Chapter 3 Online Investing, Information, and Trading

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Chapter 3 Online Investing, Information, and
Trading
2
Online Investing

• The Growth of Online Investing
• The percentage of securities transactions
  increased from 27 to more than 50 from 1998 to
  1999 alone.
• Investors have opened 16 million accounts at over
  170 brokerage firms that offer online accounts.
• About 4 million households manage over 550
  billion in assets online.
• The internet makes buying and selling securities
  convenient, relatively simple, inexpensive, and
  fast.
• The internet provides the most current
  information which is updated continuously.
• See Charles Schwabs home page in Figure 3.3.

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Online Investing

• Investment Education Web Sites
• The Motley Fool Fools School (www.fool.com)
• America Onlines Money Basics
• Investopedia (www.investopedia.com)
• Zacks Investment Research (www.Zacks.com)
• WSJ.com Online Investing (www.investing.wsj.com)
• Nasdaq (www.nasdaq.com)
• Money Magazine (www.money.com)
• Kiplingers Personal Letter (www.Kiplinger.com)
• Smart Money (www.smartmoney.com)

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Online Investing

• Investment Tools
• Financial Planning Calculators. Some useful
  calculators include investment growth
  calculators, college planning calculators,
  retirement planning calculators, and others. (See
  www.fidelity.com, www.financenter.com and also
  Figure 3.2).
• Security Screening Tools. Screening tools allow
  you to sort through huge databases of securities
  to help you narrow down your choices and
  construct your portfolio. (See www.quicken.com,
  www.morningstar.com, and www.wallstreetcity.com
  and also Figure 3.3).

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Online Investing

• Investment Tools
• Charting. Charting is a technique that plots the
  performance of stocks over a time period from
  months to decades or more. (See www.barchart.com,
  www.bigcharts.com, www.stockcharts.com and also
  Figure 3.4).
• Stock Quotes and Portfolio Tracking. Almost
  every investment-oriented web site includes stock
  quotation and portfolio tracking tools. (See
  www.investor.msn.com and www.etrade.com).

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Online Investing

• Using the internet effectively
• The internet is a powerful tool in the hands of
  an astute investor.
• However, using the internet also carries risks
  that warrant advice
• Dont let the speed and ease of online investing
  blind you to the realities higher transactions
  costs will result from greater trading activity.
• Dont believe everything you read on the internet
  stick to the sites of major brokerage firms and
  professional information services.
• If you get bitten by the online investment bug,
  dont be tempted to use margin debt to increase
  your stock holdings its risky!!!

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Types and Sources of Investment Information

• Investment Information can be either descriptive
  or analytical (see Figure 3.5)
• Descriptive information is factual data on the
  past behavior of the economy, the market, the
  industry, the company, or a given investment
  vehicle.
• Analytical information is available current data
  in conjunction with projections and
  recommendation about potential investments.
• Some forms of investment information are free
  (internet, newspapers, magazines, brokerage
  firms, and libraries) others must be purchased
  individually or by subscription from the same
  source categories.

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Types and Sources of Investment Information

• Types of Information
• Economic and current event information
• Industry and company information
• Information on alternative investment vehicles
• Price information
• Information on personal investment strategies
• Sources of Information
• Economic and Current Event Information
• Financial Journals (WSJ, Barrons, and Investors
  Business Daily)
• General Newspapers (New York Times, Washington
  Post, and LA Times)
• Institutional News such as banks (BOA) and Wire
  Services (Bloomberg)

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Types and Sources of Investment Information

• Sources of Information (continued)
• Economic and Current Event Information
  (continued)
• Business Periodicals (US News World Report,
  Business Week, Fortune)
• Government Publications (The Annual Economic
  Report of the President, The Federal Reserve
  Bulletin, Survey of Current Business)
• Special Subscription Services (The Kiplinger
  Washington Letter)
• Industry and Company Information
• General Business Periodicals (Business Week,
  Forbes, the WSJ)
• Trade Publications (Chemical Week, American
  Banker, Computerworld, Industry Week, Oil and Gas
  Journal, Public Utilities Fortnightly)
• Magazines (Red Herring, The Industry Standard,
  Business 2.0, Fast Company, Upside)
• Other Sources (see Table 3.1)

