1. Investment Information and Securities Transactions
Chapter 3
Investment Information and Securities Transactions

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

3. 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

4. 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

5. Stock Chart for Qualcomm

6. 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

7. Types of Investment Information
Descriptive Information – factual data on past behavior of economy, market, industry company or given investment vehicle
Analytical Information – available current data in conjunction with projections and recommendations about potential investments

8. Types of Investment Information
Economic and current events
Industry and company information
Information on alternative investment vehicles
Price information
Information on personal investment strategies

9. 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
Government Publications: Economic Report of the President, Federal Reserve Bulletin
Special Subscription Services: Kiplinger Washington Letter

10. Sources of Investment Information
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

11. Sources of Investment Information
Industry and Company Information (cont’d)
Comparative Data Sources: Dun & Bradstreet’s Key Business Ratios
Subscription Services: Standard & Poor’s Corporation, Value Line Investment Survey
Brokerage Reports: research reports available to brokerage firm’s clients
Investment Letters: recommendations of experts in securities investment

12. A Report Containing Descriptive and Analytical Information

13. Sources of Investment Information
Price Information
Quotations: use ticker symbols to obtain current price data and statistics on companies
TV sources: Bloomberg TV, CNBC, CNN Headline News

14. Sources of Investment Information
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)

15. Sources of Investment Information
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

16. Sources of Investment Information
Protect Yourself by Asking Three Key Questions:
Is the investment registered?
Is the person licensed and law-abiding?
Does the investment sound too good to be true?

17. 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

18. Understanding Market Averages and Indexes
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

19. Understanding Market Averages and Indexes
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

20. Stock Market Averages and Indexes (July 12, 2006)

21. Understanding Market Averages and Indexes
NYSE Composite Index
Includes 2,100 or so stocks listed in NYSE
AMEX Composite Index
Includes all stocks listed on the 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

22. Understanding Market Averages and Indexes
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 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

23. 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

24. The Role of 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

25. The Role of Stockbrokers
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

26. 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

27. Types of Brokerage Firms
Basic Discount Brokers
Main focus is executing trades electronically online
No research or investment advice
Commissions are at deep-discount

28. 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

29. 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

30. Basic Types of Orders Orders for less than 100 shares of stock
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

31. Basic Types of Orders 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

32. Basic Types of Orders 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

33. Day Trading Highly risky, especially if used with margin 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

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. 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. Trading Consideration
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. 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. 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. 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

40. The End!

41. Online Sources for Industry and Company Information

42. Pages from a Stockholders’ Report

43. Popular Offerings of the Major Subscription Services

44. Popular Investment Web Sites

45. The DJIA from January 13, 2006, to July 12, 2006

46. Major Full-Service, Premium Discount, and Basic Discount Brokers