bankrupt than the amount of the liabilities. While it is comparatively
easy to get at the cost or book value of the assets, if the books have
been properly kept, it is usually necessary to write off a considerable
portion of this value to arrive at the amount likely to be realized on
forced sale. It is usually advisable, therefore, to call in an
appraiser, familiar with the line of business involved, to set the
values of the assets on the basis of a going business and on forced
sale.
By showing the book value of the assets and the values they are expected
to realize, the probable deficiency as a result of the liquidation of
the estate is readily seen. Book debts should be classified as good,
doubtful, and bad. Good debts are extended at face value, doubtful debts
at the amount they are expected to realize, while the bad debts are
entered on the statement without extending any amounts.
Assets should be listed in the order of their availability, those most
readily realized being placed first. At the bottom of the statement, in
the form of a note, the dividend available for ordinary creditors,
exclusive of expense of realization and liquidation, is shown.
A statement of affairs is shown, Page 27, which will make the
explanation clear.
Every statement of affairs should, when possible, be accompanied by a
_deficiency account_. The purpose of the deficiency account is to show,
as far as may be, the cause of insolvency. This account is credited with
the losses and shrinkage in the estate shown by the statement of
affairs, the losses shown by the books, and the withdrawals of the owner
or partners. It is debited with the capital at the last known date of
solvency, all additions of capital, and all profits shown by the books.
The balance is the net amount of the deficiency, and should agree with
the amount shown by the statement of affairs. A deficiency account is
shown in connection with the illustration of a statement of affairs.
[Illustration:
STOCK EXCHANGE BUILDING, CHICAGO, ILL.
]
STOCK BROKERS' ACCOUNTS[4]
=1.= The principal feature of brokerage accounting is that such
companies are not supposed to make investments upon their own account,
but to act as intermediaries or agents for those who desire either to
buy or sell.
Footnote 4:
_Copyright, 1909, by American School of Correspondence._
As this is the case, such companies' profits depend entirely upon the
commission charged their clients, which is charged whether they buy or
sell for a client. There is also a margin of profit on the interest
account, as large brokerage firms are enabled to secure money from banks
at very favorable rates, sometimes much lower than the regular six per
cent charged to customers.
The legitimate broker actually buys and sells, as instructed by his
client. If a customer instructs the broker to buy one thousand shares of
D. & R. G. preferred at 88½, the customer deposits the margin required
by the broker, usually 10 per cent, and the broker at the first
opportunity thereafter, buys in open market the one thousand shares of
D. & R. G. stock ordered, paying in full for the same. The customer may
have a certain time to take up this stock, say thirty or sixty days, but
as he is still indebted to the company for ninety per cent of the
purchase, he is required to pay six per cent interest upon the deferred
payments until such time as the stock is finally taken up and paid for.
LARGE CAPITAL REQUIRED
=2.= It will be seen that in a multitude of transactions of this
character, a very large amount of money is required by the broker, to
carry on his business successfully. As very few of them have the amount
of capital necessary, they resort to bank loans. Banks are very willing
to loan money with listed stocks as collateral security, and frequently
do so at favorable rates for the broker. This rate is determined by the
condition of the money market, but is invariably less than the rate of
interest charged to the client.
GRAIN PURCHASES
=3.= Purchases of grain at a stipulated price differ from stock
purchases, inasmuch as the full amount of the purchase does not have to
be paid until the delivery of the goods, although there are frequently
charges, such as storage and insurance, which must be made upon long
time purchases. These charges do not accrue, however, until after
delivery. If a customer buys fifty thousand bushels of wheat in April
for September delivery, the purchase is made by the brokers at the
earliest date possible, in order to avoid any fluctuation of the market.
When the broker makes the purchase he pays over the amount necessary to
secure the same. If the deal is carried through to maturity, the grain
is delivered to the broker who has made the purchase for his client, and
is in turn delivered to the client upon the payment of the balance due,
including all charges upon the same.
