J.J. Butler

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.

Stocks should be bought when they are cheap. By being cheap, we mean that the market price is much less than the intrinsic value. In Chapters X. to XV. we talk about influences that affect the price movements of stocks. By studying these carefully you should be able to decide when stocks generally are cheap. Of course, not all stocks are cheap at the same time, but the majority of listed stocks do go up and down at the same time, as a rule.

There are two kinds of stock traders. One kind nearly always makes a profit, and the other wins sometimes and loses other times, but eventually loses all if he does not change his methods. The first kind buys stocks on liberal margin or outright and is not worried when the market goes against him, because he has good reasons for believing that prices eventually will go up. If he does have to take a loss occasionally, it is likely to be small compared with his profits.

There are times when stocks should not be bought, and that is when nearly all stocks have advanced beyond their real values. It is doubtful if there ever is a time when all stocks have advanced beyond their real values, but when the great majority of stocks have so advanced, there is likely to be a general decline in all stock prices. The stocks that are not selling too high will decline some in sympathy with the others. Therefore, there are times when we advise our clients not to buy any stocks.

What are the possibilities of profit in stock speculation? That question is frequently asked but it is difficult to answer. James R. Keene is quoted as having said: "Many men come to Wall Street to get rich; they always go broke. Others come to Wall Street to operate intelligently for fair returns; they usually get rich."

While it is true that nearly all stock traders who try to make unusually large profits in a very short time in stock trading lose, yet unusual profits can be made if you exercise good judgment and have patience.

You should sell stocks when the market price is too high. That is a general rule, but it is necessary for you to study all the influences affecting stock prices to be able to decide more accurately when you should sell your stocks. We give you, in future chapters, much more information on judging the markets.

Where do you get your market information? Perhaps most people get it from the daily papers. When you look over the financial news of one of the leading metropolitan papers and see how much there is of it, you can get some idea of the enormous volume of work necessary to get this matter ready for the press in a few hours. There is no time to confirm reports. It is necessary that many of the articles be written from pure imagination, based on rumors.