copyright © 2011 pearson prentice hall. all rights reserved. chapter 3 investment information and...

Copyright © 2011 Pearson Prentice Hall. All rights reserved.

Chapter 3

Investment Information and Securities Transactions

Copyright © 2011 Pearson Prentice Hall. All rights reserved.1-2

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


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


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


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


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 (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


Table 3.3 Symbols for Some Well-Known Companies



• 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 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!!


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

index in stock of price share base

index in stock of price shareIndex P&S



• 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


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


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 $100,000 for cash– Does not guarantee against churning or bad broker advice


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

copyright © 2011 pearson prentice hall. all rights reserved. chapter 3 investment information and...

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