Evening star. [volume] (Washington, D.C.) 1854-1972, 1929-11-20
MARGIN PURCHASES
OF STOCKS DEFINED
Puts and Calls, Spreads and
StraddIeS and Short Sell
ing Explained.
BY JOHN F. SINCLAIR.
;ial Dispatch to The Star.

NEW YORK, november ZU.-tPleaSe
explain what is meant by buying stocks
-, on margin and make it simple enough
so that even I can understand" asks
California reader.
I have received recently a number OF
similar letters from various parts of the
country and take this opportunity to
reply to all of them
- Let us suppose that Mr.. Brown has
= $4,000 that he wants to put in the stock
market. He has two choices: % To
: put it away, or, CD to buy more than
$4,000 worth and borrow the difference.
: He decides on plan No. 2.
The New York banks have announced
that they will loSn up to rs per cent CT
the present prices of good stocks. Mr..
Brown, on this basis, is able to buy
four times as much stock as he could
by buying outright. So he puts in his
% own $4,000 and borrowS from the bank
the reSt--$l5,0 900. The banker takes
Mr.. Browns note for $4,000 and puts
1.-The $4,000 of stock back of the note as
) collateral.
Say the stock goes down in value so
that the total instead of being worth
$4,000 falls to $4,000.
The banker Immediately calls for
more collateral. But suppose Mr.
Brown has no more cash or collateral
! to give. Then the banker sells him out
and Mr.. Brown loses his $4,000. If the
banker is not quick enough and realizes
! only $4,000 for the collateral instead of
$15,000 the amount borrowed, then he,
the banker, is faced with loss, too.
That is margin operation.
Now let us take the same case and
have Mr.. Brown do business with his
stock broker
The broker loans Mr.. Brown the
$4,000 needed to complete the $4,000
stock purchase, but does not take Mr..
Browns note. He merely keeps the
stock with authority from Mr.. Brown
to sell it whenever in the judgment of
the broker the margin is impaired.
The wise broker never lets the stock
sink to the absolute margin. He usually
, demands more collateral or cash before
1t quite reaches that zero point, namely.
$4,000 and if he fails to get more, he
sells out the account.
Now where does the broker get the
money: In two ways (1) he can take
the $4,000 worth Of stock to his bank
and borrow $4,000 on it in the same
way that Mr.. Brown could with a
banker! or (2) the broker can take it
to the loaning post in the stock ex-
change. loan the stock and receive
check for the entire $4,000.
Where does the broker make his
profit? In the first instance, cited
above, he makes the commission on the
shares of stock sold. This varies with
the price of the stock, but one can
figure it about $40 per 100 shares. In
the second place-and this is a little
more delicate-the broker often makes
a profit on the difference IN the rate
of interest which he charges the Gus
toner and the rate at which he borrows
from his bank.
In the second instance, the broker
borrows all he loaned so that he has
no cash involved in the transaction.
But he has just as much profit in trans
action No. 2 as in No. /.
Follow that just little further and
here we find the place where the short
sales" take place. The broker mas
the entire amount. Every short sale"
requires that the broker borrow the
stock from somebody, agreeing to pay
back to the borrower on demand. In
bull market. it is more difficult to
short SELF with safety than in bear
market. "Short selling though Is
never safe.
"Puts and calls; spreads and strad-
dles-pleaSe tell us something about
these" a Connecticut student asks.
These terms are not so well known
In the United States but they are very
well known in England and have been
in use in Europe for almost 200 years
by bankers, brokers and traders in gen.
;eral.
Russell Sage was the first American
stock operator who first introduced them
into the United States. They are really
stock options and are primarily insur-
ance on stock market operations.
A call is a negotiable contract en-
fitting the holder to "call or purchase"
a specified number of shares of stock
at a fixed price within a time limit,
usually 80 days. A put is directly OPP
posite to a call, giving the holder the
privilege to put or sell" the stock
specified in the same way.
A spread is a double option-a COM
bination of both put and call. A
straddle consists of a spread written at
the market.
Here's the way call reads:
November TO- 1929.
For value received, the bearer may
call on me on one days notice, except
the last day, when notice is not required.
100 shares of the common stock OF the
United States Steel Corporation, at
one hundred sixty-siX and one-half
dollars per share, any time in thirty
day from date. All dividends for which
transfer books close during said time,
go with the stock.
Expires December 20, 1929, PAS pm.
And this is the way put reads:
November 20, 1929.
For value received, the bearer may
deliver me on one days notice, except
last day, when notice is not required.
one hundred shares of the common
stock of the United States Steel
Corporation. at one hundred Sixty-six
and one-half dollars per share, any
time in thirty days from date. All
dividends for which transfer books close
during said time, go with the stock.
Expires December 20, 1929, 2:45 pm.
"When legitimately employed, puts
( calls. spreads and straddles are very
/. valuable. The insurance feature of
!. stock options-protection-is at the
! base of such operations" says A. Bridg-
|, ems, a New York specialist in this field
I Trading in these unusual forms of
4 stock options is rapidly growing into
Il large business in the United States. To-
/. day a large number of shrewd profess
4 SIGNALS use the option method in the
VI stock market.
Secretary Melons announcement that
II he will ask Congress for an additional
Il Sl75000, 900, making the total $423,-
+ 900 900, for the construction of public
/. buildings over 10-year period brings
Y to the public attention Immediately the
4 far-reaching identification plans Of the
II City of Washington.
u About $l5,000000 will be expended
F. each year in identifying the Capital
+ and in its building program, and about
I, SIS, 900, 900 in Government construction
4 expenditures outside the Capital.
4 The Government business is increas-
I, ing yearly. The amount it is spending
!, in rentals in different parts of the
b country to house its various activities
;e ,,ar,, n7hic vNrouroS1, &c Y,7oraIu