The Theory of Stock Exchange Speculation. Arthur Crump

The Theory of Stock Exchange Speculation - Arthur Crump


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of options.

      Options, if considered in their proper light, are the most important adjunct to speculation. They will enable the speculator to bridge over many difficulties, and furnish capital to speculators who know how to use them.

      I do not say this simply because I am a broker in options, but because it is my honest conviction that options are cheap at almost any price, when a speculator has occasion to use them. If money is lost by buyers of options, it is because many of them are bought by people who have not sufficient reasons for doing so, and after the option has been bought, the owner does not know what to do with it. I have, for example, known people to be bulls on Lake Shore, and then go and spend money for a put in Western Union. Is it any wonder that men who do business on such principles lose money?

      That many stock brokers object to options is natural. They look out for commissions, and greatly prefer to buy and sell several times a day on stop orders or on margins, even if customers lose money thereby, rather than see them make money two or three times a year, through operations extended over periods of two or three months each.

      I do not mean to say that all stock brokers are of this kind, but if speculators recall their own experience, they will undoubtedly remember how often their broker said to them, “Cut your losses,” if the transaction was against them, while, if the transaction showed a profit, the advice was, “Taking profits will never make any man poorer.” All these things make commissions for the broker, and this is the object of his business.

      Another reason for the unwillingness of some brokerage houses to encourage speculation against options must be found in the fact that a great many of them have not sufficiently large capital to enter upon large transactions without any other margin than the option. Although I acknowledge that it is hardly fair to ask a broker to do an unlimited amount of business based on options alone, the fact, nevertheless, exists that the strongest houses have always been glad to encourage trading against options, and only the more insignificant houses are opposed to it.

      A well planned and matured operation, looking far ahead, backed by ample capital and patience, is the only way to make a fortune at the Stock Exchange, and prudence demands that in case the speculator’s idea should have been wrong, he should have a safe way for a retreat open. Options will fulfill all these demands; and no matter how expensive, if the speculator can afford it, it is the only way of speculating in a safe and reasonable manner.

      There are some people who are under the impression that they know everything already, and have nothing to learn, and such may be amused, but not benefited, by reading this book; others, however, who are inclined to speculate (and there are and always will be many of them) cannot fail to derive great benefit from the perusal of Mr. Crump’s interesting work, and I hope I may put money in some people’s pockets or save others from ruin by sending this book forth among the American people.

      H. W. Rosenbaum.

      New York, Nov., 1886.

      The last chapter in Mr. Crump’s book, entitled “Outside Criticism on the Causes of Disturbance in the Money Market,” has been omitted in this edition, as it relates simply to questions about the policy of the Bank of England in regard to regulating the discount rate, and a controversy and correspondence on this point between Mr. Crump and Mr. Bonamy Price.

      As this whole question is of no practical value or interest to the American reader, I thought it expedient to omit the whole matter.

      H. W. R.

       Table of Contents

      Our object in writing this book is to endeavour to show to persons who may contemplate trying their hand at Stock Exchange speculation, the improbability of their hopes being realized. Much mischief and trouble would be avoided, and a deal of money saved, if, before entering upon such a dangerous career under the most favorable circumstances as that of a speculator, a study were made of the difficulties such an occupation involves, and also of the chances against the operator, considered as one individual versus the Stock markets. It is melancholy to think of the vast sums of money that are invested in the most serious sense of the word, annually by Stock Exchange speculators in the purchase of a sorrowful experience. It seems to be in the nature of things, that numbers of people must come to grief in their early struggles, through an obstinate determination to trust complacently in their own ingenuity, in preference to profiting by the experience of others. A mountain climber who disclaims the aid of a guide, and is subsequently fished out of a crevasse, can expect no other epitaph, even from his friends, than that he has paid the deserved penalty of extreme temerity and folly. There are probably many guides who can ensure a safe passage over most mountain defiles, but he would be a bold man who guaranteed to pilot a young speculator through the Stock markets, and bring him out to a certainty with a profit.

      If a speculator asks the advice of what we will term “an old hand,” and it is in his interests to tell him what he really thinks, he will say: “Leave it alone.”

      Why so many people will never be convinced except by their own personal experience is, that they cannot believe what others say of things that are hidden.

      “Hereof experience hath informed reason, and time hath made those things apparent which were hidden,” says Sir W. Raleigh.

      “But apt the mind or fancy is to rove

      Uncheck’d, and of her roving is no end,

      Till warn’d, or by experience taught, she learns

      That not to know at large of things remote

      From use, obscure and subtle, but to know

      That which before us lies in daily life

      Is the prime of wisdom,”

      says Milton; and

      “But if you’ll prosper, mark what I advise,

      Whom age and long experience render wise,”

      says Pope.

      Stock Exchange speculation is very deceitful to the eye, and also to the ear. In some respects its associations are like those of a morass, under whose smooth and inviting surface are hidden the remains of unwary travellers. Those who are new to the business see only the glittering surface, and hear only of the fortunes made by stock brokers. People seldom tell of their losses.

      Individuals who are tempted, not only by curiosity, but by a love of excitement, and more than all in this case by the love of gain, go into the markets and lose their money, and quit the place with much the same feelings as the man who paid a penny to see a horse with his tail where his head ought to be.

      “If we hope for things of which we have not thoroughly considered the value, our disappointment will be greater than our pleasure in the fruition of them,” wrote Addison.

      The most brilliant good fortune which may result from the operations of a speculator generally fall below his anticipations, when the operations are reduced to figures. It appears that the imagination gets, as it were, diseased by feeding on the contemplation of very rapid gains; and that whatever may be the reality of a hypothetical gain, the mind gets bewildered and fails to estimate as an element of loss, the surrounding husks in which the fruit is enclosed. One forgets that every tangible advantage, in whatever form obtained in this life, has to be got out of a shell. What, then, must be the speculator’s feelings when the balance is on the wrong side of the account?

      It has been suggested that the abolition of “time-bargains” would materially, if not quite, prevent much of the mischief that results from speculation; but it is no more possible entirely to do away with the custom of “time-bargains” than it is to abolish credit in other kinds of business. It may be readily conceded that a very large number of those who are ruined or greatly injured by Stock Exchange speculation, would never operate at all if they were called upon even to make a deposit before the purchase was effected. But when it is considered


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