It is frequently the case, however, that before the actual delivery
takes place, the client has ordered the broker to sell a sufficient
amount to cover the deal. This may be either at an advance or a decline
from the price purchased, but in either case the broker receives his
commissions for both transactions—buying and selling.
BULLS AND BEARS
=4.= Investors who are always figuring upon an advance in prices are
termed _bulls_, and those who are confident of lower prices are termed
_bears_. If a seller sells for future delivery what he does not own, he
is termed _short_ and becomes temporarily a buyer, in order that he may
have a sufficient amount to fill his orders. If a buyer holds stock or
grain for a rise, or contracts for future delivery, he is termed _long_
and becomes temporarily a seller, seeking to bring his holdings down to
the normal demand.
EXACT BOOKKEEPING NECESSARY
=5.= It will be seen from the nature of the business that the
bookkeeping department must be very exact, careful in its dealings, and
as prompt as a bank in its action. Every precaution must be taken to
safeguard the broker and protect the customer. The accounts must show,
with each transaction, the brokerage or commission charges and, as in
active times the transactions are very numerous, they must be quickly
and accurately recorded in the books of the company.
BROKER'S COMMISSION
=6.= The percentage or commission due to the broker is included in the
amount deposited to protect the deal, which is called a _margin_. If
there should be a decline in price of either stock or grain, sufficient
to cause the broker to feel insecure, he always reserves the right to
call upon the customer for an additional deposit, even though the time
of delivery has not yet arrived. In case the customer fails to make such
additional deposit, the broker can sell the securities, grain, or other
purchase, at once, in order to protect himself; the amount primarily
deposited by the customer is thereby forfeited.
All orders for the purchase and sale of any article are received and
executed with the distinct understanding that _actual delivery_ is
contemplated and that the party giving the order so understands and
agrees.
SECURITIES
=7.= It is understood and agreed between the broker and his client, that
all securities carried in his account, or deposited to secure the same,
may be carried in the broker's general loans, and may be bought or sold
at public or private sale without notice, when such sale or purchase is
deemed necessary by the broker for his protection.
It is also understood and agreed that the right is reserved by the
broker to close transactions on all accounts without notice, when
protection is exhausted, or when, in his judgment, it is near enough
exhausted as to endanger the account, and the broker reserves the right
to settle contracts with his client, in accordance with the rules and
customs of the exchange where the order is executed.
BUCKET SHOPS
=8.= The class of brokerage concerns termed _bucket shops_ are those
which do not actually carry out the orders of their customers, who
neither buy nor sell anything, but who expect quick deals, frequent
changes and, speaking plainly, merely _gamble_ with their clients,
allowing them to take whichever side they prefer. The large margin which
this fraternity receives is a commission on deals whether they win or
lose.
In order to maintain at least a pretense of legality, there must be an
_actual_ transfer of all stocks and commodities speculated in. The
broker must acquire nominal possession of something which represents
stocks, grain, cotton, or other commodities. To do this he must borrow
money from the bank, or borrow stock or warehouse receipts from those
who have them to lend. In either instance he charges interest to his
speculative customers.
It is estimated that the brokers in New York City who are members of the
various exchanges, have an average amount in call loans outstanding of
about $600,000,000.00, all of which vast sum is used to finance the
orders of the brokers' customers. In dull times the minimum falls as low
as $350,000,000.00, but there have been periods of speculative activity
when $1,100,000,000.00 have been thus employed. The interest rate
charged brokers constantly varies, but those who have had dealings with
them state that their accounts rarely show less than five per cent
interest. The broker charges the customer six per cent, thus averaging
one per cent profit upon all money borrowed.
The New York Stock Exchange was founded for a high and honorable
purpose, the same being true of the New York Produce Exchange, The
Chicago Board of Trade, and other institutions for coöperative trading
and the determination of values, in accordance with the recognized codes
of business, and in conformity with the laws of supply and demand. Such
exchanges serve admirably the producer and the merchant. They have a
valid function to the investor in railroad and corporation securities,
and are indispensable in facilitating the massing and distribution of
capital required by large commercial enterprises.
