Manufacturers frequently sell goods that are not yet made, to be delivered at some future time. Selling stocks short is a similar transaction, except that in a majority of cases delivery of the stock must be made immediately.

However, your broker can attend to that by borrowing the stock. As explained in the preceding chapter, when the market is active most of the trading is done on margin. Your broker buys a stock for you, but as he has to pay for it in full, it is customary for him to take it to his bank and borrow money on it. A bank usually lends about 80% of the market value, but if some other broker wants to borrow this stock, he will lend the full value of it. If that particular stock is very scarce and hard to get, the lender of the stock may get the use of the money without any interest.

Therefore, there is an advantage to the broker in lending stock, and for that reason it is nearly always possible for a broker to arrange delivery of stock for you if you wish to sell short. When you instruct him later on to buy the stock for you, he will do so and deliver it to the broker from whom he borrowed it, who will return the money he received for it.

When you sell stock short and the price goes up, you will have to pay a higher price for it. Therefore, to protect himself against the possibility of losing, your broker demands a payment from you just the same as you pay margin when you buy stock.

Short selling is something that we do not recommend very much to our clients. We think it is not advisable to do any short selling as long as there are good opportunities to make money by buying; but when all bargains disappear, as they do sometimes, you must either sell short or else keep out of the market entirely. At such times, there may be many opportunities to make money by short selling, and we do not consider that there is any reason why our clients should not take advantage of them.

Of course, great care must be exercised in selling stocks short. You might sell a stock short because you know the market price is 100% greater than its real value, but it is possible for manipulators to force it up a great deal higher; and if you are not able to put up sufficient money with your broker to protect him, he will buy at a high price and you will lose the money you have put up with him. In some instances, stocks are cornered and the short interests are forced to buy the stocks at prices that represent enormous losses.

It is a common thing to read about the short interests in certain stocks. All stocks that are sold short must be bought sooner or later, and when that buying takes place, it may affect the market very much. Therefore, if it is known that there is a big short interest in a certain stock, we should expect the stock to sell at a higher price; but sometimes the short interests break the market and force the price down, especially when general conditions are in their favor.

CHAPTER XVIII.
BUCKET SHOPS

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. Bucket shops get their clients into the very speculative stocks, where there is likely to be a great deal of fluctuation in the price of the stocks, which gives them frequent opportunities to sell out their clients.

When the market is going down or when there are many movements up and down in the price of stocks, the bucket shops make money rapidly, but occasionally there is a long period when the market is working against the bucket shops, and unless they have a great deal of money they must fail.

In August, 1921, Stock Exchange stocks started to go up. The upward movement was very slow but it was continual. Up to the time of this writing, there has not been a three-point reaction, except in a few stocks, in all of that time. Without a fluctuating market, the bucket shop has no chance to clean out its customers. As a consequence, the bucket shops began to fail in the early part of 1922, and up to the present writing (April, 1922) there have been more than fifty of these failures. However, it is not likely that all the bucket shops will be put out of business. The more successful ones are likely to "weather the storm."

Many laws have been enacted against bucket shops, and we believe some way will be found to get rid of them at some future time; but we do not expect that to happen soon, and we warn our readers not to get into their hands, because if they do not get your money away from you one way they are likely to get it some other way. The man who runs a bucket shop usually has no conscience, and it certainly is an unfortunate thing for anyone to get mixed up with such a man.

CHAPTER XIX.
CHOOSING A BROKER

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.

Occasionally a member of the Stock Exchange fails and once in a while one is suspended for running a bucket shop or being connected with one, but these instances are very rare compared with the number of brokers who get into trouble who are not members of the New York Stock Exchange. The rules and regulations of the Stock Exchange protect you to a great extent.

When you buy stock on margin, you leave your money in the hands of a broker, and you should know that he is responsible. No matter who your broker is, you should get a report on him. If you are a subscriber to Bradstreet's or Dun's Agencies, get a report from them. If you are not a subscriber to any mercantile agency, you perhaps have a friend who can get a report for you, or your bank may get one for you. Banks make a practice of getting reports of this kind for their clients. When asked to do so, we send our clients the names of brokers who are members of the New York Stock Exchange, but we prefer not to recommend any broker. Of course, we cannot guarantee that a broker is all right. We simply use our best judgment, but, as we said before, you eliminate a large percentage of your chances of going wrong when you trade with a broker who is a member of the New York Stock Exchange.