portions may con- tain. The price paid to the parent company is made up of; perhaps, one half in cash and the other in the shares of the new concern. An im- mediate profit accrues from the payment in cash, and there is a wide field for further gains if the operations of the subsidiary companies are suc- cessful. But in this, as in all speculative enter- prises, the prizes have been few and the blanks many.