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    Fin432_gj_ch3.ppt Fin432_gj_ch3.ppt Presentation Transcript

    • Chapter 3 Online Investing, Information, and Trading
    • 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.
    • 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
    • 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:// /
    • 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
    • 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.
    • Types of Investment Information
      • Economic and current events
      • Industry and company information
      • Information on alternative investment vehicles
      • Price Information
      • Information on personal investment strategies
    • 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
    • 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
    • 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
    • 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
    • Table 3.3 Symbols for Some Well-Known Companies
    • 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.
    • 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?
    • 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
    • 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
    • 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
    • Figure 3.7 Major Stock Market Averages
    • 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
    • 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
    • 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
    • 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
    • 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.
    • 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
    • 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
    • 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
    • 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.
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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
    • 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)
    • 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
    • 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.
    • 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)