investment information / averages

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Copyright © 2008 Pearson Addison-Wesley. All rights reserved. Chapter 3 Investment Information and Securities Transaction s

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Page 1: Investment Information / Averages

Copyright © 2008 Pearson Addison-Wesley. All rights reserved.

Chapter 3

Investment Information and Securities Transactions

Page 2: Investment Information / Averages

Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 3-2

Online Investing, Information, and Trading

• Learning Goals1. Discuss the growth in online investing 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 the key aspects of commonly cited stock and bond market averages and indexes.

4. Review the roles of stockbrokers.

5. Describe the basic types of orders, online transactions, transaction costs, and legal aspects of investor protection.

6. Discuss roles of investment advisors and investment clubs.

Page 3: Investment Information / Averages

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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

Page 4: Investment Information / Averages

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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

Page 5: Investment Information / Averages

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Figure 3.2 Financial Calculators Concerned with Stocks

Page 6: Investment Information / Averages

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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

Page 7: Investment Information / Averages

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Figure 3.3 Zacks Predefined Screener

Page 8: Investment Information / Averages

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Figure 3.4Stock Chart for Qualcomm

Page 9: Investment Information / Averages

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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

Page 10: Investment Information / Averages

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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

Page 11: Investment Information / Averages

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Types of Investment Information

• Economic and current events

• Industry and company information

• Information on alternative investment vehicles

• Price information

• Information on personal investment strategies

Page 12: Investment Information / Averages

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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

Page 13: Investment Information / Averages

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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

Page 14: Investment Information / Averages

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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

Page 15: Investment Information / Averages

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Figure 3.5 A Report Containing Descriptive and Analytical Information

Page 16: Investment Information / Averages

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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

Page 17: Investment Information / Averages

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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)

Page 18: Investment Information / Averages

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Table 3.3 Symbols for Some Well-Known Companies

Page 19: Investment Information / Averages

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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

Page 20: Investment Information / Averages

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Sources of Investment Information (cont’d)

• 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?

Page 21: Investment Information / Averages

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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

Page 22: Investment Information / Averages

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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

Page 23: Investment Information / Averages

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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

Page 24: Investment Information / Averages

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Figure 3.7 Stock Market Averages and Indexes (July 12, 2006)

Page 25: Investment Information / Averages

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Understanding Market Averages and Indexes (cont’d)

• 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

Page 26: Investment Information / Averages

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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 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

Page 27: Investment Information / Averages

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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