Transactions May Be Effected Either For "Money" Or For "Account."

Business (purchases and sales) may be effected either for "Money" or for the "Account"; the price, in other words, may be paid or the stock delivered either at once, or at the ensuing Account day fixed periodically by the Committee.

The "Account" And The " Settlement" Not Identical

It is a frequent error to confuse the "Settlement" with the "Account" and to describe the Settlement days as Account days. The Settlements consist of appointed dates when transactions require to be settled between buyer and seller, while the Account expresses the period which intervenes between each Settlement, so that each Account begins at one Settlement and terminates with the next; and when an Account has ended bargains are then said to be entered into for the new Account. If the investor pay for the stock he has bought, or deliver the stock he has sold, directly the transaction is arranged, and does not defer payment or delivery (the latter course, however, being almost universally the practice) until the date of the ensuing Settlement, the price is somewhat lower since (in the instance, for example, of a purchase) the buyer retains his money for the interval and obtains the benefit of its interest from the date of purchase to the Settlement, besides possessing the chance of selling meantime at a profit, which the vendor has surrendered. Thus, on February the 28th, 1908, the price of Consols for money was 87⅜ - 87⅝, but for the Account on April the 1st, 87⅝ - 87⅞, or, on a purchase, a diminution of price of 5s. per cent. The price quoted for any stock is par excellence the " Account " price, and any one inquiring the price of a security would receive that price in reply.

The Settlement

The Settlement occurs twice a month - about the middle and end; but the Settlement in Consols, and a few similar securities, is fixed for once a month. The Settlement occupies three days, on the last of which - called the Settling or Pay day (termed in the rules of the Exchange the "Account Day") - all bargains effected during the past Account or fortnight must be completed and closed by payment of the price in the one case, and the delivery of stock in the other.

The "Carry Over."

But a person who has engaged in a speculation - who may be a member of the House or one of the public - may not then deem it advantageous or expedient to close the bargain into which he has entered; he may have purchased in the hope that the price of the stock would appreciably rise beyond the price he had agreed to give; the anticipated increase may not have occurred to an extent sufficient to satisfy his expectation of selling at a substantial profit, and accordingly, instead of concluding the transaction by payment of the purchase money on pay-day, he defers the acceptance of the stock he has bought, and postpones completion until the ensuing fortnightly date; that is, he "carries over," or "continues" his bargain to the next account then beginning. In a similar manner, a speculator who has sold stock in the hope of realising a profit by subsequently purchasing it when a decline of price has occurred, discovers that events have not fully justified his anticipation of a fall, and accordingly decides to defer delivery of the stock of which he has disposed until the following Settlement in the expectation that the fall may meantime take place. He therefore "continues" his bargain.

The "Making-Up" Price And "Differences."

In connection with these continuations, an official of the House, in accordance with certain rules, fixes, on the first day of the Settlement, a "making-up " price (usually determined by the actual mid-day price) as that on which these continued bargains are to be based. As the process would be found somewhat complicated if expressed in general words, I will adopt a concrete illustration; and to prevent the confusion usually resulting from the use of demonstrative pronouns alone, I will employ the personal and demonstrative distinction. Thus: I speculatively purchase a stock for the Account ending on June the 26th, at the price of 125; I do not wish to take it up on that day by paying the value. On the " carrying-over" day, accordingly, June the 24th, I (through a broker) sell to B (the jobber, for example, from whom I bought,) exactly the same amount of that stock at the "making-up" price (which assume to have been fixed by the official at 124 - the value of the stock having meantime fallen), to be delivered by me on June the 26th; and at the same time I buy from B precisely the same amount of that stock at the 124, to be paid for at the next Account on July the 15th. Hence by the act of sale I undo my first bargain of purchase, and stand in a free position for the further part of the process, which consists in the new contract for the second purchase just mentioned. But as I originally bought at 125 and then sold at 124, I have, on June the 26th, to pay to B the "difference" of 1 per cent upon the amount of stock. The word "difference" seems here to have acquired a technical sense, though on what ground it is difficult to say; it simply indicates the evident fact that by the intervening fall in price in the market I have made a loss on this part of the transaction. Had, on the contrary, the "making-up" price been 126 (the value of the stock having meantime risen since I originally purchased) I should have received the 1 per cent from B instead of being charged with it; in other words, I should have secured a gain on the transaction. I am thus finally a buyer of the amount of stock which I bought at first, but under a new bargain, the completion of which is deferred for a fortnight, that is, until the following Account. The first bargain for the current Account has been closed; a similar bargain for the next Account has begun. If, on the other hand, I be a seller at 125 for the Account terminating on June the 26th, I can postpone the delivery of the stock until the ensuing Account on July the 15th by buying, on June the 24th (through a broker), from B at the price of 124, for settlement at the Account on June the 26th, an identical amount of the stock which I had sold. By reason of the "making-up" price being 124, I thus receive the "difference" of 1 per cent, since the "making-up" price is inferior to that at which I originally sold; and I simultaneously sell, for completion on July the 15th, the same amount of the same stock at the same price of 124. Hence my purchase has cancelled my first sale, and I am placed in my original position (except as to price) by the second sale, but with the deferment of the time for settlement of the bargain. Had the "making-up" price been 126 (the value of the stock having increased since my first sale) I should have had to pay the difference of 1 per cent. The original bargain made, in respect of both the speculator for the rise and the fall, is reversed for the present Account and is restored for the subsequent Account. The "difference" being discharged or received, the continuation or carrying over of the bargain is arranged.

Without entering into more details than are requisite for an intelligent apprehension of the position, it will be noticed that the purchaser who wishes to continue is virtually provided with a loan for purchase of the stock he had contracted to buy, since the act of B, the jobber, from whom he bought, in waiting for his money until the following account, constitutes in effect a loan of that amount. Similarly, the seller who continues is virtually placed in the position of a vendor with the stock for delivery, since in effect the stock he sold is lent to him for that purpose.