It is in the nature of free trade, that whatever mathematical advantage is to be obtained at all is more accessible to the rich speculator than to the poor one. The rich player consequently can make himself the stronger one, and the operator with capital has advantage over the operator without.[38] So far, however, as it is worth while to exercise at all the natural skill in Stock Exchange speculation, which one individual may possess beyond another, there can be no doubt that a less rich, but very skilful operator, would very materially, if not quite, in the long run, restore the balance of advantages which was against him at the start. As the haphazard speculator always must enter the lists at a disadvantage or on unequal terms, it follows that the exercise of any amount of skill will only bring him somewhat nearer to, or at best slightly beyond, holding his own; and in that he would fail in the long run. If he lay down all the machinery necessary to success in ordinary business, he virtually passes the limit which defines pure speculation by reducing the risks to such a minimum that they are no more than the percentage which is an inevitable element in all mercantile transactions.

That it is absolutely necessary that a speculator should possess capital may be illustrated from several points of view, and although we may become, perhaps, tedious by repetition, as in Chapter III., for instance, when speaking of the temperament of a speculator, the time spent in double reflections by the uninitiated may prevent shipwreck, at least in the first stages. A man who is going to operate on a large scale will be equally dishonest if he have not a large capital, as a small speculator who has no more than his £300 a year out of which to save up if he loses more than he can pay. It seems hardly necessary to state that a speculator who operates in the Stock markets and loses without having anything of his own wherewith to pay, inflicts just the same loss upon the broker who does the business for him, as he would upon a butcher of whom he purchased a leg of mutton, consumed it, and then declared he had no money. It is really, however, necessary to make this statement, clear as is the truth of it, because speculators, as a rule, do not realize the liability in the same way. There are differences in degrees of tangibility in these matters, no doubt, and hence the morally injurious effects of speculation and all kinds of gambling. A leg of mutton is a solid substance, and the fact of consuming it not only impresses the circumstance upon the mind, but upon the body too, in the shape of the recollection that the body benefited by the food. By the aid of the remembrance of the benefits that grow out of the consumption of the leg of mutton, the liability to pay for it becomes realizeable in a high degree, and no man allows himself to dream of escaping from it. It is not so in the same degree with a liability incurred by “time bargain” speculation, because what represents exactly the same tangible substance, was never fully, or even partially, realized as such.

All large speculators are well known. If they try to operate through other persons in order to deceive, the truth leaks out some time or other. Large orders are very difficult of execution, unless the broker is either of very good standing himself, or hints at the source from which he receives his instructions. Unless, therefore, it can be shown that the real operator has a very broad pecuniary back, an attempt to buy or sell large amounts of stock through brokers is difficult. It is sometimes necessary to have capital to throw away in feints, before the speculator commences his operations, just as a general may find it expedient to throw away a quantity of ammunition, and even the lives of some of his soldiers, to draw off attention from the real attack. A speculator who contracts to bring out a new loan, unless the security he has to offer is of the highest class, runs considerable risk of losing his money, as he has, as a rule, to pay something down to the borrower as a guarantee of good faith, and to allow him also to taste the ready cash, as some immediate consideration for entering upon business, which, if successful, is of all business the most remunerative. This kind of speculation belongs to la haute finance.

A supply of ready money is essential to the speculator in all markets, and it is marvelous that there can be so many persons who have to grope their way by the aid of bitter experience through the thick darkness of their ignorance to such a shining light of truth as this. And the full realization of this truth is, in most cases, only obtained at an expense which renders it impossible to repeat the experiment.

After a severe commercial collapse, like that of 1866 for instance, all securities are low in price, holders of them have been compelled to realize through the debacle which has for the time destroyed credit, turned profits into losses, and frightened everybody into hoarding the precious metals. When things are beginning to mend, and a resurrection of industries takes place, the tide of the national profits begins to turn, and, rippling back into innumerable channels where securities of all sorts have laid high and dry and neglected, again floats them into notice. Just as when there is no use for the plough the oxen are idle, so when the great industries of a nation are stagnant, floating capital lies idle, and is cheap. In such times the speculator of good judgment, with ten or twenty thousand pounds can make money without much risk if he is satisfied to watch the general recovery of prices up to a certain level, and then realize. We will suppose money at 3 per cent., and the best English railway stocks some thirty per cent. below the value they will reach when the country is in the full tide of prosperity. He selects one hundred thousand pounds worth of the leading stocks, yielding at the price at which he purchased them, 6 per cent. At different banks where he keeps accounts for the purpose, he pawns the stock, and gets loans within 10 per cent. of the market value, which amount to eighty thousand pounds. The ten thousand pounds he has himself, which enables him to take the stock off the market. In this way he is virtually the possessor for the time of this amount of stock, and he profits by the rise in value at the rate of one thousand pounds for every one per cent. Apart from this advantage he benefits to the extent of the difference between the yield on the money value of the stocks, and the interest with which the bankers debit him on the eighty thousand pounds; and so long as circumstances are favourable and the value of money does not rise and remain above the rate which the stocks yield, he enjoys an income from that source with a fair prospect in a year or so of doubling his ten thousand pounds.

Very large amounts of money are known to have been made in 1870, 1871, and 1872, in English railway, and also in various other stocks, in this way in the London market, when money was poured in from France and the Continent generally on the outbreak of the Franco-German war. Bankers, moreover, were aware that the large amounts placed with them for safe keeping might be called for at any time, and sound Stock Exchange securities, upon which loans could be made from fortnight to fortnight, were very much in favour. In consequence of such operations as that referred to, prices were found upon several occasions to be very much inflated, resulting in some mischief and not a few failures.

In speculation of this nature, there is a time to begin and a time to leave off. When stocks have attained a reasonably high level of value as a result of the recovery of a country’s industry, the chances for the speculator to profit by a continuous rise are of course gone, and he seeks in other directions to turn his capital to account; but the example we have given illustrates perhaps the most legitimate of all forms of speculation in Stocks, provided always the operator knows his business, and allows a sufficient margin for contingencies.

The marked difference between Stock Exchange business and other kinds is, that it is the custom to pay cash for all bargains when the settlement takes place. Special delays may be agreed to between persons who know each other well, but it is quite the exception, and certainly should remain so, for credit is already quite sufficiently extended throughout all branches of trade and commercial affairs. The one thing that keeps a tight rein on Stock Exchange operators is the test of their position which lies in fortnightly cash settlements.[39] The very nature of the business affords such facilities for incurring very large liabilities by extensive operations in various securities, that if settlements by bill accommodation were permitted, extending over two or three months as in trade, hopeless confusion would soon be the result, apart from the temptation which an insolvent broker or jobber would lie under further to involve himself so long as he could get the credit. The remarkably few failures that take place among stock-jobbers and brokers, when it is considered how much risk they run, and to what a limited extent they can make themselves aware, in time to avoid complications, of their clients’ actual means, reflects much credit upon them as a class. At the same time it must be admitted that the custom of frequent cash settlements, by testing the actual position of all concerned, is the best possible safe-guard against operators getting out of their depth; and although business generally would be very seriously curtailed if the custom prevailed in all branches of commerce when distance did not make it impossible, there can be no doubt that a vast deal of mischief and dishonesty would be nipped in the bud.