CREDIT TRANSACTIONS IN SECURITIES 199
buyers who had originally bought their stock at lower prices
would begin to take their profit by selling at this price. Also,
speculators who believed that 175 was more than Steel common
was really worth, would sell the stock short. Selling from this
double source would soon tend to depress the price of the stock
toward its real value of 150.
If, however, Steel common should be selling at 125, these
corrective forces set in motion by speculation would also tend
to bring up the price nearer to the real value of 150. Previous
short sellers would begin to purchase at the low figure of 125
to cover their short sales and obtain their profit, while buyers
on margin, encouraged by the belief that the stock was selling
under its real value, would begin buying it “for the rise.” And
this buying, both from the optimistic bulls and the previously
pessimistic bears, would of course tend to lift the price back
toward its real value of 150. Thus speculation through margin
purchases and short sales normally prevents the wide and vio-
ent price fluctuations which would result if stocks were removed
from the price-registering machinery of the stock exchanges.
Economic Value of Short Covering.—Particularly in
times when panic is threatening does the “short interest”’—i.e.,
the speculators who have sold short and who are waiting to
purchase and cover—perform a valuable service to investors by
supporting the falling market with their buying orders and thus
helping to hold prices up even in the face of disaster. For at
such times the investor and margin purchaser become extremely
timid and thus the previous short seller, who is under compul-
sion to purchase and cover his sales, alone enables the investor
who must liquidate, to selPhis securities.
Writing of conditions prevailing on the New York Stock
Exchange at the outbreak of the Great War in 1914," the
president of the Exchange declared:
The conditions on the Stock Exchange when the storm burst, were
in some respects very hopeful . . . the unsettled business outlook
7 Noble. “The New York Stock Exchange in the Crisis of 1914.” pp. 5-6
