Chapter 3


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Chapter 3

  1. 1. Chapter 3 On-Line Investing, Information and Trading
  2. 2. Key Topics <ul><li>Key topics include: </li></ul><ul><ul><li>on-line trading issues; </li></ul></ul><ul><ul><li>uses of investment information from written/electronic sources and the role of investment advisers; </li></ul></ul><ul><ul><li>stock and bond market averages and indexes; and </li></ul></ul><ul><ul><li>making security transactions. </li></ul></ul>
  3. 3. On-Line Investing <ul><li>The internet has empowered individual investors by </li></ul><ul><ul><li>providing low-cost information and tools formerly available only to investing professionals </li></ul></ul><ul><ul><li>Simplifying the investment process </li></ul></ul><ul><li>On-line investing provides </li></ul><ul><ul><li>Savings in time and money </li></ul></ul><ul><ul><li>Real-time stock price quotes </li></ul></ul><ul><ul><li>Market activity data </li></ul></ul><ul><ul><li>Research reports </li></ul></ul>
  4. 4. On-Line Investing <ul><li>On-line tools include </li></ul><ul><ul><li>Financial planning calculators </li></ul></ul><ul><ul><li>Stock-screening programs </li></ul></ul><ul><ul><li>Charting </li></ul></ul><ul><li>On-line buying and selling </li></ul><ul><ul><li>Convenient </li></ul></ul><ul><ul><li>Relatively simple </li></ul></ul><ul><ul><li>Inexpensive </li></ul></ul><ul><ul><li>fast </li></ul></ul>
  5. 5. Types of Investment Information (1 of 3) <ul><li>This information can be descriptive or analytical. </li></ul><ul><ul><li>Descriptive information provides factual data on the past behavior of the economy, the market, the industry, the company, or a given investment vehicle. </li></ul></ul><ul><ul><li>Analytical information carries available current data in conjunction with projections and recommendations about potential investment. </li></ul></ul>
  6. 6. Types of Investment Information (2 of 3) <ul><li>Investment information can be divided into different types: </li></ul><ul><ul><li>Economic and current events information provides data related to economic, political, and social trends. </li></ul></ul><ul><ul><li>Industry and company information relates to specific industries and companies and is most relevant to stock, bond, or derivative investments. </li></ul></ul>
  7. 7. Types of Investment Information (3 of 3) <ul><li>Investment information can be divided into different types: </li></ul><ul><ul><li>Information on alternative investment vehicles provides data on real property investments and other non-traditional investments. </li></ul></ul><ul><ul><li>Price information contains current price quotes and volume information on securities. </li></ul></ul><ul><ul><li>Information on personal investment strategies provides recommendations on investment strategies and tends to be educational or advisory. </li></ul></ul>
  8. 8. Sources of Economic and Current Event Information (1 of 4) <ul><li>The Wall Street, Barron's, Investor's Daily, USA Today, local newspapers and special financial </li></ul><ul><li>General business and economic articles appear in Newsweek, Time, and US News & World Report. </li></ul>
  9. 9. Sources of Economic and Current Event Information (2 of 4) <ul><li>Strictly business- and finance-oriented periodicals include Business Week and Fortune. </li></ul><ul><li>Securities and marketplace commentaries are mostly found in Forbes, Money, Kiplinger's Personal Finance Magazine and many others. </li></ul>
  10. 10. Sources of Economic and Current Event Information (3 of 4) <ul><li>Special subscription services include business and economic forecasts, information on government regulations and contracts, and overall economic activity. </li></ul>
  11. 11. Sources of Economic and Current Event Information (4 of 4) <ul><li>Industry and company information is of special interest to security investors. </li></ul><ul><li>General information is available in trade publications such as Chemical Week and American Banker. </li></ul><ul><li>Specific information comes from shareholder's reports, subscription services, brokerage reports, and investment letters. </li></ul>
  12. 12. Shareholders’ Reports and Fair Disclosure Rules (Reg FD) <ul><li>Shareholders' or annual reports are published each year by publicly held corporations. </li></ul><ul><ul><li>Included in this report are the company's financial statements both current and a summary of the past several years. A company's 10-K, which is a required statement filed with the SEC, is also a rich information source. </li></ul></ul><ul><li>Fair Disclosure Rules (Regulation FD) </li></ul><ul><ul><li>Senior executives must disclose critical information simultaneously to investment professionals and the public via press releases or SEC filings. </li></ul></ul>
  13. 13. Subscription Services <ul><li>Subscription services can provide information on an industry or company. Usually a basic fee entitles the investor to regularly updated, general information. Other information is often available for an additional fee. Services such as Value Line, Standard and Poor's, and Moody's are available in libraries and at brokerage offices. </li></ul>
  14. 14. Brokerage Offices and Investment Letters <ul><li>Brokerage offices provide their customers with prospectuses on new issues and research reports on those companies and countries they follow. </li></ul><ul><li>Investment letters are sold on a subscription basis and provide analysis, conclusions, and recommendations relating to specific firms and/or industries. </li></ul>
