198 THE WORK OF THE STOCK EXCHANGE
crease the supply of it. Conversely, every seller tends to lower
prices by increasing supply and decreasing demand. These
laws operate in the establishing of prices utterly irrespective of
whether purchases or sales are made outright or on credit. The
outright purchaser of 100 shares of Reading tends to raise the
price of this stock just as much as a margin purchaser of the
same amount, and an outright seller tends to depress its price
just as much as a short seller, if they sell the same amount of
stock.
But there is this difference, as regards their effect upon
prices, between purchases and sales made outright and those
made on credit. The outright purchaser tends more perma-
nently to increase the price of the stock he purchases, since he
usually withdraws for a long period a number of shares from
the supply. Also, the outright seller tends more permanently to
depress stock prices, since in most cases he does not soon buy
back his stock. Credit transactions in stocks, however, almost
always involve both a purchase and a sale. The buyer on
margin must ultimately prove a seller before he can obtain his
profit, and for the same reason the short seller in the end must
buy stock. Moreover, both margin purchases and short sales
must usually be terminated within a reasonably short period,
lest interest charges and dividends eat up all hope of profits.
In consequence, it is obviofis that the buyer on margin at first
tends to raise prices and later to lower them; and that similarly,
the short seller for the time being tends to lower prices, but
later to raise them again. Thus a double check is created
against the undue inflation of the price above, or the undue
depression of prices below, the actual value of any security in
which active speculation occurs on the Stock Exchange.
Automatic Checks Against Inaccurate Prices.—Let us
suppose that the actual inherent value of 1 share of U. S. Steel
common stock is really $150. Should the price of this stock
rise to 175—or higher than its value warranted—the margin
18 See Chapter II. po. 47.
