6. Partial payment method.—A variation of the margin system is found in the partial payment method of buying stocks. Legally and technically it is the same, but it varies in certain details. Besides the original margin, which is usually at least $20 a share, the customer agrees to pay about $5 a month until the stock is fully paid for. If the methOd is followed properly, only high grade, non-fluctuating stocks are purchased. As a result this plan is very safe because the large initial payment is added to regularly on the first of each month, thus constantly bulwarking the stock from being wiped out by a decline in the market, By the partial payment method a person with $100 is able to buy five shares of a standard stock and pay for it by saving only $20 a month. He will become the owner of stock costing $100 a share in a year and eight months. The investor can always increase his payments, and if he discontinues them his status does not differ froin that of the regular margin buyer.
In any margin operation the broker invariably re serves the right to call for "additional" at any time, and the customer always has the right to demand delivery of the stock whenever he is prepared to pay for it. In the vast majority of marginal operations customers never see the stock because they never pay for it. Margins, it should be noted, may consist of securities as well as cash. "Paper profits," the flame for an advance in price which has not been cashed in, may also serve as margin.
7. When a broker may close a transaction.—In speculative dealings of the above character, it is always assumed, unless otherwise stipulated, that the broker has a right to close any transaction with his customer at will, provided he gives reasonable notice of the time and place of sale. The procedure is merely to hand the customer the securities dealt in with the re quest that the balance due on the securities be paid. No reason for this action is required.
Whether the amount of time and notice of sale is reasonable or not depends upon the circumstances re lating to each case. Consideration must be given to the location of the parties, physical possibility of the client to meet the demand (he may be out of town and cannot be reached), the condition of the market itself, and the nature of the stock. In some cases the courts have held one hour to be sufficient notice while in others a week was considered a fair time limit.
The fact that a patron has paid down a margin en= titles him to partial ownership of the securities, and so long as the margin is sufficient for the purpose the broker is not allowed to sell them without receiving direct permission from the customer. When a broker wishes to sell out a customer, he does not have to wait until the price falls so low as to make him incur a loss but he may sell out before that point is reached. The reason for this interpretation of the law is that inasmuch as the device of requiring margins was cre ated to protect the broker, no protection is afforded him by forcing him to suspend judgment and action until a loss is incurred.
If a broker decides that a larger margin is neces sary, he must notify his customer in exact terms of the amount required to carry his account still further. Reasonable time must be given to the customer to make good the additional margin. The period varies from one hour to two days. Before the broker ul
timately sells, notice of the time and place of sale must be given to the customer, provided the security is held as pledge. When this is found to be impossible, after making every effort to find his customer, a broker is then free from the obligation actually to serve notice concerning the time of sale and also from the obliga tion to give the customer reasonable time within which to advance the sum requested as additional margin.
Very often brokers who conduct extensive transac tions with the public print at the foot of their notices of purchases and sales the following sentences or others to a similar effect: It is agreed between broker and customer that (1) all transactions are subject to the rules and customs of the . . . exchange and its clearing house ; (2) all securities from time to time carried on the customer's account may be loaned by the broker or may be pledged by him either sepa rately or together with other securities, either for the sum due thereon, or for a greater sum, all without further notice to the customer and (3) in all marginal business the broker may close transactions by the sale or purchase of securities at his discretion when the margin is near exhaustion, with out further notice to the customer.
The safest way for a broker to carry on transactions with a customer is to secure in writing from his cus tomer, every time business dealings are carried on with him, the permission to use the securities he buys, whenever an exigency arises, to best protect the for mer's interest.
The whole question of margins is succinctly de scribed in a legal decision, that of Markham vs. Jaurdon (41 N. Y. 235) : The customer employs the broker . . . to buy certain stocks for his account, and to pay for them, and to hold them subject to his order as to the time of sale. The cus tomer advances 10 per cent of their market value and agrees to keep good such proportionate advance according to the fluctuations of the market. . . . The broker undertakes and agrees (1) at once to buy for the customer the stocks indi cated; (2) to advance all the money required for the pur pose, beyond the 10 per cent advanced by the customer ; (3) to carry or hold such stocks for the benefit of the customer so long as the margin of 10 per cent is kept good or until notice is given by either party that the transaction must be closed. An appreciation in the value of the stocks is the gain of the customer and not of the broker. (4) At all times to have in his name or under his control, ready for de livery, the shares purchased or an equal amount of other shares of the same stock. (5) To deliver such shares to the customer when required by him upon the receipt of the ad vances and commissions accruing to the broker ; or (6) to sell such shares upon the order of the customer, upon pay ment of the like sums to him, and account to the customer for the proceeds of such sale. Under this contract the cus tomer undertakes (1) to pay a margin of 10 per cent on the current market value of the shares, (2) to keep good such margin according to the fluctuations of the market and (3) to take the shares so purchased on his order whenever re quired by the broker, and to pay the difference between the percentage advanced by him and the amount paid therefor by the broker.