Chapter 3 Investment Information and Securities Transactions.

Chapter 3

Investment Information and Securities Transactions

Getting Started in Online Investing

2

Internet is a major force in investing

Makes investing more accessible to more people

Provides access to sophisticated investment tools

Convenient, relatively simple, inexpensive and fast

Online Investment Tools

3

Investment Education Websites Offer tutorials, online classes and articles Examples: Investing Online Resource Center,

Investor Guide.com, The Motley Fool

Investments Tools Websites Develop financial plans, set investment goals

Planning Tools Websites Provides financial calculators Example: Kiplinger’s Personal Finance

Online Investment Tools

4

Screening Tools Websites Sort through databases of stocks, bonds and

mutual funds to find those with specific characteristics

Examples: Zacks.com and Yahoo!Finance Charting Tools Websites

Plot performance of stocks over a specified time period

Examples: Barchart.com and BigCharts.com Stock Quotes and Portfolio Tracking Websites

Obtain prices and track stock performance Examples: Yahoo!Finance and MSN Money

5

Stock Chart for Qualcomm

Pros and Cons of Using the Internet as an Investment Tool

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Exercise same cautions as regular investing Remember: there is no live broker to act as a

“safety net” Be skeptical of “free” advice online Know what you are buying and from whom Watch out for frequent trading

High transaction costs Higher taxes on short-term gains

Beware of the risks of margin trading

Types of Investment Information

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Descriptive Information – factual data on past behavior of economy, market, industry company or given investment vehicle

Analytical Information – available current data in conjunction with projections and recommendations about potential investments

Types of Investment Information

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Economic and current events

Industry and company information

Information on alternative investment vehicles

Price information

Information on personal investment strategies

Sources of Investment Information

9

Economic and Current Event Information Finance Journals: Wall Street Journal, Barron’s,

Investor’s Business Daily General newspapers: The New York Times Institutional News: Dow Jones, Bloomberg Financial

Services, AP, UPI, CNNMoney Business Periodicals: Fortune, Forbes, Business Week,

Kiplinger’s Personal Finance, Money, Smart Money Government Publications: Economic Report of the

President, Federal Reserve Bulletin Special Subscription Services: Kiplinger Washington

Letter

Sources of Investment Information

10

Industry and Company Information General business periodicals: Wall Street Journal, Business

Week, Forbes, Fortune Trade publications: periodicals devoted to a specific industry Regulation FD: requires critical company information to be

disclosed simultaneously to investment professionals and public

Company Web sites Stockholders’ Reports: report published annually by publicly

held corporations Form 10-K: annual statement filed with SEC by all

companies with publicly traded stock Freeedgar.com: SEC-maintained website with free access to

SEC filings

Sources of Investment Information

11

Industry and Company Information (cont’d) Comparative Data Sources: Dun &

Bradstreet’s Key Business Ratios Subscription Services: Standard & Poor’s

Corporation, Value Line Investment Survey

Brokerage Reports: research reports available to brokerage firm’s clients

Investment Letters: recommendations of experts in securities investment

A Report Containing Descriptive and Analytical Information

12

Sources of Investment Information

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Price Information

Quotations: use ticker symbols to obtain current price data and statistics on companies

TV sources: Bloomberg TV, CNBC, CNN Headline News

Sources of Investment Information

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Other Online Investment Information Sources Financial Portals: supersites on the Web that combine investing

features with other personal finance features

Bond sites: online resources for bond and interest rate information

Mutual fund sites: online resources for mutual fund information

International sites: online resources for global investing, from country research to foreign currency exchange

Investment discussion forums: websites where investors can exchange opinions on stocks and investing strategies (Examples: Motley Fool, Yahoo! Finance)

Sources of Investment Information

15

Avoiding Online Scams Beware of stock manipulators posting false

news or overly optimistic opinions Always know your source Beware of “pump-and-dump”—promoters

who hype a stock and sell out on the inflated prices

Beware of “get-rich-quick”—promoters selling worthless investments to naïve buyers

Sources of Investment Information

16

Protect Yourself by Asking Three Key Questions:

Is the investment registered?Is the person licensed and law-

abiding?Does the investment sound too

good to be true?

Understanding Market Averages and Indexes

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Reasons to use market averages and indexes Gauge general market conditions Compare your portfolio performance to large,

diversified portfolio Study market cycles, trends and behaviors to

forecast future market behavior Stock market averages and indexes measure the

general behavior of stock prices over time Averages reflect the arithmetic average price

behavior at a given point in time Indexes measure the current price behavior

relative to a base value set at an earlier point in time

Understanding Market Averages and Indexes

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Dow Jones Industrial Average (DJIA) Most popular average Comprised of 30 high quality, diversified stocks Tracks overall market activity Stock makeup can change to better reflect the

broader stock market

Dow Jones Transportation Average Comprised of 20 stocks, including railroads,

airlines, freight forwarders and mixed transportation companies

Understanding Market Averages and Indexes

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Dow Jones Utilities Average Comprised of 15 public utility stocks

Standard & Poor’s 500 Composite Index Comprised of 500 stocks from major industry

sectors More broad-based and representative of overall

market than DJIA True index calculated from 1941–1943 base

period closing market values Standard & Poor’s provide seven other indexes for

tracking specific industry sectors

Stock Market Averages and Indexes (July 12, 2006)

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Understanding Market Averages and Indexes

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NYSE Composite Index Includes 2,100 or so stocks listed in NYSE

