OnLine Investing, