SOME PRACTICAL POINTS OF INVESTMENT PROCEDURE D. CRITCHLEY

SOME PRACTICAL POINTS OFINVESTMENT PROCEDURE

by

D. CRITCHLEY

(A paper discussed at a Junior meeting of the Society on 30 October 1959)

T H I S paper is not intended either to be an exhaustive treatise oninvestment department practice, or to give the student any assis-tance in examinations on investment policy. It is hoped, however,that it might engender an interesting discussion of points whicha newcomer to an investment department will find useful, and itmay give some background to examination reading. The paper isconcerned only with investment in securities dealt in on the StockExchange.

THE JOBBING SYSTEMThe prime purpose of the Stock Exchange is to bring togetherbuyer and seller of stocks and shares. In most Exchanges,including the provincial ones in this country, this meeting is madedirectly by the broker of the buyer finding the broker of the seller,or vice versa. In London a shop-keeping system exists witha number of firms of jobbers making prices in specialized sectionsof the market. For instance, three firms of jobbers will buy or sellinsurance shares, and those same firms operate in three or fourother sections of the market—one of them operates in bank,shipping, tea and hire-purchase shares. Theoretically, one ought atany time to be able to buy or sell any number of shares in anyquoted security. Unfortunately, that is not the case.

Before following that point further, some detailed explanation ofthe methods of using the jobbing system is required. When a mem-ber of the public instructs his broker to buy or sell, a dealer, whomay be either a member of the Stock Exchange or an authorizedclerk, proceeds to the pitch of a jobber who deals in that stock andasks the price of the share, without indicating whether he is

24 D. CRITCHLEY

a buyer or seller, or what the size of the order might be. The jobberthen quotes two prices—a price at which he will buy and a price atwhich he will sell—and the broker's dealer can if he wishes com-plete the deal, either buying or selling at the quoted price providedthe amount is a normal amount, i.e. between about £100 and £1200in most stocks, up to £5000 in blue chips and several tens ofthousands in gilts. Once the broker's dealer leaves the jobber'spitch the jobber is no longer bound by the quotation. Nevertheless,the dealer will frequently leave the pitch and go to others to findwhich jobber is making the best price in the way the dealer wishesto deal. Dealing is a highly specialized and skilled occupation witha considerable degree of personal influence. The dealer must beable to assess whether to accept the price quoted or whether to moveelsewhere in the hope of finding a better price knowing that thejobber he is leaving may on his return be making a less favourableprice. He must also try to assess whether he can talk the jobberinto making closer prices, or whether by doing so he will disclosethat he is a buyer or seller, and so enable the jobber to move theprice against him should he decide to test prices with other jobbers.The system is part way between that of eastern markets and that ofstores operating on fixed prices, for the simultaneous quotation ofbuying and selling prices restricts the scope for bargaining innormal-sized deals, but because values of securities are subjectiveprices cannot be fixed.

Sales of under-sized lots are usually made at a slightly reducedprice, to recompense the jobber for the cost of additional stamp andfee expenses. Deals in large lots are usually made by disclosing thesize after obtaining the original quotation but before disclosingwhether one is a buyer or seller. The jobber may then be preparedto make a price in a larger lot either at the same price or at widerprices.

It has already been mentioned that a completely free market doesnot exist. Jobbers' capital is limited. It must be put up by mem-bers of the jobbing firm, who must be members of the StockExchange—there is nothing comparable to a name at Lloyds toenable non-members to participate in profits, nor are there facilitiesfor building up tax-free reserves. Jobbers are taxed on their

25INVESTMENT PROCEDURE

trading results for the year, whether they be made up of the marginbetween buying and selling without price movement, or of appre-ciation in value of stocks held. Their profits can fluctuate violently,and could easily be negative in any one year. Shortage of capitallimits the size of bargain for which a jobber is prepared to quoteeven if the turnover in the stock is relatively high. If turnover isinfrequent, stamp duty is also a limiting factor, as the jobbersuffers a 10s. stamp duty on stock held over an account date, anda 2% ad valorem stamp duty on any stock held over two months.He will not, therefore, deal in any size in a stock in which he cannotsoon deal in the opposite direction, and in certain securitiesa jobber may only be prepared to deal in one way—i.e. he may beprepared to buy but not to sell, or vice versa.

The jobber's profits come from his turn—the difference betweenthe prices paid for his purchase and his sale of stock—but it shouldnot be thought that that is equal to the difference between theprices he quotes. If jobber A is quoting prices B-.B + C andjobber A' is quoting B+D:B + C+D where D is small, jobber Awill find himself a seller of stock and A' a buyer of stock. If theprice is not moving, jobber A will have to raise his price when hefinds he is selling more than he wishes, i.e. he will have to buy backat a price greater than B. If prices are, say, moving upward, he willfind he has to pay more than B+D to buy back. On the otherhand, jobber A' will then be able to sell his stock at more than B + Cand possibly more than B + C+D.

A jobber's business is that of a shopkeeper, and his object isturnover sometimes with a very small profit per share. If he hasspare capital he may also take a view of the way certain stock in hiscatalogue is about to move in demand. In that case he will increasehis holding of stock which he thinks is likely to rise in price, ordecrease that of stock he thinks will fall. He may sell more stockthan he has in certain cases, but will have to buy back in time todeliver when called upon to do so—on or about the settlement date,and that may prove very costly if some large buyers enter themarket, if there is good news, or a take over, or merely if there areno sellers.

Now the jobber has a value not only as a dealer but, like any

26 D. CRITCHLEY

other shopkeeper, can be an expert in his stock. One will naturallydeal with a jobber who is helpful with useful information ratherthan one who is not, if prices are the same with both. Some jobberspublish quite comprehensive literature on the securities in whichthey deal. Advice given orally by a jobber must sometimes be takenwith a pinch of salt, as he may well be biased in favour of stock withwhich he is well supplied, but if poor advice is received it is usuallyas a result of imperfect appreciation rather than for the purpose ofthe immediate deal, as reputations are the essence of the business.

THE CHOICE OF SHARE

Sufficient has now been said about the jobbing system that we cannow consider the mechanics of investment from the investor'spoint of view, and can raise some of the questions which must bedecided—consciously or unconsciously—in making an investment.A number of papers have been given at the Institute on varioustheories of investment philosophy, and L. G. Whyte has set out intwo text-books considerable detail of various types of investments.He gives eight questions which he considers most fundamental tothe study of investment problems. Answers to these fundamentalquestions give rise to more detailed ones which must be consideredafresh at frequent intervals. Is investment to be fixed interest orequity? If fixed interest, is the term to be short or long, withappreciation or depreciation to redemption? Can one determinethe optimum time for switching to other stock? What course canone expect interest rates to take? To what extent should one beconcerned with assets or with income, with current profits or withexpectations, with current management or with future manage-ment? If investment is to be in equities, is one to invest for growth,level income, or recovery?

The concept of expected yield is understood to give a value to aninvestment

27INVESTMENT PROCEDURE

where d1 is a possible dividend at the end of year I, and p1 theprobability of its payment, and Mn is the amount finally realizedand Pn the probability of its payment. Maximization wouldprobably be obtained by a series of large short-term investmentsin companies which increase their dividends, the investments takingplace shortly before the announcement of the increase. If a takeover, rather than a dividend increase, could be foreseen, even betterresults would probably be obtained. Assuming permanent invest-ment, however, what are the measures for comparing growth,income and recovery stocks? It must be remembered that valua-tion of investments is partly subjective. One cannot assign proba-bilities to the formula with accuracy. It is therefore desirable toproduce an approximate formula which can be applied with certainassumptions, and I would suggest vd1+v2d2 + ..., where d1 d2, etc.,are arbitrary estimates of future dividends. The rate of interest tobe used might be the same for all investments being considered andmight reasonably be an estimate of the expected yield using Pegler'smeaning (I.I.A. 74, 179) or might vary slightly to allow for thedegree of risk.

If one is considering an investment for steady income which onebelieves should give a higher yield than that on a security withoutrisk, there is an implication that some risk exists. Even if onebelieves the chances of dividend increase is about the same as thatof dividend decrease one is entitled to a higher yield to compensatefor the uncertainty. The value of the investment might therefore beK(d/i) where K will depend not only on the amount of risk butalso on the size of the investment in relation to the size of the fund,and the size of the surplus in the fund, and will lie between o and 1.

If there appears more chance of the dividend increasing thandecreasing, or vice versa, then estimates of future dividends mustbe made. These estimates will depend on the current earnings, therate of growth of earnings, the trend in sales, stocks, profitability,the available assets, and innumerable bits of information one canobtain about the company, the industry and the economy in general,and the shape of the variable annuity suggested for valuing invest-ments will change with every new piece of information. We can setup some standard forms which by simplification could be used to

28 D. CRITCHLEY

compare the value of shares more mathematically than by merelyclassifying one as a growth stock and another as income stock.

It must be emphasized that the purpose is not an accurateevaluation of securities, but a comparative evaluation, so as toenable a choice to be made. Although no investor would pretendto be able to forecast dividends with accuracy, it is believed thatbetter comparisons can be made by setting up a number of simplemodels to reflect one's estimates of future dividends than by merelyarbitrary ideas of the difference in value of varying degrees ofgrowth.

Examples of models one might set up are:(I) Suppose the earnings and dividends have been increasing

by a factor of I +y each year recently, and that we believe thatwill continue.then V is infinite if y> i or

if yV =

This will apply if the rate of growth is expected to continueindefinitely, or if it is expected that a switch can be made intoanother stock growing at a similar rate at a price which gives thesame or better yields.

(2) Let us assume increases for n years followed by constancy,then

V = Kdo

As an example of the power of growth of dividends let usvalue at 5% and take n = 5, 10 and 20, then V/Kd0 equals

y = o

•OS•10•20

n = 520.OO25.003I.OO

46.66

n= 10

2O.OO30.00

44.8898.51

n — 20

20.0040.00

84.56

(3) A third model might result from an assumption of a per-petual rate of inflation coupled with a temporary growth due tobeing in the right industry, having good management, etc.

(4) A stock might be expected to recover from a recession andthen maintain a constant dividend or a dividend increasing at adifferent rate.

<i.

29INVESTMENT PROCEDURE

The systems provide means of comparing dividend yields, andit may be thought that the value of earnings is being ignored. Thisis not, however, the case as the level of earnings and the rate ofgrowth of earnings are material to one's estimates of future divi-dends. The factors affecting dividend levels are multitudinous, butthe rate of growth in the long run must follow somewhat the rate ofgrowth of earnings, and dividends which are already well coveredcan reasonably be expected to grow at rather greater rates than thegrowth of the earnings, whilst dividends only modestly coveredwill lag. It must always be remembered that a purchase of anequity is a purchase of a residual interest in a concern, and theactual payment of a dividend is comparable to a transfer of cashfrom one pocket to another. Should we then construct our systemson earnings rather than on dividends? I would think not, fora constant earnings yield of (I +x) times a constant dividend hasrequired the ploughing back of x times the dividend to maintainthe constancy. This should not be taken to imply that dividendyields have as great a value as earnings yields if used as singleindices. Having decided on one's ideas of the relative values ofsecurities on offer, one should theoretically, if one was sure of thatevaluation, then buy the best until one's cash is exhausted, or elseone has forced the price of the security up to the extent that it is nolonger the best bargain. Such a move is not, however, advisablefor the following reasons, inter alia:

(1) One's evaluation may be wrong, either through oversight orthrough conditions not developing as expected.

(2) The risk might be too large even if one's evaluation provedcorrect.

(3) Too large an interest may be bought in one concern.(4) The price paid would be higher than necessary.

BUYING INSTRUCTIONS

Having tempered one's views of a share with one's need for cautionand the desirability of some spread, and having decided whichshares one wishes to buy at a particular time how does one succeedin obtaining them at the best price possible? There are basically

3° D. CRITCHLEY

five ways in which the buying can be carried out. The broker canbe instructed to

(a) buy at best,(b) buy at limits,(c) buy on rising prices (or falling prices)(d) buy at regular intervals at best,

ororor

or one can wait until brokers offer the stock in amount and at pricesconsidered suitable.

Buying at best in a normal-sized bargain requires the dealer toobtain the best price he can as already described. If the purchaseis larger than normal sized (see p. 24) then the broker is givendiscretion as to the best way of completing, which may be either topay one jobber a little more for quantity, to buy in normal-sizedlots from more than one jobber, or to try to find a seller amongsthis own clients holding the stock. If he cannot complete the orderat a reasonable price immediately, he might consider it preferableto buy what he can from the best jobber, and then either ask thatjobber to offer further stock when it becomes available, or leavethat jobber a limit price at which to supply the balance. In thatcase he will deal with one jobber only, for that jobber can thenobtain stock for the dealer without much increase in price, i.e.without the other jobbers altering their price upward also. Theorder to buy at best implies a certain degree of urgency. It impliesthat the buyer is willing to pay a few pence more, if necessary, foran immediate transaction than risk the price moving to a higherlevel before the stock is obtained.

If the buyer is not expecting an immediate increasing trend inprice he may hope to deal more advantageously by being patient.He may instruct his broker to deal at a limit of a certain price. Ifthat price is above the current one the broker will be able to com-plete part of the order immediately. One jobber will then be toldof the limit, and may or may not be told the size of the order. Thatjobber will then usually be prepared to accept a very small turn (ashe is taking no risk in buying the stock) and so he can makea better price to a seller. Similarly, if a price below the currentbuying price is set a jobber will be told, and again he will usually

3IINVESTMENT PROCEDURE

accept a very small turn and the bargain will be completed as stockis obtained. He will naturally not accept the very small turn if hebelieves that there are buyers at a higher price, but a bird in thehand is worth two in the bush and the jobber makes his profit onlywhen he has both bought and sold. Perhaps it is worth mentioningwhat sounds obvious but is frequently overlooked, namely, that ifan investor buys stock someone else, in this case the jobber, mustwish to sell it and he may not wish to reduce his stock if he thinksthe price is about to rise.

If the limit set is below the current market price the stock maypossibly be picked up at a saving or it may be lost. The saving mayoccur either through a large seller being willing to take a lowerprice in order to make a sizeable bargain, through a fluctuation inthe price due to an excess of sellers over buyers, or through thejobber being prepared to take a smaller turn. It is possible in anidle market that the jobber receiving the limit purchase order maydecide that a seller may as easily materialize at one price as atanother a few pence higher. He may put his price down eventhough no dealings have taken place to warrant such a move, but helays himself open to having to sell stock, although he wishes to buyfor the purpose of passing it on. (Example: A jobber making priceof share B:B + C, receiving an order from a buyer at say B, might,if the market is idle, then make his price B—D:B+C—D, and if athis next deal he finds himself to be a buyer he may complete hislimit and so make D per share. If, however, he finds himselfa seller he will receive D per share less than he would have donehad he dealt at his original price.) The danger about limit dealingis that the deals may be left uncompleted. If a share has a verylimited market tightness over price may result in the stock goingelsewhere and that might establish a new buyer's interest in theshare and so result in a higher price.

The purpose of buying on rising prices is to obtain the stock ina limited market by encouraging profit takers. The fact that one isprepared to go on at a higher price is not disclosed to the jobber,and the broker will only pass on the higher price after waitinga reasonable time to see if stock will become available at the lowerprice.

32 D. CRITCHLEY

Buying on falling prices is aimed at obtaining more stock ata relatively low price on a falling market than would be availableif one tried to buy all at what one considered to be the lowest priceto which the stock would fall.

A big investor will find that, in certain states of the market, hecannot obtain sufficient of the stock he requires without moving orholding the market against himself. If he has set his policy fora few months ahead he might find he obtains his stock morecheaply by spreading his purchases so that he is buying some ofeach stock each week or each month than if he were to completethe purchases in one stock before going on to the next. He mightinstruct a broker to invest £x a week or a month in say steel shares,and so leave the broker to pick up the stock which he believes to beparticularly cheap. This method has the disadvantage that pur-chases may be made in small packages, and thus cause extraclerical work, but on the other hand some of the labour connectedwith timing is passed on to the broker.

If one is not willing to incur this extra clerical expense stock cansometimes only be obtained in sufficient quantity if one waits untila seller comes along. The advantage of this procedure is that thebuyer can give individual attention to whether the price is con-sidered right, and can sometimes obtain a reduced price because ofthe size of the purchase. Speed of decision is essential for this typeof dealing as the broker's first obligation is to the seller, and hemust contact all his possible buyers without delay.

In giving an order to a broker it is believed that full disclosure ofthe size of the order should be made—if one cannot trust one'sbroker one should get another; furthermore, it is essential thata broker should never, however unwittingly, mislead a jobber whennegotiating and so should not be put in a position where he mightdo so. The whole of the order, or at least that part of it to be carriedout at a particular time, should be placed with one broker.

If the order is split the jobber may believe there are two buyersand may imagine the order to be bigger than it is, or possibly thatthere is inside information he has not received. This applies whetherthe brokers are London or provincial ones, as most provincialbrokers have London connexions.

INVESTMENT PROCEDURE 33

QUESTIONS OF TIMING

The question of timing is one of the most difficult in investmentand one which many institutional investors consider impossible ofsolution. The factors affecting this question are the expectation ofchange in

(1) The state of economy of the particular country.(2) The ruling rates of interest and the supply of money and credit

(including the flow of money to and from other countries).(3) The fortunes of the particular industry.(4) The fortunes of the particular company.(5) The public's opinion of these four factors.(6) Technical states of the market.

These factors are far too general to be covered in a short paper,but there are a few remarks which might be considered 'practicalpoints'. First, it should be noted that it is the expectation ofchange which is important. Secondly, investors in general arebecoming much more scientific than they used to be, and to beahead of the general body of investors, i.e. to buy before the pricehas risen substantially, one has to take a longer view than in thepast. On the other hand, with the increase in the number ofinvestors it seems that the rise in price of a particular share isslower and takes longer, and may well continue after the announce-ment of good results, even if the results were no better than wasgenerally expected by analysts.

The value of correct timing can be seen from charts of indices ofindustrial share prices. The main point of note is the size of theswings in price, in particular the size of the falls on bad news. Thisis partly due to the lack of capital; partly to the psychologicaldifficulty of acting against general public opinion, e.g. buying whenmost other people want to sell; partly to the realization that theresult of a fall in trading is more than a proportionate fall in profits.It is also partly due to the attraction of high yields obtainable onfixed-interest stocks at such times. This attraction seems verystrong, even if it is believed the fall will only be temporary, andeven amongst investors who will prefer equities when the current

3 ASS 16

34 D. CRITCHLEY

yield on those equities has later fallen more than on fixed-interestinvestments.

In considering whether one should increase one's liquidity in theexpectation of being able to buy more cheaply on bad news, themain factors are one's patience and the danger that one may bewrong. Too early a decision not only means that a rise in price ismissed but also tries one's patience longer. The temporary invest-ment in relatively liquid form will bring in a lower yield, but if one'stiming is reasonably good the difference can be handsomely out-weighed by the higher yield from the lower price later obtained onthe permanent investment. Good timing is necessary, both in thedecision to increase liquidity and to reduce it, but the latter isusually much less important as recovery in prices is usually muchslower than the fall.

EXPENSES OF BUYING AND SELLING

In a growing fund an increase in liquidity may mean only theinvestment of new money in short-dated investments, and as theexpenses of such investment are small they can be ignored inarriving at a decision. If the sale of long-dated or irredeemablestock is involved the question of expenses is of more importance.A sale of an equity and the purchase of a short-dated gilt, laterreversed, incurs approximately the following costs to be set againstthe improvement in price (or to be added to the deterioration if oneis wrong!):

Jobber's turn on short-dated giltJobber's turn on equityStamp duty on equityCommission on equity twice

Say %Say I %2%Say 2 % on a small transaction to I %on a large one

Say %Half-commission on gilt twice(reinvestment)

Total (approximately) 5 ½ % on a small transaction to 4½ % ona large one

Commission on the equity varies from £ % to I ¼ % of the moneyinvolved if the share price is over 30s., and up to 2½% on cheaper

35INVESTMENT PROCEDURE

shares for the first £2500 in value, followed by half the rate abovethat figure, and depends on the price of the share. On gilts the rateis % on any amount of stock up to £10,000 and ¼ % up to £50,000,halved for reinvestment. For amounts over £50,000 the rate is %for long-dated stock and 1/16 % for stock with terms less than ten years,while commission is 'at discretion' for terms less than five years.

As the commission is less on gilts, the reinvestment rate willapply to the gilts at both ends of the switch.

CHARTIST THEORIES

There are a number of chartist theories which are sometimes usedwith the object of helping in timing. I doubt if any chartist believeshe can forecast a Suez Crisis or a 7 % bank rate, and I am sure noinstitutional investor would buy a share solely because a charttheory indicated the price was due to rise. That does not destroythe usefulness of some of these theories, which may well help in theselection of the order in which certain investments should be made;once the decision has been made, on broader grounds, that thoseare the right investments. They seem to me to be much moresuitable for helping to discern short-term trends than long ones.Discernment of parallel lines covering recent highs and lows doesnot enable an absolute forecast to be made, but shows the levels ofstrength of sellers and buyers at certain prices in the past. It isreasonable to assume that some of the buyers at the lower end ofthe price swing will again like the share at that price if it again fallsback, and will again try to take their profit if it rises again. If theparallel lines are horizontal such feelings would appear to be relatedto absolute price; if they are at the same slope as that of a suitableindex allowance is being made for general changes in price levels;

3-2

whilst if the slope is somewhat different the feeling about the shareis changing. Triangular formations in the trends indicate thatopinions regarding the value of the share are narrowing or diverging.Double or treble bottoms or tops can be indicative of strong buyingor selling forces at certain prices. Unfortunately, they do notindicate whether those forces are to remain or be withdrawn.

Charts may be useful for timing over a matter of weeks. Over

36 D. CRITCHLEY

the matter of days forecasting is virtually impossible, but thefollowing factors do play a part:

(I) The account runs for two weeks, with dealing for a new accountstarting two dealing days before the account begins. Short-term buyers may be in the market at the beginning of anaccount and during the previous two days, particularly at timesof great optimism. In a bull account, short-term sellers appeartowards the end of the account and tend to depress prices, and

vice versa in a bear account.(2) The jobbers may be full or short of stock.(3) There may be a big buyer/seller in the market, in which case

the market will remain strong/weak until his order is completed.Such a buyer/seller might exhaust the supply of willingsellers/buyers at around that price.

(4) The approach of a dividend declaration may induce somespeculative buying or selling.

(5) A special item of news, possibly unconnected with the share,may cause a spasm of optimism or pessimism which, because ofthe thinness of markets, will sway the price unduly. This neednot be local news. Owing to the amount of investment by theUnited States through the London market, the sentiment onWall Street receives considerable reflection in London.

(6) The presence or expectations of new issues will affect thedesire for liquidity. The issue may also provide some freedomof market when none normally exists.

CHECKING BARGAINS

When a transaction of any size has been carried out the brokershould report it by telephone immediately. This procedure protectsthe broker by recording the time at which the transaction is carriedout, and enabling the principal to check that the price is reasonablyin line with prices ruling at the time. It also provides confirmationthat the details of the order are correct. The quicker errors arecorrected the less costly they are. If errors are made they cansometimes be corrected without cost if it is done without delay andbefore the jobber has again dealt in the stock, but once he has

37INVESTMENT PROCEDURE

dealt he has taken a risk and the correction can only be made bydealing afresh in the opposite direction. Even if the jobber has notdealt again it is not reasonable to ask him to undo a bargain as hemay have missed deals by quoting prices reflecting that bargainwhich have proved uncompetitive. Some indication of the effi-ciency of dealing can be obtained from a study of the marks, butthere are decided limitations. Marking is not compulsory, nor isthe size or direction of the transactions shown. The published orderof the markings is not necessarily the order of the transactions, andthe dealer may be too busy to enter his marks before 2.15 p.m., inwhich case they will not show until the following day. Transactionscarried out after 2.15 p.m. must of necessity be entered with thefollowing morning's transactions. Brokers should as a rule beinstructed not to mark uncompleted orders, as it may be dis-advantageous, in bargaining, for the opposite side to know one'sposition.

