chapter 3 online investing, information, and trading

Chapter 3 Online Investing, Information, and Trading

• 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 Schwab’s home page in Figure 3.3.

Online Investing

• Investment Education Web Sites

– The Motley Fool Fool’s School (www.fool.com)

– America Online’s 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)

– Kiplinger’s Personal Letter (www.Kiplinger.com)

– Smart Money (www.smartmoney.com)

Online Investing

http://www.fool.com/

http://www.investopedia.com/

http://www.zacks.com/

http://www.investing.wsj.com/

http://www.nasdaq.com/

http://www.money.com/

http://www.kiplinger.com/

http://www.smartmoney.com/

• 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).

Online Investing

http://www.fidelity.com/

http://www.financenter.com/

http://www.quicken.com/

http://www.morningstar.com/

http://www.wallstreetcity.com/

• 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).

Online Investing

http://www.barchart.com/

http://www.bigcharts.com/

http://www.investor.msn.com/

http://www.etrade.com/

• 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:

• Don’t let the speed and ease of online investing blind you to the realities

higher transactions costs will result from greater trading activity.

• Don’t 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, don’t be tempted to use

margin debt to increase your stock holdings – it’s risky!!!

Online Investing

• 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.

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, Barron’s, and Investor’s Business Daily)

• General Newspapers (New York Times, Washington Post, and LA Times)

• Institutional News such as banks (BOA) and Wire Services (Bloomberg)


• 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)



– 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.


http://www.freeedgar.com/

Figure 3.6 A Page from a

Stockholders’ Report


– 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 & Bradstreet’s 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 service’s 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).


http://www.multexinvestor.com/


– 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.


http://www.europeaninvestor.com/

Table 3.3 Symbols for Some Well-Known Companies

• Studying the performance of market averages and indexes

allow us to:

– Gauge general market conditions

– Compare a potential portfolio’s 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.

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 & Poor’s Indexes:• Unlike the DJ averages, the S&P 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 S&P Indexes are useful only in making comparisons to past values.


• 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


• 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 Barron’s.


• 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”)

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.


• 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)


• 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

– Don’t ignore the online reminders that ask you to check and recheck

– Don’t get carried away and churn your own account

– Open accounts with two brokers

– Double-check your orders for accuracy

– Bonds


• 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.


• 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 customer’s 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.


• 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.

Investment Advisors and Investment Clubs