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  • 1. Chapter 3 Online Investing, Information, and Trading
  • 2. Online Investing, Information, and Trading
    • Learning Goals
      • Discuss the growth in online investing, online sites and investment tools and the pros and cons of using the Internet as an investment tool.
      • Identify major types and sources of traditional and online investment information.
      • Explain and interpret commonly cited stock and bond market averages and indexes.
      • Review the roles of stockbrokers.
      • Describe the basic types of orders and legal aspects of investor protection.
      • Discuss roles of investment advisors and investment clubs.
  • 3. The Growth of Online Investing
    • Internet has become major force in investing
      • Makes investing more accessible to more people
      • Creates a more level playing field for investing
      • Provides access to sophisticated investment tools
      • Expected to grow from 14.3 million Internet users in 2000 to 32.4 million in 2004
      • Easy, relatively simple, inexpensive and fast
  • 4. Online Investment Tools
    • Investment Education Websites
      • Offer tutorials, online classes and articles
      • Examples: Investing Online Resource Center , Investor , The Motley Fool
      • Eg. http:// /
    • Investments Tools Websites
      • Develop financial plans, set investment goals
    • Planning Tools Websites
      • Provides financial calculators
      • Example: https:// /
  • 5. Online Investment Tools
    • Screening Tools Websites
      • Sort through databases of stocks, bonds and mutual funds to find those with specific characteristics
      • Examples: http:// /
    • Charting Tools Websites
      • Plot performance of stocks over a specified time period
      • Examples:
    • Stock Quotes and Portfolio Tracking Websites
      • Obtain prices and track stock performance
      • Example: http:// /investor
  • 6. Pros and Cons of Using the Internet as an Investment Tool
    • 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.
  • 7. Types of Investment Information
    • Economic and current events
    • Industry and company information
    • Information on alternative investment vehicles
    • Price Information
    • Information on personal investment strategies
  • 8. Sources of Investment Information
    • 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, CNN
      • Business Periodicals: Fortune, Forbes, Business Week, Money, Smart Money, Worth
      • Government Publications: Economic Report of the President, Federal Reserve Bulletin
      • Special Subscription Services: Kiplinger Washington Letter
  • 9. Sources of Investment Information (cont’d)
    • 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
      • SEC-maintained website with free access to SEC filings
  • 10. Sources of Investment Information (cont’d)
    • Industry and Company Information (cont’d)
      • Comparative Data Sources: Dun & Bradstreet’s Key Business Ratios
      • Subscription Services: Standard & Poor’s Corporation, Moody’s Investor Services, Value Line Investment Survey
      • Brokerage Reports: research reports available to brokerage firm’s clients
      • Investment Letters: recommendations of experts in securities investment
  • 11. Sources of Investment Information (cont’d)
    • Price Information
      • Quotations: use ticker symbols to obtain current price data and statistics on companies
      • TV sources: CNN Headline News, MSNBC
      • 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
  • 12. Table 3.3 Symbols for Some Well-Known Companies
  • 13. Sources of Investment Information (cont’d)
    • Investment Discussion Forums
      • Websites where investors can exchange opinions about stocks and investing strategies
      • Examples: Motley Fool, Yahoo! Finance
    • 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.
  • 14. Sources of Investment Information (cont’d)
    • Protect Yourself by Asking Three Key Questions:
      • Is the investment registered?
      • Who is making the sales pitch?
      • Is it too good to be true?
  • 15. Understanding Market Averages and Indexes
    • 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
  • 16. Understanding Market Averages and Indexes (cont’d)
    • 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
  • 17. Understanding Market Averages and Indexes (cont’d)
    • 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
  • 18. Figure 3.7 Major Stock Market Averages
  • 19. Understanding Market Averages and Indexes (cont’d)
    • NYSE Composite Index
      • Includes all 3,100 or so stocks listed in NYSE
    • AMEX Composite Index
      • Includes all stocks listed on the AMEX
    • Nasdaq OTC Composite Index
      • Includes all 3,450 or so stocks traded on the Nasdaq system
      • Often used to track technology companies’ behavior due to large technology companies listed with Nasdaq
  • 20. Understanding Market Averages and Indexes (cont’d)
    • 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 NYSE, AMEX and OTC
    • Russell 1000 Index
      • Includes 1,000 largest companies
    • Russell 2000 Index
      • Includes 2,000 small companies
  • 21. Bond Market Indicators
    • Bond Yields
      • Total return on bond purchased at current price and held to maturity
      • Reported as annual rate of return
    • Dow Jones Corporate Bond Index
      • Calculated for utility bonds, industrial bonds and a composite bond average
    • NYSE Bond Diary
      • Daily statistics on number issues traded, advances, declines, and remained unchanged
  • 22. The Role of Stockbrokers
    • 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
      • OTC orders are placed through Nasdaq system
  • 23. The Role of Stockbrokers (cont’d)
    • 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.
  • 24. Types of Brokerage Firms
    • Full-Service Broker
      • Offers broad range of services and products
      • Provides research and investment advice
      • Examples: Merrill Lynch, Salomon Smith Barney
    • Premium Discount Broker
      • Low commissions
      • Limited research or investment advice
      • Examples: Charles Schwab
  • 25. Types of Brokerage Firms (cont’d)
    • Basic Discount Brokers
      • Main focus is executing trades electronically online
      • No research or investment advice
      • Commissions are at deep-discount
      • Fast-growing; many traditional brokerage firms are adding online brokerage operations
      • Examples: E*Trade, Ameritrade
  • 26. Selecting a Stockbroker
    • 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
  • 27. Types of Brokerage Accounts
    • 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.
  • 28. Basic Types of Orders
    • 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
      • Order to buy or sell stock at best price available when order is placed
      • Fastest way to fill order
  • 29. Basic Types of Orders (cont’d)
    • 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 Order
      • Limit order which is canceled if not filled immediately
    • Day Order
      • Limit order that expires at end of the day if not filled
    • Good-’til-Canceled (GTC) Order
      • Limit order that remains in effect for six months unless filled, canceled, or renewed
  • 30. Basic Types of Orders (cont’d)
    • 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 Order
      • Order to sell stock at or better than specified price
      • Prevents sale at undesirable price
      • No sale may occur if price continues to decline
  • 31. Tips for Successful Online Trades
    • 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
  • 32. Trading Considerations
    • 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
  • 33. Trading Considerations (cont’d)
    • 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
  • 34. Using an Investment Advisor
    • 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)
  • 35. Paying an Investment Advisor
    • 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
  • 36. Investment Clubs
    • Investments Clubs
      • A legal partnership formed by investors to pool their knowledge and money.
      • Members make stock recommendations and analyze stock performance.
      • National Association of Investors Corporation (NAIC) assists in organizing clubs and provides educational tools.
      • NAIC has over 325,000 investors in over 28,000 investment clubs.
  • 37. Chapter 3 Homework
    • Exercises (will NOT be collected)
      • Text Website: Self-assessment quiz
      • End-of-Chapter CFA questions (Page 122)
      • End-of-Chapter Odd-numbered Discussion Questions and Problems
    • Homework (will be collected and graded, due date to be announced)
      • Excel with Spreadsheet (page 128)