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Chapter 7: Aspects Of The Trade

You are now versed in the functionality of the stock market and have decided that you are willing to accept the risk factors involved. However, you want to know everything you can about balancing that risk with intelligent investment options. How can you be sure that the risks you take are more likely to be rewarding in the long run than destructive?

Long and Short

One of the most important parts of making money on the stock market is to determine your position. The long position is basically the purchasing position - you are about to take on a long-term commitment for ownership of some stock, security, or other traded commodity. The short position, by contrast, is the selling position - you are shortly going to dispose of the same sort of ownership and any responsibility toward it.

The best time to take up the long position is when stock prices are low. This will get you into the market at a reasonable price and increase your chances for profitability as new offerings go up in price and older investment options recover or rebound. In fact, as others take the long position and purchase at the same time you do, this will actually drive the value of securities up through the standard rule of supply and demand, causing the beginning of what could be a bull market.

You may equate this with the end of the month at a car dealership. The prices tend to drop on any cars left on the lot for sale, and the dealer is more often willing to bargain because he or she wants less inventory on the lot. Likewise, when stock prices are low, some will panic and dump all of their holdings at these low prices, thinking that their shares will never recover the value. This can only be of assistance to you.

When prices are high, it is likely time to turn around and sell your shares to bring in a profit, not losing anything on unrealized gain (profit that cannot be counted in liquid assets or cash because it is still invested in a volatile stock option). You should never sell for a price that is below your cost, as this brings negative equity and loss of funds. You should always sell for the greatest amount of profit that you feel is safe.

In other words, if you buy a security at fifteen dollars per share, and it quickly rises to twenty-five dollars per share, you may very well feel that it could hit thirty dollars per share within a week. However, you must determine if you are willing to risk losing your already secured earnings often dollars per share to wait that long, should the price actually fall, so you may decide to sell at the current high price.

Market-Makers And Selling Short

What if the stock values are up incredibly high, but you did not get in on that particular commodity and own no shares? Your first step should be to visit a market-maker or to make a deal with a broker for a short sell. A market-maker is literally a stockbroker who purchases keeps a certain amount of shares of several securities or stocks on hand, which are purchased during a time when the market rates are low.

The firm will then turn around and sell those shares to an individual at that low price, regardless of the market rate, in effect making its own market (thus the name). The individual who purchases from the firm can immediately sell the commodities on the open market at market rate (which is higher), making an incredible amount of profit in a short period of time.

A short sell is another option for a quick profit. In this scenario, you will borrow a particular number of shares from a stockbroker to sell when the market value is high. Your job is to then wait for the stock price to go down, purchase the same quantity of stock, and return the holdings to the broker, keeping the profit from the sale, minus the broker fees.

The way that a car dealer works with trade-ins is very similar. They will purchase the car from you at a very low price, then turn around and sell it on the lot for a high profit margin.

One of the most positive aspects of a short sell is that you never actually take possession of the stock, meaning that you are never in a position to lose money. Because you have sold shares for a high price, you have already profited, and in the worst-case scenario, the particular stocks will not drop in price. Rather than return the stocks to the broker from whom they were borrowed, you can simply pay back the amount for which they were originally purchased, along with the premium.

How can you be sure that you will not overshoot the best price options or miss a good rate because you are unavailable to place a buy order or sell order with your broker? Is there a way to set limits on your trades? Next, we will discuss ways to protect your investments and limit your risk factors.

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When a stamp collector is charged with being extravagant, with spending money lavishly and foolishly on a mere hobby, he may very justifiably reply that even his most extravagant spendings may be regarded as an investment.

The ordinary investor in, say, industrial securities is fairly content if he can, with a little risk, secure a steady six or seven per cent. If he launches out into more speculative shares, yielding higher rates of interest, he must be content to face a much greater risk of the capital invested. Now, the severest test of an investment is the yield of interest over a series of years covering periods of depression as well as periods of prosperity. The stamp collector who has used ordinary discretion in his purchases may confidently submit his investment to this test.

Some years ago, when I was writing in defense of stamp collecting as an investment, 1 received a very indignant letter from a collector who had made a large collection, complaining that he had then recently endeavored to sell, but could get only a very small percentage of his outlay back, and that the very firms from whom he had bought most of his stamps scouted the idea of paying him anything like what they had cost him. He therefore ridiculed the idea that stamp collecting could be regarded as a safe investment, as in his case it had been a delusion and a snare. He was quite right, and it is still possible to make big collections—of, say, five thousand, ten thousand, and even larger—of stamps that are never likely to appreciate, and it is possible to buy those stamps at such a price that any attempt to realize even a small percentage of the original outlay must result in a woeful eye-opener.

Let me explain. In the stamp business, as in all other branches of commerce, there are wholesale and retail dealers. The wholesaler buys by the thousand stamps that are printed by the million. I refer, of course, to used stamps. In some cases the price paid per thousand is only a few pence for large quantities that run into millions. The wholesaler sells to the retail dealer at a small advance per thousand. Those stamps the ordinary dealer makes up into packets at a further profit, but still at a comparatively low price. Good copies he picks out for sale in sets and separately. Those have to be catalogued. Therefore, the catalogue price of common stamps bought and sold by the million eventually comes before the general collector at “one penny each,” and the man who makes a collection of common stamps of the “one penny each” class can scarcely be expected to realize a fortune out of his stamp collecting. When he offers his gatherings of years to the self-same dealer, and asks, say, only the half of what he paid, he is astounded when the dealer has the audacity to tell him frankly, “I can buy most of those stamps at a few shillings per thousand, and you want an average of a halfpenny each for them!” “But,” retorts the collector, “I paid you one penny each for them years ago, and now you won’t give me half that amount. A pretty thing investing money in stamps!” The reply of the dealer will be, “My dear fellow, you have put your money into the wrong stamps. I bought, and can still buy, those stamps wholesale at a few shillings per thousand, some of them at a few pence per thousand; but I have to pay clerks for handling them and sorting them out, other assistants for cataloguing them, and the printers for printing the catalogue, so that in the end I cannot afford to sell them separately for less than about one penny each, but if you want a few thousand of any value I can sell them to you at a price enormously below what you ask for your collection.” The collector’s eyes are opened.

It is impossible to get away from the necessity of regarding stamps as an investment. Even the schoolboy cannot afford to put his shilling into stamps unless he can be fairly assured that he may get his money back at critical periods, which will crop up even in school life. Indeed, it may be said that there are few, if any, stamp collectors nowadays who do not put more money into stamps than they could afford to do if there were not some element of investment in view. In some instances large fortunes are actually invested in stamps, and I was only recently told of a collector who had taken his money out of a very profitable business and put it into stamps, and had netted very much larger profits than he ever realized in his regular business. But to do that sort of thing requires a profound knowledge of stamps and a ready command of a very large banking account.

Generally speaking, the best countries from an investment point of view are British Colonials, especially those of the small colonies that have small populations, and therefore very small printings of stamps. Obviously, countries that put stamps into circulation by the million can never be a very good investment, so far as their common values are concerned. Those who buy with a keen eye on the investment purpose, always buy unused copies of uncommon values. Unused are not likely to depreciate, and they may appreciate.