The Psychology of Speculation

A matter of present and future importance in connection with many investment and speculative stocks, involving as it does questions on which there is a wide diversity of opinion, is the modern practice of increasing the outstanding shares of corporations by splitting them up into fractions, or by declaring liberal stock dividends. Many of the large companies have recently doubled and quadrupled their shares, and some have issued as high as nine new shares for one, on somewhat the same principle as the Government will issue ten one dollar notes in exchange for a ten dollar bill. And in several instances the fractional shares have been split a second, and even a third time. In past years when there were only a few listed securities it was possible for any well informed person in financial circles to tell the par value and the approximate book value of all the leading stocks, but the good old-fashioned methods are no longer in vogue; there are now 1,045 stocks listed on the New York Stock Exchange alone, representing almost every imaginable industry, from steam locomotives to lunch counters, and under the new capital readjustment process it takes a professional statistician to keep up with the changes and determine what stocks are actually worth. But whatever their value may be, it is at least certain that there is not enough money in the world to cash them all in at anywhere near their present market price. Nowadays it is not unusual for industrial companies to have from five to ten million or more shares outstanding.

The lately devised and much over-worked practice of splitting stocks up into small fractions, avowedly for the convenience of traders, savors strongly of the old worn-out custom of "baiting" the public with low-priced issues, ranging from $1 a share upward. As long as we are riding on the crest of the wave of prosperity there appears to be no imminent danger in such inflation, but when business slackens, as it always has periodically in the past -- -- However, the optimists contend that these problems are too far in the future to worry about. Furthermore it is not the design of this article to criticise abuses, or to prognosticate future difficulties that seem likely to grow out of them.