chapter 3 investment information and securities transactions

Chapter 3

Investment Information and

Securities Transactions

Copyright ©2014 Pearson Education, Inc. All rights reserved. 3-2

Getting Started in Investment Research

• Investment Education Sites– Offer tutorials, online classes and articles– Examples: Investing Online Resource Center, Investor

Guide.com, The Motley Fool

• Investments Tools– Develop financial plans, set investment goals– Screen stocks on a wide variety of characteristics– Plot charts that track the performance of investments over

time– Keep track of your investments by obtaining current stock

quotes as well as your overall portfolio value


Online general sources

• Google Finance– Company and market information– Stock screener– articles

• Yahoo Finance– Company and market information– Stock screener

• AAII– American Association of Individual Investors– Articles– Company and bond information– Portfolio Information


Figure 3.1 FINRA Investment Calculator

http://www.finra.org/Investors/ToolsCalculators/


Figure 3.2 Zacks Stock Screener

http://www.zacks.com/screening/stock-screener


Pros and Cons of Using the Internet as an Investment Tool

• Makes it easier for individuals to do research on investment and to act on that research

• 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

• 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


Types of Investment Information

• Economic and current events

• Industry and company information

• Information on alternative investments

• 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, CNNMoney– Business Periodicals: Fortune, Forbes, Business Week,

Kiplinger’s Personal Finance, 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

– Freeedgar.com: SEC-maintained website with free access to SEC filings


Table 3.1 Online Sources for Industry and Company Information



• Industry and Company Information (cont’d)– Comparative Data Sources: Dun & Bradstreet’s Key

Business Ratios

– Subscription Services: Standard & Poor’s Corporation, Mergent, Value Line Investment Survey

– Brokerage Reports: research reports available to brokerage firm’s clients

– Investment Letters: recommendations of experts in securities investment



• Price Information– Quotations: use ticker symbols to obtain current

price data and statistics on companies

– TV sources: Bloomberg TV, CNBC, CNN Headline News


Table 3.3 Symbols for Some Well-Known Companies



• Other Online Investment Information Sources– 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

– International sites: online resources for global investing, from country research to foreign currency exchange

– Investment discussion forums: websites where investors can exchange opinions on 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



• Protect Yourself by Asking Five Key Questions:– Is the seller licensed?

• How would you know?

– Is the investment registered?• How would you know?

– How do the risks compare to the potential rewards?

– Do you understand the investment?

– Where you can turn for help?


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



• 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



• 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



• 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


Figure 3.5 The DJIA Average Compared to the S&P 500 Index from May 2010 to May 2012


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


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


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, A.G. Edwards

• 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


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


Table 3.5 Major Full-Service, Premium Discount, and Basic Discount Brokers


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 – Orders 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 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


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


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


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 $250,000 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

– 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

chapter 3 investment information and securities transactions

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