Chapter 3
Investment Information and
Securities Transactions
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
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Offer tutorials, online classes and articles
Examples: Investing Online Resource Center,
Investor Guide.com, The Motley Fool
 Investments Tools Websites
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Develop financial plans, set investment goals
 Planning Tools Websites
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Provides financial calculators
Example: Kiplinger’s Personal Finance
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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Stock Chart for Qualcomm
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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
vehicle
 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 investment
vehicles
 Price information
 Information on personal investment
strategies
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Sources of Investment Information
 Economic and Current Event Information
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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
 Industry and Company Information
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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
 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
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A Report Containing Descriptive and Analytical
Information
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Sources of Investment
Information
 Price Information
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Quotations: use ticker symbols to obtain
current price data and statistics on
companies
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TV sources: Bloomberg TV, CNBC, CNN
Headline News
Sources of Investment Information
 Other Online Investment Information Sources
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Financial Portals: supersites on the Web that combine investing
features with other personal finance features
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Bond sites: online resources for bond and interest rate
information
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Mutual fund sites: online resources for mutual fund information
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International sites: online resources for global investing, from
country research to foreign currency exchange
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Investment discussion forums: websites where investors can
exchange opinions on stocks and investing strategies (Examples:
Motley Fool, Yahoo! Finance)
Sources of Investment Information
 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
 Protect Yourself by Asking Three Key
Questions:
 Is
the investment registered?
 Is
the person licensed and lawabiding?
 Does
the investment sound too
good to be true?
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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
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 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
 Dow Jones Industrial Average (DJIA)
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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
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Comprised of 20 stocks, including railroads,
airlines, freight forwarders and mixed
transportation companies
Understanding Market
Averages and Indexes
 Dow Jones Utilities Average
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Comprised of 15 public utility stocks
 Standard & Poor’s 500 Composite Index
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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
 NYSE Composite Index
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Includes 2,100 or so stocks listed in NYSE
 AMEX Composite Index
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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
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Understanding Market Averages
and Indexes
 Value Line Composite Index
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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
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Includes 5,000 stocks traded on the major exchanges
 Russell 1000 Index
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Includes 1,000 largest companies
 Russell 2000 Index
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Includes 2,000 small companies
 Europe/Australia/Far East (EAFE MSCI)
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Tracks stocks trade on foreign exchanges
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
 Brokerage Services
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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, A.G. Edwards
 Premium Discount Broker
 Low
commissions
 Limited research or investment advice
 Examples: Charles Schwab
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Types of Brokerage Firms
 Basic Discount Brokers
 Main
focus is executing trades
electronically online
 No
research or investment advice
 Commissions
discount
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are at deep-
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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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
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decisions to a professional money manager and
charges a flat annual fee
Basic Types of Orders
 Odd-lot Orders
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Orders for less than 100 shares of stock
 Round-lot Orders
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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
 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
 Stop-Loss (Stop) Orders
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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
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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
 Day Trader: an investor who buys and sells
stocks quickly throughout the day in hopes of
making quick profits
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Highly risky, especially if used with margin
trading
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High brokerage commissions due to
frequent trading
Tips for Successful Online Trades
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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
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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
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Fixed commissions used on small trades
Negotiated commissions may be used on
large trades
 Securities Investor Protection Corporation (SIPC)
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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
 Mediation
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Informal, voluntary dispute resolution process
between a customer and a broker
Nonbinding if parties cannot agree
 Arbitration
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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)
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Paying an Investment Advisor
 Typical professional investment advice fees
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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
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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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