The Bear.
A bear is a speculator who hopes to gain by the reverse operation. He sells for the settlement, hoping to buy back at a cheaper price, and gain by the difference.
Contango.
Contango[11] means continuation charge; for instance: if a bull operator has £2,000 Brighton railway stock open for the account, of which there are two in a month, one in the middle and one at the end, and the settlement which is to take place, say in the middle of the month, is approaching without the price having advanced as much as he supposed it would at the time when he bought, he wishes to carry over or keep the stock open for another fortnight. For this accommodation he must pay the jobber in the House of whom the stock has been bought, a certain rate per cent. to allow the speculator to continue a bull of the stock, instead of paying the money and taking it off the market. The contango rates depend upon different circumstances. Sometimes, instead of having to pay any contango, a bull will get something paid to him. If the stock is very scarce, and the jobber finds it difficult to deliver to purchasers, he will be glad to carry over a bull account for nothing, and may be he will pay a consideration to postpone delivery for a fortnight.[12] On the other hand, if the stock is very plentiful when the settling day arrives, if the sellers have been numerous, and the deliveries are large, the jobber will prefer delivering the stock to the bull speculator to continuing it to the next account, because he wants money to pay those who have sent their stock to market. Under these circumstances the contango rate may be ¼ per cent. on the money price of £20,000 nominal stock for the fortnight, or it may reach a much higher figure, even exceeding one per cent. for the fortnight, but such a rate is seldom charged.
The contango rates depend very much upon the state of the money market, and hence the fluctuation in the price of public securities in sympathy with the rise and fall in the value of money.
It has become more of a custom with bankers to lend money to the Stock Exchange than was the case formerly; one reason being that, through the more enlightened management of the Bank of England of late years, the changes in the rate of discount are made more in obedience to the varying condition of the money market as a whole, as reflected in the Bank return, than was the case in former years, when the directors would come down to the City some Thursday afternoon to put up their terms when there was very little available money left upon which to obtain the increased charge. In other words, the value of money changes more frequently than it used to, and bankers, desiring to act at all times in view of contingencies, find it very convenient to lend their surplus balances for a fortnight upon easily convertible securities with a good margin. Moreover the risks attending bills of exchange are avoided. The contango rates at the settlement may rise suddenly through unexpected demands upon bankers arising out of a bullion drain, and a fall in the foreign exchanges, which compels them to refuse to continue their loans upon stock. Such stock must then be turned out upon the market, and, if there happen simultaneously to be more deliveries than there is stock taken off the market, the contango rates will rule high.
It may be here observed that the contango charge is an item in the cost of speculation which the haphazard operator seldom takes into account at all; yet, if speculation be engaged in upon a large scale, the item of contango charges may become a formidable one, and, when added to the commission charged by the broker, takes so much out of the possible advance in price which may take place in the period of, say, two accounts, or the space of one month, that it requires no great experience to show that the game is not worth the candle, taking one operation with another.
Take a case in point:—A speculator buys £5,000 Turkish 5% ’65 stock at £50, for which he engages to pay £2,500 on the settling day, which is the last of the three account days. He pays ⅛ commission to the broker, or £6 5s. When the settlement arrives, we will suppose he has been very lucky, and has got a rise of ½ per cent. in the price, which is a good advance for a class of stock which investors do not like, but nevertheless is speculated in a good deal. How does the account to be rendered to him stand, with 6 per cent. contango for carrying over the transaction?
| Dr. | |||
|---|---|---|---|
| £ | s. | d. | |
| 5000 Turks. 5% at 50 | 2500 | 0 | 0 |
| Commission ⅛% | 6 | 5 | 0 |
| Balance | 18 | 15 | 0 |
| 2,525 | 0 | 0 | |
| Cr. | |||
| £ | s. | d. | |
| 5000 Turks. 5% at 50½ | 2525 | 0 | 0 |
| 2,525 | 0 | 0 | |
The operation so far is successful, and the speculator, taking courage from his success, awaits a further advance. He is not disappointed, we will suppose, and the stock continues to rise, to give him the favourable start which is so frequently the cause of his future troubles and losses. During the next account the stock gains a further ¼ per cent., and he credits himself mentally with an additional £12 10s. Here is a gain of £37 10s. minus the selling commission, which is generally charged when the stock is not bought and sold in the same account, and also minus the contango. This second commission, which is usually charged when a speculative account is kept open for a month, is frequently left out of the calculation by novices. Supposing, then, towards the close of the second account, there occurs a relapse of ⅝ per cent., making the price really ⅜ lower, which is a very reasonable hypothesis, as stocks do not always move in one direction,—how does the account to be rendered at the next settlement stand? We have—