The members of the Stock Exchange are of two descriptions, jobbers and brokers. The jobber[9] deals in stocks and shares, either as a buyer or seller, at the market prices. The broker deals with the jobber, and is paid a commission by his principal for transacting the business between the two.

A bull is a speculator who buys for the settlement[10] with a view of selling at some future date at a higher price, and gaining by the difference.

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[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 ? 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?

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 ? per cent., making the price really ? 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—

It becomes apparent, in examining this account, the extreme danger the speculator was in just at the period immediately preceding the relapse, and forcibly demonstrates the importance of acting upon the soundest of maxims in “time bargain” operations, which is, never to refuse a profit. We have been supposing the speculator to have been “running the stock,” as the saying is, for nearly a month, during which period it had been advancing in price. At the same time he had been incurring expense to have the chance of making a profit by such advance. After carrying over the transaction, he had incurred the certain loss in any case of the two commissions and the contango charge, which make together the sum of £18 14s. 6d. It seems almost incredible that, under such circumstances, he should still hold on when he could close with a profit of £18 15s.; instead of which he closes with a loss of £12 9s. 6d., after having commenced to operate with just as reasonable a prospect of a fall of ½ per cent., and another on the top of it of ¼. On the other hand, everything went as well as can ever be expected on a series of operations, and yet he finishes with a loss. The charges, to begin with, kill the profit, to say nothing of the “turns” of the dealers, and the risks of the fluctuations in price.

Backwardation[13] is the term for the charge paid by the speculator for the fall. The word itself implies that the charge is for holding back a transaction, as directly opposed to that for which a contango is paid. The one is to carry forward, and the other to carry backward. A speculator who sells for the fall, and thereby makes himself a bear, must pay something if he wishes to keep the transaction open; just as the bull must, unless exceptional circumstances are influencing the market. When the settlement arrives, a bear must either deliver what he has sold, or pay the backwardation demanded for postponing delivery; which, in other words, is the price paid for obtaining the stock elsewhere. If the supply of stock should chance to be large, he will find it very easy to continue his bear account, because the stock he has sold is not wanted. Under such circumstances, the position of the bear speculator comes to be the exact antithesis of that in which the bull finds himself at the settlement when the stock he has bought is scarce. In both cases the charges recede until either the transactions are carried over “even,”[14] that is to say, for nothing, or it may be the speculator receives a consideration. As in all other markets, it is a question of paying or receiving, and the one or the other depends upon the relation which the demand bears to the supply. As we shall have occasion farther on to speak more minutely upon bear speculations, we shall not pursue the subject at any length here; suffice it to say that the public, as speculators, do not understand selling for the fall. It goes against the grain. Speculating at all is associated, in the minds of nearly all people, with fine sunshiny weather, and a settled state of the political atmospheres of one’s own and neighbouring states. The time to speculate for the fall is when growling despatches are being exchanged between nations whose prosperity has reached a zenith where nothing more is to be had, except by quarreling; when the exchanges are adversing, and there is a drain of gold setting in and the biting winds and sleet of chill October fill everybody with pessimist views; when the reports of shipwrecks and hurricanes at sea fill the minds of Oriental merchants with alarm for the safety of their galleons, and there is an uneasy general impression creeping over the public mind that it is perhaps prudent, under the circumstances, to hold less in securities, and to have a larger balance at the bank. Yet, when the very air seems to whisper coming difficulties and disturbances, and the time is ripe for speculating for the fall, such is the weakness of the human character that the opportunity presented is seldom discerned until the return of sunshine, and the blowing over of the storm has shown the inutility of being wise after the event.

Speculation by “options” is of all methods of speculating the most prudent, as it is the most sensible, for all parties concerned. It resembles in some degree the lottery-ticket mode of gambling. The indefinite mischief that is caused by speculation which allows the operator to incur unlimited risk on credit is prevented by the system of options, inasmuch as a fixed payment must be made by the speculator at the time the option account is opened. There are three kinds of options. First, is the “put and call,”[15] which means to take or to deliver stock at a fixed price at a future date, for which a certain sum is paid on the day the bargain is entered into.

The second is the “put,” which means the option of delivering a specified amount of stock at a fixed date, the price and the day of delivery being agreed upon at the time the money is paid.