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Types and Sources of Investment Information

• Sources of Information (continued)
• Industry and Company Information (continued)
• Fair Disclosure Rules. In August 2000, the SEC
  passed the fair disclosure rule (Regulation FD)
  requiring senior executives to disclose critical
  information such as earnings forecasts and news
  of mergers and new products simultaneously to
  investment professionals and the public via press
  releases or SEC filings.
• Stockholders Reports and 10-K Reports. Annual
  Reports are are published yearly by publicly held
  corporations and contain a wide range of
  information including current and past financial
  statements (see Figure 3.6 on the following
  slide). 10-K reports are filed with the SEC and
  are available at www.freeedgar.com.

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Figure 3.6 A Page from a Stockholders Report
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Types and Sources of Investment Information

• Sources of Information (continued)
• Industry and Company Information (continued)
• Comparative Data Sources. Comparative data
  sources are typically broken down be industry and
  firm size and are good tools for analyzing
  company financial condition. Useful sources
  include Dunn Bradstreets Key Business Ratios,
  Robert Morris and Associates Annual Statement
  Studies, and the Almanac of Business and
  Industrial Financial Ratios.
• Subscription Services. With subscription
  services, a subscriber generally pays a basic fee
  to access the services information and can
  purchase premium services for greater depth or
  range (See Table 3.2 for a summary of the major
  services).
• Brokerage Reports. Brokerage firms offer reports
  from subscription services or from their own
  in-house analysts. They also provide clients
  with prospectuses and back-office research
  reports (www.multexinvestor.com).

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Types and Sources of Investment Information

• Sources of Information (continued)
• Price Information. Price information is
  available on the Web or in periodicals such as
  the WSJ (See Table 3.3 on the following slide).
• Other Online Investment Information Sources (See
  Table 3.4)
• Financial Portals (See also Figure 3.7).
• Bond Sites
• Mutual Fund Sites
• International Sites. See www.worldlyinvestor.com,
  www.adr.com, www.europeaninvestor.com, and
  www.cbs.marketwatch.com.
• Investment Decision Forums. See www.fool.com,
  www.finance.yahoo.com, www.ragingbull.com, and
  www.cnet.com.
• Avoiding online scams.

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Table 3.3 Symbols for Some Well-Known Companies
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Understanding Market Averages and Indexes

• Studying the performance of market averages and
  indexes allow us to
• Gauge general market conditions
• Compare a potential portfolios market
  performance against a large, diversified market
  portfolio
• Study market cycles, trends, and behaviors in
  order to forecast future market behavior.
• Stock market averages and indexes (See Figure
  3.8)
• Averages reflect the arithmetic average price of
  stocks.
• Indexes measure the current price of stocks in
  relation to a base value set at an earlier point
  in time.

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Understanding Market Averages and Indexes

• Stock market averages and indexes (continued)
• Dow Jones Averages
• DJIA (See Equation 3.1 and Figure 3.9)
• Occasional changes in the DJIA 30
• Impact of higher priced stocks
• Meaningful only when compared to past values
• Other Averages (DJ Transportation, DJ Utilities,
  etc)
• Standard Poors Indexes
• Unlike the DJ averages, the SP Indexes are true
  indexes (See Equation 3.2)
• Unlike the DJ averages, they are based on market
  values rather than share prices.
• Like the DJ averages, the SP Indexes are useful
  only in making comparisons to past values.

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Understanding Market Averages and Indexes

• Stock market averages and indexes (continued)
• NYSE, AMEX, and Nasdaq Indexes
• Each of the three above indexes reflects the
  movement of stocks listed on its exchange.
• The NYSE composite index includes the
  approximately 3,000 stocks listed on the Big
  Board. (Base year 1965)
• The AMEX composite index reflects the price of
  all shares traded on the American Stock Exchange.
  (Base year 1973)
• The Nasdaq composite reflects over-the-counter
  market activity. (Base year 1971)
• Value Line Indexes
• Other Averages and Indexes
• Wilshire 5000
• Russell 2000

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Understanding Market Averages and Indexes

• Bond Market Indicators
• Bond Yields. Bond yields represent the annual
  rate of return investors would earn if they
  purchased a bond at its current price and held it
  to maturity.
• Dow Jones Bond Averages. DJ bond averages
  include utility, industrial, and composite
  averages.
• NYSE Bond Diary. The NYSE is the dominant
  organized exchange on which bonds are traded.
  Activity is summarized daily in the WSJ and
  weekly in Barrons.