  15. 15. Web sites <ul><li>Price information, including real-time stock quotes, may be found at numerous Web sites, including financial portals, most business periodical Websites, and brokerage sites. </li></ul><ul><li>There are sites devoted to bonds, mutual funds, equities, derivatives, international assets, etc. </li></ul>
  16. 16. Averages and Indexes <ul><li>Stock market averages and indexes allow investors to monitor and keep abreast of securities </li></ul><ul><li>markets. </li></ul><ul><li>Stock market averages and indexes are used to measure the general behavior of stock prices. </li></ul><ul><ul><li>An average is the arithmetic average price behavior of a representative group of stocks at a given point in time. </li></ul></ul><ul><ul><li>An index measures current price behavior relative to a base value set at an earlier time. </li></ul></ul>
  17. 17. Dow Jones <ul><li>Dow Jones prepares five stock averages which appear daily in the Wall Street Journal. </li></ul><ul><ul><li>The most popular is the Dow Jones Industrial Average (DJIA) made up of 30 high-quality stocks which represent the American economy. The DJIA is the most followed stock market indicator. </li></ul></ul><ul><ul><li>Other Dow averages are Dow Jones Transportation Average (20 stocks), Dow Jones Utilities Average (15 stocks), the Dow Jones 65 Stocks Composite Average (includes the 65 stocks of the other three), and the newest Dow Jones Global-US Index, which is a market-weighted index. </li></ul></ul>
  18. 18. Standard and Poor’s <ul><li>Standard and Poor's (S&P) publishes six indexes relating the current price of a group of stocks back to 1941-1943. </li></ul><ul><li>The S&P 500 is a composite of an industrial index (400 stocks), a transportation index (20 stocks), a utility index (40 stocks), and a financial index (40 stocks). </li></ul><ul><li>In recent years a new S&P Midcap 400 index has been established consisting of 400 medium-sized companies. Many experts prefer the S&P indexes to the Dow averages, feeling they reflect more accurately the price behavior of the market. </li></ul>
  19. 19. Other Indexes <ul><li>The NYSE, AMEX, and Nasdaq indexes are based on activity on the New York and American stock exchanges and the Nasdaq National Market respectively. They are calculated in a manner similar to the S&P indexes. </li></ul><ul><li>Value Line, the Wilshire 5000 Index, Barron's, and the New York Times also publish indexes. These, too, reflect the general behavior of the overall market. </li></ul>
  20. 20. Key Measures of Bond Markets (1 of 3) <ul><li>Key measures to assess the general behavior of bond markets are bond yields, the Dow Jones bond averages, and the New York Stock Exchange bond statistics. </li></ul><ul><li>Bond yields are arithmetic averages of yields-to-maturity for groups of similar bonds. These yields are reported to Barron's, S&P, Moody's, and by the Federal Reserve. These, like other summary measures, are most useful when viewed over time. </li></ul>
  21. 21. Key Measures of Bond Markets (2 of 3) <ul><li>Dow Jones presents a utility, an industrial, and a composite bond average. These are the arithmetic averages of the closing prices of the bonds included in each group. Dow Jones also has a government bond average. Dow Jones bond averages are published in the Wall Street Journal and Barron's. Typically the bond yields are also quoted. </li></ul>
  22. 22. Key Measures of Bond Markets (3 of 3) <ul><li>Most bond trading done on an organized exchange is done on the NYSE. Summary statistics on bond trading from that exchange include the number of issues traded; number that advanced (in price), declined, did not change; the number of new highs and lows; and total dollar volume. These are published daily in the Wall Street Journal. </li></ul>
  23. 23. Security Transactions <ul><li>Making security transactions involves: </li></ul><ul><ul><li>understanding the procedures required </li></ul></ul><ul><ul><li>the costs involved </li></ul></ul><ul><ul><li>the types of orders that can be placed in order to develop a sound investment program. </li></ul></ul>
  24. 24. Stockbrokers (1 of 3) <ul><li>The role of stockbrokers, also referred to as account executives, investment executives or financial consultants, is an important one to fully understand. Stockbrokers are individuals licensed by the NASD to facilitate transactions between buyers and sellers of securities. </li></ul>
  25. 25. Stockbrokers (2 of 3) <ul><li>Brokerage services vary, but most full-service brokerage firms provide research, information, and record-keeping. </li></ul><ul><li>Brokerage firms most often hold securities for safekeeping in street name, which means that the stock certificates are issued in the brokerage house's name but held in trust for its clients who are the actual owners. </li></ul><ul><li>Most brokerage houses also perform the service of investing clients' excess cash in money market funds. </li></ul>
  26. 26. Stockbrokers (3 of 3) <ul><li>Full-service broker is a broker who, in addition to facilitating transactions, provides clients with a full array of brokerage services. </li></ul><ul><li>A discount broker charges low commissions to make transactions for customers but provides little or no research information or investment advice. </li></ul><ul><li>An on-line broker is typically a discount broker through whom investors can execute trades electronically on-line through a commercial service or on the Internet. </li></ul>
