Chapter 3
Investment
Information and
Securities Transactions
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Getting Started in Online Investing
• 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
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Online Investment Tools
• 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
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Online Investment Tools
• 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
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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
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Types of Investment Information
• Descriptive Information – factual data on past
behavior of economy, market, industry company
or given investment
• Analytical Information – available current data
in conjunction with projections and
recommendations about potential investments
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Types of Investment Information
• Economic and current events
• Industry and company information
• Information on alternative investments
• Price information
• Information on personal investment strategies
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Sources of Investment
Information (cont’d)
• Price Information
– Quotations: use ticker symbols to obtain current price
data and statistics on companies
– TV sources: Bloomberg TV, CNBC, CNN Headline
News
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Table 3.3 Symbols for Some Well-Known
Companies
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Sources of Investment
Information (cont’d)
• 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
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Sources of Investment
Information (cont’d)
• Protect Yourself by Asking Three Key Questions:
– Is the investment registered?
• How would you know??
– Is the person licensed and law-abiding?
• How would you know?
– Does the investment sound too good to be true?
• Use your brain!!
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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
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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
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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
 shareprice of stock in index 
S & P Index 
 base shareprice of stock in index 
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Understanding Market Averages
and Indexes (cont’d)
• NYSE Composite Index
– Includes all stocks listed in NYSE
• AMEX Composite Index
– Includes all stocks listed on the NYSE 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
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Understanding Market Averages
and Indexes (cont’d)
• Value Line Composite Index
– Includes all 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
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Bond Market Indicators
• Bond Yields
– Total return on bond purchased at current price and held to
maturity
– Interest +/– changes in bond value
– Reported as annual rate of return
• Dow Jones Corporate Bond Index
– Calculated for utility bonds, industrial bonds and a composite
bond average
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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
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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
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Types of Brokerage Firms
• Full-Service Broker
– Offers broad range of services and products
– Provides research and investment advice
– Examples: Merrill Lynch, A.G. Edwards
• Premium Discount Broker
– Low commissions
– Limited research or investment advice
– Examples: Charles Schwab
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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
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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
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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
– Orders to buy or sell stock at best price available when order is placed
– Fastest way to fill order
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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 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
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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 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
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Day Trading
• 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
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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
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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
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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
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Investment Clubs
• 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
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