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Making Securities Transactions

• The Role of Stockbrokers
• Stockbrokers Defined
• Brokerage Services
• Types of Brokerage Firms (See Table 3.5)
• Full-service brokers
• Discount brokers
• Online brokers
• Selecting a Stockbroker
• Select a broker whom you believe understands your
  investment goals
• Compare the cost and types of services available
• Referrals from friends or business associates are
  a good way to begin your search (watch out for
  churning)

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Making Securities Transactions

• The Role of Stockbrokers
• Opening an Account
• Single or Joint Account
• Cash or Margin Account
• Wrap Account
• Odd Lot or Round Lot Transactions
• Basic Types of Orders
• Market Order. A market order is an order to buy
  or sell a stock at the best available price when
  the order is placed.
• Limit Order. A limit order is an order to buy or
  sell at or below a specified price or to sell at
  or above a specified price.

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Making Securities Transactions

• Basic Types of Orders (continued)
• Limit Order (continued)
• Fill-or-kill order canceled if not immediately
  executed
• Day order if not executed is canceled at the
  end of the day
• Good-til-canceled (GTC) order generally
  remains in effect for 6 months unless executed,
  canceled, or renewed.
• Stop-Loss Order. A stop-loss order is an order
  to sell a stock when its market price reaches or
  drops below a specified level can also be used
  to buy stock when its market price reaches or
  rises above a specified level.
• Online Transactions (See Table 3.6)

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Making Securities Transactions

• Online Transactions (continued)
• Stocks (See Figure 3.10)
• Day Trading
• Technical and Service Problems
• Tips for successful online trades
• Know how to place and confirm your order before
  beginning
• Verify the stock symbol of the security you wish
  to purchase
• Use limit orders
• Dont ignore the online reminders that ask you to
  check and recheck
• Dont get carried away and churn your own account
• Open accounts with two brokers
• Double-check your orders for accuracy
• Bonds

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Making Securities Transactions

• Online Transactions (continued)
• Mutual Funds
• Transactions Costs
• Since the passage of the Securities Acts
  Amendments of 1975, brokers have been able to set
  their own commission rates.
• Fixed Commission Schedules. Fixed brokerage
  commissions typically apply to the small
  transactions make by individual investors.
• Negotiated Commissions. Negotiated commissions
  are typically agreed to by the client and broker
  as a result of negotiations typically applies to
  large institutional transactions and to
  individual investors who maintain large accounts.

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Making Securities Transactions

• Investor Protection SIPC and Arbitration
• The Securities Investor Protection Corporation
  (SIPC) is a nonprofit membership corporation
  authorized by the federal government that insures
  each brokerage customers account for up to
  500,000 with claims for cash limited to 100,000
  per customer.
• Mediation is an informal, voluntary dispute
  resolution process in which a customer and a
  broker agree to a mediator who facilitates
  negotiations between them to resolve the case.
• Arbitration is a formal dispute resolution
  process in which a customer and a broker present
  their argument before an arbitration panel which
  then decides the case in this case, you do not
  have the option to sue.

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Investment Advisors and Investment Clubs

• Using an Investment Advisor
• Regulation of Investment Advisors
• The Investment Advisors Act of 1940
• Advisors with Professional designations are
  generally preferred (CFA, CFP, ChFC, CLU, CPA)
• Online Investment Advice (See Table 3.7)
• The Cost and Use of Investment Advice
• Investment Clubs. Investment clubs are legal
  partnerships through which a group of investors
  are bound to a specified organizational
  structure, operating procedures, and purpose,
  which is typically to earn favorable long-term
  returns from moderate risk investments.