June 27, 2008

Day trading futures – For example, if the securities owned are in turn issues of a company which is also using leverage to an extreme, as many of the public utility holding companies did in the twenties, the leverage quality will be accelerated both ways, which unfortunately was forgotten in the promotion of investment companies.

By pyramiding, or superimposing, one leverage company on another leverage investment company, a small change in the asset value of the company at the base might be reflected many times over in the asset value of the common stock at the top company. An investment company was organized with a public subscription of $25 million (250,000 shares) in first preferred stock and 250,000 shares of common stock. The sponsors paid $5.1 million for 50,000 shares of second preferred stock and 750,000 shares of common stock. After deducting organization and underwriting expenses, there were not enough assets to meet the prior claims of the preferred stocks in the event of liquidation; so the common stock had no asset value. Four years later, the net assets accruing to the common stock had increased by $23 million, being practically all of the appreciation in the total assets of the company.

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