LEGITIMATE DEALERS
=9.= Every legitimate brokerage concern has its representative or
representatives on the board of trade in the city wherein it is located,
and they are members in good standing of the board. When an order is
given by a customer, either through the wicket or by wire, it is
immediately transferred to the floor man and he proceeds to buy or sell
as the instructions are given. In an active market the client must take
the chances of slight fluctuations, which are just as likely to be in
his favor as against him. The floor man reports the sales or purchases
as soon as made, with the price paid and from whom purchased. The
entries are immediately made to the customer's account.
CLEARING HOUSE
=10.= The boards of trade in different cities maintain a clearing house
somewhat similar to that used by the banks, to settle the deals of each
member of the board each day. The deals consummated during the day's
session are reported to the clearing house and the amounts due from and
payable to each firm or individual member are computed. If the brokerage
firm has purchased ten thousand dollars more than it has sold, a check
is given to the board for ten thousand dollars, as there must be some
other firm or firms who have sold more than they have purchased to whom
this ten thousand dollars is due, and to whom it is paid. Deliveries of
stock are made at the time the balance is paid.
RING SETTLEMENT
=11.= At the close of the day, settlements for grain purchases are made
between brokers at an agreed _settlement price_. If brokers have bought
and sold to each other in varying amounts, only the difference in the
price is adjusted with each other. What are called _ring settlements_
save considerable time, money, and labor. The _ring settlement_ is a
settlement between three or more parties without the necessity of
margining and may be illustrated in this manner:
_A_ has bought 50,000 bushels of wheat of _B_, and has sold 50,000
bushels to _C_. By inquiry, it is found that _C_ has sold 50,000 bushels
to _B_. It is ascertained that the transactions between _A_, _B_, and
_C_ offset each other, and instead of each party being obliged to put up
margins upon each transaction, a settlement may be effected by paying
the difference in price, as the sale from _C_ to _B_ may be at a
different price from the sale made by _B_ to _A_, and the sale made by
_A_ to _C_, may have been at a still different price. By the adjustment
between the different parties of the difference in price, the necessity
of margining by _A_, _B_, or _C_ is rendered unnecessary.
ILLUSTRATION
_A_ bought 50,000 bushels of wheat of _B_ at $1.23; A sold 50,000
bushels of wheat to _C_ at $1.23½. By making up the ring it was
found that _C_ has sold to _B_ 50,000 bushels at $1.22½. In making
the settlement it is found that _C_ is indebted to _B_ ½ cent per
bushel for the amount sold, as _B_ sold at ½ cent advance; _C_ is
also indebted to _A_ ½ cent per bushel as he purchased of _A_ at a ½
cent advance on the price _A_ bought from _B_. The settlement of
this deal would be made by _C_ giving his check for the amount due
to _B_ and to _A_, and there would be no necessity for any one of
the three brokers putting up a margin on the deals. The amount of
grain is offset one by the other, and the difference in price has
been adjusted by payment of cash.
COMMODITIES HANDLED
=12.= The commodities that are handled upon the board and by brokers in
general—food stuffs—are wheat, corn, oats, pork, lard, and short ribs.
The various listed stocks are also bought and sold, a considerable
business is done in bonds, and in some exchanges mining properties are
listed, bought, and sold; although the latter is not common in the
larger and more important exchanges. Cotton is a very important factor
in some exchanges, and tobacco in others.
CORNERING THE MARKET
=13.= To _corner the market_ is to offer to buy and be prepared to carry
out your offer, for an amount more than is offered for sale, thus
causing the price to advance. Sometimes this is done by large operators
to their advantage and sometimes, in spite of their large purchases,
which encourage a rising market, the prices fall before their deals are
consummated, and they are left high and dry with a considerable loss
instead of a large profit. The _bull_ who tries to run a corner has a
strong foretaste of what it means to advance sensationally, a staple
article of consumption. Stocks and bonds may be hoisted ever so high;
real estate may be boomed to far beyond its intrinsic or even potential
worth—the public has no objection; the process is, in fact, rather
pleasing to it. A lift in cereals or cotton above the normal lines
encounters many protests and the higher the lift, the more savage the
protest. This of course does not include the farmer or planter, unless
he has disposed of his output; then he willingly enough joins the chorus
of protestation.
