Fin432_gj_ch3.ppt

Chapter 3

Online Investing, Information, and Trading

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

Online Investing, Information, and Trading

• Learning Goals1. 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.


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


Online Investment Tools

• Investment Education Websites– Offer tutorials, online classes and articles– Examples: Investing Online Resource Center, Investor

Guide.com, The Motley Fool– Eg. http://www.investingonline.org/

• Investments Tools Websites– Develop financial plans, set investment goals

• Planning Tools Websites– Provides financial calculators– Example: https://www.fidelity.com/

http://www.investingonline.org/



https://www.fidelity.com/




Online Investment Tools

• Screening Tools Websites– Sort through databases of stocks, bonds and mutual

funds to find those with specific characteristics– Examples: http://www.morningstar.com/

• Charting Tools Websites– Plot performance of stocks over a specified time period– Examples: http://www.barchart.com/

• Stock Quotes and Portfolio Tracking Websites– Obtain prices and track stock performance– Example: http://moneycentral.msn.com/investor

http://www.morningstar.com/



http://www.barchart.com/

http://moneycentral.msn.com/investor




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.


Types of Investment Information

• Economic and current events

• Industry and company information

• Information on alternative investment vehicles

• Price Information

• Information on personal investment strategies


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


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



• 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



• 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


Table 3.3 Symbols for Some Well-Known Companies



• 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.



• Protect Yourself by Asking Three Key Questions:– Is the investment registered?

– Who is making the sales pitch?

– Is it too good to be true?


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


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



• 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


Figure 3.7 Major Stock Market Averages



• 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



• 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


Bond Market Indicators

• Bond Yields– Total return on bond purchased at current price and

held to maturity– 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


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


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.


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


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


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


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.


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


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


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


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


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


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


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)


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


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.


Chapter 3 Homework

• Exercises (will NOT be collected)– Text Website: Self-assessment quiz– End-of-Chapter CFA questions (Page 122)– End-of-Chapter Odd-numbered Discussion Questions

and Problems• Homework (will be collected and graded, due

date to be announced)– Excel with Spreadsheet (page 128)