Chapter 3 Investment Information and Securities Transactions

1. Chapter 3 Investment Information and Securities Transactions

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

3. 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

4. Figure 3.1 FINRA Investment Calculator http://www.finra.org/Investors/ToolsCalculators/

5. Figure 3.2 Zacks Stock Screener http://www.zacks.com/screening/stock-screener

6. 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

7. 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

8. Types of Investment Information • Economic and current events • Industry and company information • Information on alternative investments • 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, Worth • Government Publications: Economic Report of the President, Federal Reserve Bulletin • Special Subscription Services: Kiplinger Washington Letter

10. 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

11. Table 3.1 Online Sources for Industry and Company Information

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, Mergent, Value Line Investment Survey • Brokerage Reports: research reports available to brokerage firm’s clients • Investment Letters: recommendations of experts in securities investment

13. 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

14. Table 3.3 Symbols for Some Well-Known Companies

15. Sources of Investment Information (cont’d) • 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)

16. Sources of Investment Information (cont’d) • 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. Sources of Investment Information (cont’d) • 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?

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. 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. 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. Understanding Market Averages and Indexes (cont’d) • 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

22. Understanding Market Averages and Indexes (cont’d) • 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

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

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

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

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. 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

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

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

31. 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

32. 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

33. 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

34. 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

35. 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

36. 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

37. 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

38. 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

39. 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)

40. 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

41. 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