AMEX Composite Index Includes all stocks listed on the AMEX

Nasdaq Composite Index Includes all stocks traded on the Nasdaq

stock market Often used to track technology companies’

behavior due to large technology companies listed with Nasdaq

Understanding Market Averages and Indexes

22

Value Line Composite Index Includes all 1,700 or so stocks tracked by Value Line Uses equal weighting to eliminate the bias of stocks with

large total market values Wilshire 5000 Index

Includes 5,000 stocks traded on the major exchanges Russell 1000 Index

Includes 1,000 largest companies Russell 2000 Index

Includes 2,000 small companies Europe/Australia/Far East (EAFE MSCI)

Tracks stocks trade on foreign exchanges

Bond Market Indicators

23

Bond YieldsTotal return on bond purchased at

current price and held to maturity Interest +/– changes in bond valueReported as annual rate of return

Dow Jones Corporate Bond IndexCalculated for utility bonds, industrial

bonds and a composite bond average

The Role of Stockbrokers

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Stockbrokers Act as intermediaries between buyers and

sellers of securities

Typically paid by commissions Must be licensed by SEC and securities

exchanges where they place orders Client places order, stockbroker sends order

to brokerage firms, who executes order on the exchanges where firm owns seats

The Role of Stockbrokers

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Brokerage Services Primary service is to executive clients’ purchase and

sale transactions at the best possible price Client’s security certificates often held in street name Street name: stock certificates issued in brokerage

firm’s name, but held in trust for the client who actually owns them

Research information is often provided on specific stocks or economic conditions

Statements showing detailed account transactions are provided

Types of Brokerage Firms

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Full-Service BrokerOffers broad range of services and productsProvides research and investment adviceExamples: Merrill Lynch, A.G. Edwards

Premium Discount BrokerLow commissionsLimited research or investment adviceExamples: Charles Schwab

Types of Brokerage Firms

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Basic Discount Brokers

Main focus is executing trades electronically online

No research or investment adviceCommissions are at deep-

discount

Selecting a Stockbroker

28

Find someone who understands your investment goals

Consider the investing style and goals of your stockbroker

Be prepared to pay higher fees for advice and help from full-service brokers

Ask for referrals from friends or business associates

Beware of churning: increasing commissions by causing excessive trading of clients’ accounts

Types of Brokerage Accounts

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Custodial Account: brokerage account for a minor that requires parent or guardian to handle transactions

Cash Account: brokerage account that can only make cash transactions

Margin Account: brokerage account in which the brokerage firms extends borrowing privileges

Wrap Account: account that shifts investment decisions to a professional money manager and charges a flat annual fee

Basic Types of Orders

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Odd-lot Orders Orders for less than 100 shares of stock

Round-lot Orders Orders for a 100-share unit or multiples

thereof Market Orders

Orders to buy or sell stock at best price available when order is placed

Fastest way to fill order

Basic Types of Orders

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Limit Orders Order to buy at or below a specified price or to sell

at or above a specified price If price limits are not met, order is not filled

Fill-or-Kill Orders Limit orders which is canceled if not filled

immediately Day Orders

Limit orders that expires at end of the day if not filled Good-’til-Canceled (GTC) Orders

Limit orders that remains in effect for six months unless filled, canceled, or renewed

Basic Types of Orders

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Stop-Loss (Stop) Orders Typically used to protect investors from stock price

declines “Suspended” order is placed to sell a stock if price

reaches or falls below a specified level Orders can be day orders or GTC orders Once activated, becomes a market order Can also use stop orders to buy stocks, such as to

limit risk on short sales Stop-Limit Orders

Orders to sell stock at or better than specified price

Prevents sales at undesirable price No sale may occur if prices continues to decline

Day Trading

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Day Trader: an investor who buys and sells stocks quickly throughout the day in hopes of making quick profits

Highly risky, especially if used with margin trading

High brokerage commissions due to frequent trading

Tips for Successful Online Trades

34

Know how to place and confirm orders Verify stock ticker symbols Use limit orders Check and recheck orders—you pay for typos Don’t get carried away

Follow a strategy Don’t churn Avoid or limit margin orders

Open accounts with two brokers Double-check orders for accuracy after completion

Trading Considerations

35

Transaction Costs Fixed commissions used on small trades Negotiated commissions may be used on

large trades

Securities Investor Protection Corporation (SIPC) Protects against broker financial failure Limits up to $500,000 for securities and

$100,000 for cash

Does not guarantee against churning or bad broker advice

Trading Consideration

36

Mediation Informal, voluntary dispute resolution process

between a customer and a broker Nonbinding if parties cannot agree

Arbitration Formal dispute resolution process that requires

customer and broker to present arguments before a panel

Binding arbitration requires customer to accept arbitration panel’s decisions and give up right to sue broker

Using an Investment Advisor

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Advisors are required to be registered with SEC No law or regulatory body guarantees competence

Look for advisors with experience Look for advisors with professional designations

Chartered Financial Analyst (CFA) Certified Investment Management Analyst (CIMA) Chartered Investment Counselor (CIC) Certified Financial Planner (CFP) Chartered Financial Consultant (ChFC) Chartered Life Underwriter (CLU) Certified Public Accountant (CPA)

Paying an Investment Advisor

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Typical professional investment advice fees Small portfolios: annual fees between 2% and 3%

of funds under management Large portfolios: annual fees between 0.25% and

0.75% of funds under management

Check the track record and reputation of advisor

Expect lots of questions from good advisor to assess your investing expertise

Investment Clubs

39

Investments Clubs A legal partnership formed by investors to pool

their knowledge and money Members make stock recommendations and

analyze stock performance Better Investing Community assists in

organizing clubs and provides educational tools

Better Investing Community has over 200,000 investors in over 16,000 investment clubs

The End!

Online Sources for Industry and Company Information

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Pages from a Stockholders’ Report

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Popular Offerings of the Major Subscription Services

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Popular Investment Web Sites

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The DJIA from January 13, 2006, to July 12, 2006

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Major Full-Service, Premium Discount, and Basic Discount Brokers

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