CHAPTER IX.

WHEN TO SELL STOCKS

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.

Another general rule, is to sell stocks when nearly everybody is buying them. It is a well known fact that the great majority of people buy stocks near the top and sell near the bottom. Naturally when everybody is optimistic, stocks will sell up high, but sooner or later they will come down again, and when everything looks very promising is a good time to sell. It is better to lose a little of the profit that you might have made by holding on longer than not to be on the safe side. The man who tries to sell at the top nearly always loses, because stocks seldom sell as high as it is predicted they will, or, in other words, the prediction of higher prices is advanced more rapidly than the prices.

We remember reading in 1916, when U. S. Steel sold up around $136 a share, a prediction that it was going to sell up to $1000 a share.

Probably many people who read such news items consider them seriously.

Of course, that was a most exaggerated prediction, but during the extreme activity of a bull market, it seems that nearly everybody is talking in exaggerated terms of optimism. That is why most traders seldom ever take their profits in a bull market. They wait until stock prices start to come down, and then they are likely to think there will be rallies, and keep on waiting until they lose all their profits.

On the other hand, some people make the mistake of selling too soon.

Just because your purchase shows a liberal profit is no reason why you should sell. The stock may have been very cheap when you bought it. In 1920, Peoples Gas sold below $30. Those who bought it then were able to double their money by the close of 1921, and many sold out and took their profits. Of course, if they invested the proceeds in other stocks that were just starting upward, they may not have lost anything, but there was no particular reason for selling Peoples Gas at that time. The public utilities generally were coming into their own, and nearly all of them were regarded by economic students as having unusual opportunities for profit.

Then again, it is not always a mistake to sell a stock in order to get funds to put into something else that seems more promising, even though the stock you sell is likely to go much higher.

It is very important that you should try to sell your stocks at the right time. That is the main thing to keep in mind and it is better to sell too soon than too late. Don't be too greedy and hold on for a big profit. Read Chapter XXIV. on the "Possibilities of Profit."

_PART THREE_

INFLUENCES AFFECTING STOCK PRICES

CHAPTER X.

MOVEMENTS IN STOCK PRICES

It is due to the fact that stock prices constantly move up or down that speculation is possible. Sometimes certain stocks remain almost at a standstill for a long period of time, but at least a part of the stocks listed on the Exchanges move either up or down. If one always could tell just what way they were going to move, it would be comparatively easy to make a fortune within a short time.

In the last twenty years, a great deal of time and money has been spent by statistical organizations in checking up statistics for the purpose of ascertaining a definite basis upon which to predict future movements in stock prices. Several of these organizations use very different statistics upon which to base their conclusions, and yet their conclusions are very similar. They have proved beyond any question of doubt that some of these movements are clearly indicated by laws that never fail.

We do not attempt in this book to explain the fundamental statistics upon which the predictions of business cycles are based, but in the next five chapters we explain some of the influences that affect the movements in stock prices. Read these chapters very carefully, for your success in stock speculation will depend very largely upon your correct prediction of these movements.

CHAPTER XI.

MAJOR MOVEMENTS IN PRICES

Stock prices move up and down in cycles. These are the major movements in prices, but there may be many minor movements up and down within the major movements. These stock price movements nearly always precede a change in business conditions; that is, an upward movement in stock prices is an indication that business conditions are going to improve, and a downward movement in stock prices is an indication that business conditions are going to get worse.

At the present writing, we are in a period of improvement. Stock prices began to go up in August, 1921. The upward movement has been slow, but gradual. In a period of seven months, forty representative stocks show an upward movement of about 20 points, although business has not shown much improvement. A steady upward movement in stock prices is a sure sign that business conditions are beginning to improve, even though that improvement is not noticeable.

These major stock movements are not an exact duplicate of any previous ones, and it is impossible to tell how long they will last or just what course they will take. Certain influences could change a period of improvement into a period of prosperity very quickly.

