Chapter 3
Online Investing,
Information,
and Trading
Online Investing,
Information, and Trading
• Learning Goals
1. Discuss the growth in online investing, online sites and
investment tools and the pros and cons of using the Internet as
an investment tool.
2. Identify major types and sources of traditional and online
investment information.
3. Explain and interpret commonly cited stock and bond market
averages and indexes.
4. Review the roles of stockbrokers.
5. Describe the basic types of orders and legal aspects of
investor protection.
6. Discuss roles of investment advisors and investment clubs.
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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
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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
– Eg. http://www.investingonline.org/
• Investments Tools Websites
– Develop financial plans, set investment goals
• Planning Tools Websites
– Provides financial calculators
– Example: https://www.fidelity.com/
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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: http://www.morningstar.com/
• Charting Tools Websites
– Plot performance of stocks over a specified time period
– Examples: http://www.barchart.com/
• Stock Quotes and Portfolio Tracking Websites
– Obtain prices and track stock performance
– Example: http://moneycentral.msn.com/investor
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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
• 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
– 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
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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
– Freeedgar.com: SEC-maintained website with free access to
SEC filings
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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
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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: 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
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Table 3.3 Symbols for Some
Well-Known Companies
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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.
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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?
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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)
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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
– 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
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Figure 3.7
Major
Stock
Market
Averages
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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
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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
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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
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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
– OTC orders are placed through Nasdaq system
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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, Salomon Smith Barney
• 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
– Fast-growing; many traditional brokerage firms
are adding online brokerage operations
– Examples: E*Trade, Ameritrade
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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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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.
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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
– Order 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 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
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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 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
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Tips for Successful Online Trades
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•
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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
– 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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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
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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
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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
– 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.
– 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.
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Chapter 3 Homework
•
Exercises (will NOT be collected)
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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)
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