ASSESSMENT OF DECISIONS

On completion of the transaction steps should be taken to enableassessments of one's decisions to be made at future dates. Thereasons for one's decision, together with the index level of a suitableprice index, should be noted in addition to the details regardingthe actual purchase. A note of the dividend and earnings at thetime will also provide a basis for measuring trend. Some institu-tions also try to assess brokers' advice by the performance of sharesthey recommend. The records should differentiate between sharesoffered and shares recommended, for although a broker of reputewill not offer shares he believes to be poor, he should give hisclients the opportunity to make their choice. The offer of stockwithout recommendation, therefore, indicates merely that thebroker believes the client might be interested.

There are advantages in avoiding too large a number of stocks ina portfolio. If the number is reasonable in relation to the size ofone's staff, charts might be kept of the price relationship of eachstock to that of the chosen index and the chart would be markedwhenever a purchase or sale were made. Limitation of number ofstocks also enables one to keep far more detailed a watch on their

38 D. CRITCHLEY

performance, and information files on each, together with runningprecis thereof, will be found valuable. It is necessary to reviewfrom time to time companies whose shares are not held and de-tailed records should be kept on a number of second-best invest-ments so that one is aware of early signs of improvement, or forindications of deterioration in stocks held. It will be found thatgood stocks can become sluggish much more quickly than sluggishones become first class. It is therefore usually only necessary tokeep constant watch on those shares one holds and those oneconsiders almost good enough to hold, but there is sometimesjustification for buying a relatively sluggish share if the price ofthat share is expected to advance before that of the one preferredfor long term holding. This might arise through a temporarydepression in the price of the sluggish share. Such equityswitchings can be as profitable as gilt switches, but in general theexpenses are too high. If new money is used the added expensescompared with a direct purchase of the good stock are:

Jobber's turnCommission plus rein-

vestment commissionAdditional stamp duty-

Total

Say

Say

Say

SETTLEMENT

Finally we must deal with the question of payment for the stock.On the day after a purchase or sale a contract note should bereceived from one's broker and should be checked against one'sinstructions. This is the deed of title until such time as the com-pany's certificate is received, but it is only valid if settlement ismade on or before the settlement date stated. On purchases ofgilts, settlement should be made immediately. On purchases ofother stock settlement is usually due on the second Tuesdayfollowing the close of the account. The mechanics of settlementbetween buyer and seller are briefly as follows:

(I) On the third day following the close of the account a ticketbearing the name and address of the buyer and certain other

1 %

I½2

%

%

4i%

39INVESTMENT PROCEDURE

details is passed to the jobber who passes it on to the sellingbroker.

(2) The selling broker prepares and stamps a transfer deed bearingthe names and addresses of both buyer and seller, and afterhaving it signed by the seller delivers it on or after the settle-ment date together with the certificate to the buying broker inexchange for a cheque.

(3) The selling broker then pays his client.The procedure has, however, a number of complications as the

jobber must be credited or debited for his profit or loss, and if thestock has changed hands several times during the account severaljobbers and brokers will all have debits or credits. The system ofname tickets is used because it is only the final holder at the end ofthe account who pays stamp duty and who requires a certificate. Italso simplifies the difficulty that the sizes of sales will not matchexactly the sizes of purchases except in total.

As the procedure stands at the moment it is rather costly andcomplicated with the result that small transactions are not alwayswelcomed. It could certainly be simplified if the stamp duty didnot exist with a resulting saving apart from the duty itself. TheStock Exchange Council is anxious to promote greater simplifica-tion so as to encourage broader use of the Exchange. Theirdepartment, which regulates new issues by companies with, orrequiring, quotations on the Exchange, follows an active programmeof propaganda for greater uniformity in transfer and registrationarrangements.