MARGINS 1. Two classes of security buyers.—Very little of the complicated machinery of Wall Street which is so difficult for the layman to understand, would exist at all if every patron of the Stock Exchange paid for se curities entirely with his own money. The numer ous technical terms which puzzle the uninitiated arise largely from the fact that the outsider, as well as the "insider," has fallen into the habit of both buying and selling securities with the use of borrowed money, and that a huge machine must be created and kept running to provide the means.
It is usual and in some ways convenient to divide buyers of stocks into two groups. To the first group belong those who pay outright in cash or its equivalent the total amount involved in the purchase of the securi ties, just as a man who buys a $20 suit of clothes hands to the salesman a twenty-dollar bill or a few days later sends him a check. In the second group are found those persons, by far the more numerous, who buy se curities largely on borrowed money. They furnish a part only of the means necessary to buy the stock and rely on the broker to secure the balance. In common parlance the customer trades on a "margin." Ex pressed in another way the broker "carries" the cus tomer for all except a small part of the cost.
It is assumed in both cases that the broker actually buys these securities, paying for them in full with his own resources, or with money which he has borrowed, usually from a bank. Such is the general practice. Now it may be said that a person who pays for stock in full is a conservative investor and that the person who buys on a margin is a speculator. As a general ization this is well enough, for even a moment's reflec tion will show the novice that an outright purchase is safer and more conservative than the other. But it must not be supposed that there is any hard and fast line between margin dealing and outright purchase.
It is easy enough to draw a line between the man who regularly "trades" on a 10 per cent margin at a broker's office, and the outright investor who never borrows a cent. But there are innumerable grada
tions between these two transactions. There is the man well known to his broker who desires to buy a stock today but who has not sufficient means to pay for it, altho tomorrow he will have a note of many thousands of dollars coming due and he will then com plete the purchase. A man of large wealth, also well known to his broker may wish to buy a stock at once, but may not have even a check book with him. An other man buys on a margin and the next day decides to complete the purchase in full. Again, the man who buys, for example, 100 shares of stock on a 10 per cent margin, and after a few days instructs his broker, as he has a perfect right to do, to reduce the account to 10 shares, in which case he is no longer a margin trader at all but the outright owner of 10 shares, pro vided of course, there has been no decline in price and he has paid all the expenses.
Then again there is the customer who buys 100 shares of stock at $100 a share on—say a 50 point mar gin—and the stock goes to a share after his pur chase has been made. As all the profits of a transac tion go to the customer, it is apparent that he is no longer a margin trader, but the outright owner of 100 shares. And finally, there is the man who buys out right and the next month goes to his bank and borrows 80 per cent of the value of the stock. He is no longer an outright owner but a margin operator. These illustrations show the danger of generalization about margin trading and indicate also the dangers attend ant upon the passage of any legislation on the subject. A law might be passed forbidding margins of less than 20 per cent, but in an active market a man might have a 25 per cent margin one moment and regard himself as both within the law and safe. The next moment his margin might be 19 per cent and he would be a crim inal even before he could write out a check. In other words it is dangerous to legislate or generalize on the question of how much credit a broker may extend to a customer.