The third description of option is the “call,” which means an operation exactly the opposite of the “put.” It is the option of claiming a specified amount of stock at a future fixed date, such date, together with the price, to be agreed upon at the time the option money is paid. The sum of money that is paid for options fluctuates in sympathy with the changes in the value of public securities, and also depends upon the amount of business doing. An option may be done from day to day, or from account to account. The option money is paid by the principal to the broker at the time the transaction is effected. When the option expires, the person who has paid the money declares whether he buys, sells, or does nothing.[16]

Years of experience of this mode of speculating have only shown, as with other kinds of speculation, that the option money once paid is hardly ever recovered. We have taken the trouble to inquire of those who have been for as many as thirty years in the markets, and such is their experience.[17]

The Stock Exchange settling days are in the middle and at the end of each month. Each fortnightly settlement occupies three days; the first is the carrying over or contango day, the second is the name or ticket-day, and the third is the day for paying the differences, or the amount of money for stock or shares to be taken off the market. The settlement in Consols is monthly, and near the commencement. The extent of the business transacted in the Stock markets has been very accurately measured since the establishment of the Clearing House. All transactions being settled by cheques, the increase in the Clearing House totals on a Stock Exchange settling day correctly indicates the amount of money which has passed between buyers and sellers.[18]

Speculation inside the Stock Exchange by members of the House does not present many features which entitle it to comment apart from the speculation as it is practised by the public outside. It is natural to suppose that members of the Stock Exchange are better able to operate in stocks and shares, with a view to profit by speculation than the public who, as a rule, are ignorant of the art they endeavour to practise until all they have left is some bitter experience. Those whose daily business it is to be in the Stock markets must of course know that the outside public are always dropping their money, and in this respect the conviction comes nearer home to them that the play is not worth the candle. There are speculators who are members of the Stock Exchange, but we believe it is but a very small minority that troubles itself with speculation as the principal means by which the profits are made. As a rule, it may be laid down that a dealer who goes out of his market to speculate is just as likely to lose his money as an outside haphazard speculator. Each stock, and each description of shares, has its history, and is influenced more or less by special causes, as well as by general causes. Each stock, therefore, requires to be constantly watched, after it has been studied, and its peculiar characteristics well ascertained. When it is said that these stocks and shares are numbered not by tens, or by hundreds, but by thousands, it is easy to understand that no one man can master the special knowledge concerning each, which however every jobber who understands his business should do, within the limit of those in which he usually deals. Consequently, a jobber devotes himself to a few descriptions which circumstances or inclination may cause him to select. He confines himself to a particular market, where he is to be found; and if he speculates now and then, apart from the necessities of his business, and to satisfy a desire for a little excitement, or because some special view of the course of events encourages him to try his luck, it is, as a rule, in the stocks in which he is accustomed to deal.

It may be of interest to some persons to contrast the terms used in England with those employed by stock-brokers and jobbers across the Atlantic, and we append those in use on the New York Stock Exchange, with explanations. The inventive resource which is so characteristic of the American, crops up in the terms used in their Stock markets, as in the case of the “put and call” option with us, which the Yankee cannot be satisfied with, but must invent the vulgar synonym of “straddles,” which is certainly expressive of the pair of operations in one. The mania for getting rich by making short cuts and royal roads engenders apparently an impatience of terms which contain a single syllable or letter that is unnecessary, however hallowed by time, and hence, “put and call” is superseded by “straddles.” [19] The “put” is a contract by which, during a fixed time, usually thirty days, a seller for a consideration agrees to take from a buyer of a “put” a stock at a given price, generally several per cent below the market value.

The “call” is an operation of a directly opposite nature, being a contract by which for a consideration a seller of a “call” undertakes to deliver to a buyer a certain stock at a given price, generally several per cent. above the market value.

To “put up a margin” signifies to deposit with your brokers a sum of money, as a rule 10 per cent. of the par value of a stock, as security against failure to meet losses.

To buy “long” is the equivalent of our term “bull.”

To sell “short” is the equivalent of our term “bear.”

To “corner” a stock is to purchase all that can be obtained and make it very scarce, and also more than can be obtained, in order to run the price up, and “roast,” as the saying is in the London market, the speculative sellers; but the “cornering,” as we understand the meaning of the word, would seem to apply more to the speculative sellers who are “roasted” than to the stock which may be selected for the operation.

“Clique,” “pool,” or “ring” are less expressive, and in consequence of other associations, are less happy terms than our equivalent syndicate, which in English financial circles can be mistaken for nothing else than a combination of speculative capitalists which is formed either to divide a loan amongst them and unload their portions upon the public as opportunities may occur, or to “wash” a stock up and down, getting what they can out of the unwary public during the operation. Gold “rings” on the other side of the Atlantic, and foreign loan syndicates on this, must by this time almost have had their day. Each new era of prosperity requires and generally witnesses a new set of ingenious devices to throw dust in the eyes of investors, while the new race of Autolycuses are going through all the old tricks.

In London, settlements take place twice a month, but in Broad Street sales are made for either cash or “regular.” In the first case purchases have to be settled the same day before 2.15 P.M., and in the second on the following day. Time contracts correspond to our time bargains, and have about the same conditions attaching to them, with the exception that the rate of interest charged, answering to our contango, is generally 6 per cent., unless otherwise stipulated, and is not influenced by a varying standard such as our Bank rate.

The word “shrinkage” for depreciation is a neat term with which the small catalogue may be euphoniously terminated.