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J.J. Butler

To speculate is to theorize about something that is uncertain. We can speculate about anything that is uncertain, but we use the word "speculation" in this book with particular reference to the buying and selling of stocks and bonds for the purpose of making a profit. When people buy stocks and bonds for the income they get from them and the amount of that income is fixed, they are said to invest and not to speculate. In nearly all investments there is also an element of speculation, because the market price of investments is subject to change.

There has been so much publicity given to bucket shops, nearly everybody is familiar with the term. A broker runs a bucket shop when he sells stock to his clients on margin and either never buys the stock for their accounts, or else sells it immediately after buying it. The bucket shop simply gets your money on the supposition that you are more likely to be wrong than to be right. Of course, if you take the bucket shop's advice you surely are likely to be wrong.

There are certain terms used in connection with stock speculation that are very familiar to those who come in contact with stock brokers, and yet are not always familiar to those who do business by mail. Undoubtedly the majority of our readers are familiar with these terms, but we give these definitions for the benefit of the few who are not familiar with them.

It is very important that you choose a good broker. No matter how careful you are, it is possible to make a mistake. However, if you choose a broker who is a member of the New York Stock Exchange, you have eliminated a very large percentage of your chances of getting a wrong broker.

We maintain that there is only one basis upon which successful speculation can be carried on continually; that is, never to buy a security unless it is selling at a price below that which is warranted by assets, earning power, and prospective future earning power.

There are many influences that affect the movements of stock prices, which are referred to in subsequent chapters. All of these should be studied and understood, but they should be used as secondary factors in relation to the value of the stock in which you are trading.

A "put" is a negotiable contract giving the holder the privilege to sell a specified number of shares of a certain stock to the maker at a fixed price, within a specified time. A "call" is the exact reverse. It is a negotiable contract giving the holder the privilege to buy a specified number of shares of a certain stock from the maker at a fixed price, within a specified time. The price fixed in a put or call is set away from the market price a certain number of points, depending upon the stock and the condition of the market.

In deciding what stocks to buy, it is well to consider first the classes of stocks, and then what particular stocks you should buy in the classes you select. We would first of all divide all stocks into two classes, those listed on the New York Stock Exchange and those not listed on the New York Stock Exchange. As a rule, it is better to buy stocks listed on the New York Stock Exchange, although there are frequent exceptions to this rule.

A "stop-loss" is an order to your broker to sell you out if the market sells down a certain number of points. Many speculators place stop loss orders only two points from the market price. The idea is that when the market starts to go down it is likely to continue going down, and by taking a two-point loss you may save a much greater loss. It also can be applied to a short sale, when you give your broker instructions to buy in the stock for you if it goes up a certain number of points.

A great deal more can be said about stocks you should not buy than about stocks you should buy, because the list is very much larger.

It is said that the desire to speculate is very strong in the American people. That is why our country has made greater progress than any other country in the world, because progress is the result of speculation. We are not referring merely to stock speculations, but to the word in its broadest sense. Every new undertaking is a speculation.

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