VALUE OF THE WIRE
=14.= The telegraph is a very important factor to the grain and stock
broker, as a large majority of their business is done by wire. Many of
their clients are distributed through the country and keep close watch
of the fluctuations of the market, sending their orders by wire, at what
they consider an opportune time.
Most brokerage firms have a number of customers outside of the city, and
these customers as well as those in the city who are large buyers, keep
a considerable deposit on hand with the broker at all times. This
deposit is frequently augmented by advantageous sales or decreased by
losses, commissions, and interest charges. Reports of the condition of
customers' accounts are made with frequency and any customer who finds
that he has more money in the hands of the broker than is considered
necessary, can secure part of the same by asking, or if he desires to
close all transactions, the total amount due him is paid over at once.
All amounts thus deposited are credited to customers' accounts and
properly taken care of through the bookkeeping department.
SETTLEMENT OF CONTRACTS BY OFFSET
=15.= To quote from the rules of the Chicago Board of Trade:
In case it shall appear that the delivery of any outstanding trade
or contract between members of the association may be offset by some
other corresponding trade or contract, made by the parties with
other members of the association; and the parties to such trade or
contract, or their authorized agents, consent to such offset, such
trade or contract shall be deemed to have been settled; any balance
between the current value of the property covered by such trade or
contract, and the several contract prices shall be due and payable
immediately by the party from whom such balance may be due, to the
party entitled to receive the same under his contract.
This is the rule applying to ring settlements hereinbefore described. To
quote further:
"MARKET VALUE TO BE POSTED
The current market value of the property contracted for shall be
conspicuously posted, at a stated hour each day, under the direction
of the Board of Directors, in the Exchange Hall and in the
Settlement Room of the Board, which posting shall serve as a basis
for the adjustment of all contracts settled, as herein provided on
that day.
"ADJUSTMENT OF BALANCES ON SETTLEMENT
In order to facilitate the operation of this section, each member is
required to keep a _settlement book_, in which shall be entered the
names of parties with whom settlements have been made and the dates
and terms of the trades included in such settlement, and the terms
of such settlements, and the prices at which the commodities were
originally sold or purchased, and the amounts due to or from him or
them on each separate settlement, also the net amount due to or from
him or them on all settlements.
"CLEARING HOUSE AND REPORTS
The Board of Directors is hereby authorized to provide a suitable
office, with the necessary employes, to which members shall be
required, at stated hours each day, to make reports, showing the net
balance due to or from each member, as shown by such settlement
book, and also the general balance due to or from him or them upon
all such settlements; each report to be accompanied with an
acceptable check for the balances, if any, due from him or them on
the contracts so settled; whereupon, if said report is found to be
correct, as compared with other reports rendered him, the person in
charge of said office shall, at a stated hour each day, pay to each
of the parties making such report any balances which he may have
collected, and which shall appear to be due to them by said reports,
less such charges as shall be prescribed by the Board of Directors
as compensation for the services of said office.
"CONFIRMATION OF TRANSACTIONS FOR FUTURE
DELIVERY, ETC.
It shall be the duty of each member or firm making a transaction for
future delivery of grain or flax-seed in five thousand or one
thousand bushel lots, lard and pork in two hundred and fifty or
fifty package lots, and D. S. short ribs and D. S. extra short
clears in lots of fifty thousand or twenty-five thousand pounds,
under the Rules of the Association, to confirm such transaction by
sending to the clearing house a memorandum of the same by 6 o'clock
P. M. of the day on which it is made; such memorandum shall be in
writing, and shall state on its face the date of the transaction,
the quantity and kind of property covered by the same, the month of
delivery, the price, and the name of the party to whom sold or of
whom bought, and shall be signed by the party or firm making the
same. All transactions of the same date made with any member or firm
may be included in one memorandum, and all such memoranda shall be
sent to the clearing house by the member or firm making the same, in
unsealed envelopes addressed to the member or firm with whom such
transactions were made. It shall be the duty of the clearing house
manager to assort and have ready for delivery by 8 o'clock A. M. of
the following day, and to deliver, on application, all envelopes
containing such memoranda as are left with him in compliance with
this section.
