SEW RITY EXCHANGES *0»
prices is temporary or permanent, the effects are the ^ame. A decline
in credit standing, due to low security prices, will also have an adverse
effect upon any other plan for raising new capital. Again, however, this
effect of marketability should not be taken too seriously. It is likely
that the credit standing of all corporations suffers more or less in periods
of depression when all security prices are low, whether their stocks are listed
or not.
Margin Trading.—Margin trading depends for its justification upon its
similarity to the universal use of credit transactions throughout our economic
system. In form at least, a purchase of stock on margin is simply a
purchase on installments. If A decides to buy 100 shares of United States
Steel Corp. stock at $50 per share but has only $2,000 in cash, he asks his
broker to arrange to finance the remainder of the purchase price of the stock.
This is a margin purchase. In carrying out the parallel with the purchase
of a home through the use of a mortgage, presumably the purchaser of the
stock would eventually repay the $3,000 which the broker has borrowed
for him and would own the stock outright. It is interesting to note in this
connection that when we talk about the installment purchase of a house
or an automobile we speak of buying on installments. The implication i?1
that the purchaser will eventually own the thing purchased. In talking
about stock margins, on the other hand, we speak about margin "trading,'1
suggesting continued buying and selling rather than eventual ownership.
Actually the margin trader seldom expects ever to own the stock. He
puts up as little margin as he must, hoping for a rise in the price of the stock
so that he can make a higher percentage of profit than if he owned the stock
outright. For example, had he used his $2,000 to buy stock for cash, he
could have purchased 40 shares. If the stock goes up 5 points he would
have a paper profit of $200; whereas if he purchased 100 shares on margin,
he -would have a paper profit of $500, disregarding in each case commissions
and carrying charges. By the same token, a drop of 5 points would produce
a paper loss of $500 on margin trading, in the illustration used, as against
only $200 if the stock was purchased for cash.
The tragedy of margin trading is that so many people who engage in it
know so little about it. More often than not, their greed is the cause of
their downfall. Not content with a reasonable chance at a profit, they try
to spread their margin as thinly as possible. By this means, they over-
trade and are vulnerable to any adverse influence upon stock prices. They
are prone to miss their chances for a reasonable profit, even when it is
presented. They reach for the ultimate increase in the stock price and
overstay their market. If the market goes against them, they hesitate to
limit their losses by a sale below the price at which they purchased the
stock, always hoping for a price recovery that will absorb their loss. For
years, the governors of the New York Stock Exchange have recognized the .