  27. 27. Brokerage Accounts <ul><li>Many types of brokerage accounts are available. </li></ul><ul><li>An account may be single (one person) or joint (two or more people). </li></ul><ul><li>A custodial account is for a minor and requires a parent or guardian to be part of all transactions. </li></ul>
  28. 28. Brokerage Accounts (continued) <ul><li>An account may be cash or margin. </li></ul><ul><li>Cash accounts are most common meaning all transactions are for cash. </li></ul><ul><ul><li>Margin accounts allow the investor to borrow funds from the brokerage house to purchase securities. </li></ul></ul><ul><li>Wrap accounts are brokerage accounts in which customers with large portfolios pay a flat annual fee that covers the cost of a money manager's services and the commissions on all trades. </li></ul>
  29. 29. Transactions <ul><li>A transaction can be for a round lot (100 shares or multiples thereof) or for an odd lot (less than 100 shares. </li></ul><ul><li>Three basic types of orders are used to make security transactions. </li></ul><ul><ul><li>A market order is an order to buy or sell at the best price available at the time the order is placed. </li></ul></ul><ul><ul><li>A limit order is an order to buy at or below a specified price or to sell at or above a specified price. </li></ul></ul>
  30. 30. Stop-Loss Order <ul><li>A stop-loss order is an order to sell a stock when its market price reaches or drops below a specified level; can also be used to buy stock when its market price reaches or rises above a specified level. </li></ul><ul><li>It is used mainly to protect an investor from adverse price drops. When the specified price is triggered, this order becomes a market order. By raising the level of the stop as the price rises, a higher profit can be locked-in. </li></ul>
  31. 31. Market and Limit Orders <ul><li>Market and limit orders can be day orders or good-till-canceled (GTC) orders. </li></ul><ul><li>On-line Transaction Issues </li></ul><ul><ul><li>You can place the same types of orders on-line as you can with a traditional broker </li></ul></ul><ul><ul><li>Technical and service problems - the number one complaint by on-line traders </li></ul></ul><ul><ul><li>Day Trading – an investor who buys and sells stocks quickly throughout the day in hopes of making quick profits. </li></ul></ul>
  32. 32. Transaction Costs <ul><li>Transaction costs compensate stockbrokers for their services. Commissions vary depending on the investment vehicle or type of order. Commissions are charged both on purchases and sales. </li></ul><ul><ul><li>Fixed commission schedules generally apply to small transactions. </li></ul></ul><ul><ul><li>Negotiated commissions are agreed on by the client and the broker as a result of their negotiations. </li></ul></ul>
  33. 33. Investor Protection <ul><li>SIPC </li></ul><ul><ul><li>A customer's account is insured up to $500,000, except that claims for cash are limited to $100,000, by the Securities Investor Protection Corporation (SIPC), should a brokerage firm fail. </li></ul></ul><ul><ul><li>Some brokerage firms insure customer accounts for amounts in excess of $500,000. </li></ul></ul>
  34. 34. Arbitration and Mediation <ul><li>Arbitration and mediation. </li></ul><ul><ul><li>Arbitration is a formal dispute resolution process in which a customer and a broker present their arguments before a panel, which then decides the case. </li></ul></ul><ul><ul><li>Mediation is an informal, voluntary dispute resolution process in which a customer and a broker agree to a mediator, who facilitates negotiations between them to resolve a case of disagreement. </li></ul></ul>
  35. 35. Advisers (1 of 3) <ul><li>Investment advisers provide investors with advice-usually for a fee. </li></ul><ul><li>Advisers provide a product which ranges from broad general advice to specific detailed analyses and recommendations. The most general form of such advice is a newsletter, but more specific advice is available. </li></ul>
  36. 36. Advisers (2 of 3) <ul><li>The Investment Advisers Act of 1949 ensures that investment advisers make full disclosure of information about their backgrounds, conflicts of interest, etc. </li></ul><ul><li>The act requires professional advisers to register and file periodic reports with the SEC. </li></ul><ul><li>Such registration does not guarantee competence, only some protection from fraudulent and unethical practices. </li></ul>
  37. 37. Advisers (3 of 3) <ul><li>Advisers possessing a professional designation such as Chartered Financial Analyst (CFA), Chartered Financial Consultant (ChFC), Chartered Life Underwriter (CLU), or CERTIFIED FINANCIAL PLANNER ™ (CFP ® ) are usually preferred because they have completed course work in investments. </li></ul><ul><li>Professional investment advice can cost from 0.25% to 3% of an investor's portfolio. </li></ul>
  38. 38. Investment Clubs <ul><li>An investment club is a legal partnership through which a group of investors are bound to a specified organizational structure, operating procedures, and purpose, which is typically to earn favorable long-term returns from moderate risk investments. </li></ul>