There is a fine imposed upon any member failing to comply with the above
provisions.
"FAILURE TO DELIVER OR RECEIVE ON CONTRACT
In case any property contracted for future delivery is not delivered
at maturity of contract, the purchaser may, if he shall so elect,
consider the contract forfeited; or he may purchase the property on
the market for the account of the seller, by 1:15 o'clock P. M. of
the next business day, notifying him at once of such purchase; or he
may require a settlement with the seller at the average market price
on the day of maturity of contract, and any damages or loss due to
the purchaser, by reason of such purchase or declared settlement,
shall be due and payable by the seller immediately.
[Illustration:
A SECTION IN THE GENERAL OFFICES OF THE SIMMONS HARDWARE COMPANY,
ST. LOUIS, MO.
]
In case any property contracted for future delivery is not received
and paid for when properly tendered, it shall be the duty of the
seller, in order to establish any claim on the purchaser, to sell it
on the market at any time during the next twenty-four hours, at his
discretion, after such default shall have been made, notifying the
purchaser within one hour of such sale; and any loss resulting to
the seller shall be paid by the party in default.
DEPOSITS TO SECURE THE FULFILLMENT OF TIME CONTRACTS
[Illustration:
Fig. 1. Memorandum of Deposit with Broker to Secure Contracts
]
=16.= The rules of the board of trade provide that on time contracts,
purchasers shall have the right to require of sellers as security, a
deposit of ten per cent, which amount is based on the contract price of
the property purchased; they are also further allowed to demand security
from time to time to the extent of any advance in the market value above
selling price. Sellers shall have the same right on property sold, and,
in addition, any difference that may exist or occur between the
estimated legitimate value of any such property and the price of sale.
It is required that all securities shall be deposited with the treasurer
of the association or with some bank duly authorized by the board of
directors to receive such deposits. The board requires in each instance
a memorandum which shall state the name of the depository, the date on
which the deposit is made, the name of the depositor, and also the name
or names of the party or parties in whose favor the deposit is to be
made, together with the amount of such deposit in detail and also in the
aggregate. The left-hand part of the memorandum is retained by the
depository selected, the right-hand portion thereof being taken by the
depositor after being duly signed by the person authorized to receipt
for the said deposit, and without delay this memorandum must be placed
in the office of the clearing house. A detail of this memorandum is
shown in Fig. 1.
Upon the fulfillment or settlement of any contract or upon the closing
of any contract—deposits upon which have been made—when the full
adjustment of all differences relating to the same shall have been
effected, the deposit shall be paid to the party depositing.
COMMISSIONS ALLOWED BY BOARD TO BROKERS
=17.= The commissions to be collected by brokers from customers are
fully prescribed by the board of trade in each city and do not
materially differ. While it will not be possible to give all the rates
of brokerage or the charges allowed for buying, selling, or accounting,
the commissions allowed on the Chicago Board of Trade for buying _or_
selling, or for buying _and_ selling, are as follows:
For the purchase, or for the sale, or for the purchase and
sale by grade alone of wheat, corn, or oats, to be delivered in
store, either for immediate or for future delivery, one-eighth of
one cent per bushel.
For the purchase, or for the sale, or for the purchase and
sale, by grade alone, of rye, barley, or flax-seed, to be delivered
in store, either for immediate or for future delivery, one-quarter
of one cent per bushel.
For the purchase, or for the sale, or for the purchase and
sale of lard, six cents per tierce.
For the purchase, or for the sale, or for the purchase and
sale of pork, five cents per barrel.