1. Chapter 3 Online Investing, Information, and Trading

2. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 3-2 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.

3. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 3-3 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

4. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 3-4 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: FinanCenter.com

5. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 3-5 Figure 3.2 Financial Calculator Screenshot courtesy of FinanCenter. © 2003 FinanCenter

6. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 3-6 Online Investment Tools Screening Tools Websites –Sort through databases of stocks, bonds and mutual funds to find those with specific characteristics –Examples: Quicken.com, Morningstar.com Charting Tools Websites –Plot performance of stocks over a specified time period –Examples: Barchart.com, BigCharts.com Stock Quotes and Portfolio Tracking Websites –Obtain prices and track stock performance –Example: Quicken.com

7. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 3-7 Figure 3.3 Quicken’s Stock Screen Screenshot courtesy of Intuit. Copyright © 2003 Intuit.

8. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 3-8 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.

9. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 3-9 Types of Investment Information Economic and current events Industry and company information Information on alternative investment vehicles Price Information Information on personal investment strategies

10. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 3-10 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

11. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 3-11 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

12. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 3-12 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

13. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 3-13 Figure 3.5 Value Line Stock Report © 2003 Reproduced with the permission of Value Line Publishing, Inc.

14. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 3-14 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

15. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 3-15 Table 3.3 Symbols for Some Well-Known Companies

16. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 3-16 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.

17. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 3-17 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?

18. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 3-18 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

19. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 3-19 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

20. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 3-20 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

21. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 3-21 Figure 3.7 Major Stock Market Averages

22. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 3-22 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

23. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 3-23 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

24. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 3-24 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 NYSE Bond Diary –Daily statistics on number issues traded, advances, declines, and remained unchanged

25. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 3-25 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

26. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 3-26 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.

27. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 3-27 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

28. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 3-28 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

29. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 3-29 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

30. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 3-30 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.

31. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 3-31 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

32. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 3-32 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

33. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 3-33 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

34. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 3-34 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

35. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 3-35 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

36. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 3-36 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

37. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 3-37 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)

38. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 3-38 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

39. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 3-39 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.

40. Copyright © 2005 Pearson Addison-Wesley. All rights reserved. 3-40 Chapter 3 Review Learning Goals 1.Discuss the growth in online investing, online sites and investment tools and 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.