A period of prosperity is noted for high prices, high wages, and increasing production in all lines. Everybody is optimistic. Most people spend their money freely, and that makes times better. As prices go up and business increases, more money is required in business and interest rates go up. As a consequence, when interest rates go up, bond prices go down. During this period, speculative stocks are selling at their highest prices; and under the influence of this movement, many stocks that have no actual value sell up at high prices. Of course, wise speculators sell all their stocks during this period.

Following a period of prosperity comes a period of decline. The first sign of it usually is a severe break in the stock market. At that time general business is running along at top speed and there is no sign of a let-up, but this break in the stock market should be a warning. Most people think the break is merely a temporary reaction--they may refer to it as a HEALTHY reaction--and they start buying stocks again, and put the market up, but it does not go up as high as it was before the break occurred. When stock prices do not rally beyond the prices at which they were before the break occurred, it is a sign that the turning point has been reached and that the bear market has started, although the majority of people do not realize this until a long time afterwards.

Next comes a period of depression, when we have low prices, low wages, hard times, tight money, and many commercial failures. Many people who lost all their money during the speculation period, become thrifty and economize during the period of depression, and start in to save again.

Nearly everybody is pessimistic during this period. Trading on the Stock Exchange is irregular and as a rule very light.

This is the time to get stock bargains, but the general public as a rule doesn't take advantage of it. People are scared and think prices will go still lower. The big interests acc.u.mulate stocks during this period, and sell them during the period of prosperity.

CHAPTER XII.

THE MONEY MARKET AND STOCK PRICES

Perhaps no other one thing influences the movement of stock prices so much, in a large way, as money conditions. It is impossible to have a big bull market without plenty of money. During a bull market nearly all stocks are bought on margin, which is explained in Chapter XVI. This makes it necessary for brokers to borrow large sums of money. When money is tight, it is impossible to get enough to carry on a large movement in stocks.

You will see, therefore, that the Federal Reserve Bank has it in its power to regulate the stock market to some extent. In 1919 speculation was carried very much further than it should have been, but undoubtedly it would have been much worse had the Federal Reserve Bank not raised interest rates and urged member banks to withdraw money from Wall Street. While there was considerable criticism of that action, it certainly was a good thing for the entire country.

In a period of depression, the banks acc.u.mulate money, and there always is an abundance of money at the beginning of a bull market. During a period of prosperity the banks' reserves decrease and their loans increase. When you see these reserves go down to a very low point, it is usually time for you to sell your stocks.

CHAPTER XIII.

MINOR MOVEMENTS IN PRICES

Within the major movements of stock prices, there always are several minor movements, which are caused by various influences. One of the important causes is the technical condition of the market. Another cause might be called a psychological one. When stocks are moving up steadily in a bull market, people closely connected with the market expect a reaction and watch for it. The newspapers predict it. Consequently, there is sufficient let-up in buying to allow the pressure of selling by the bears to bring it about. However, the desire to buy during reactions is so general, many people rush in to buy and this buying, in addition to the covering by the shorts, puts the market up again; and if conditions are favorable for a bull market, prices will go up much higher than they were before.

In like manner, we have rallies in bear markets. Of course the professional bears sell during these rallies, with the expectation of buying later at a cheaper price.

These minor price changes mean more to the majority of traders than the major movements. The major movements are so slow that people get out of patience, and yet those who are guided only by the major movements are operating on a much safer basis. We believe that a greater amount of money can be made, with a minimum risk, by being guided princ.i.p.ally by the major movements, while taking advantage of the minor movements in a minor way. However, stocks do not move uniformly and there frequently is an opportunity to buy some particular stock at a bargain when nearly all stocks are selling too high. We try to pick out these opportunities for our clients.

Reports of earnings by various companies influence stock prices, as does also the paying of extra dividends or the pa.s.sing up of dividends. A peculiar psychological influence is noticed when a company declares an extra dividend. The price of the stock usually goes up, while as a matter of fact the intrinsic value of the stock is decreased by the amount of this dividend; and sometimes it is advisable to sell a stock shortly after an advance in its dividend rate.

CHAPTER XIV.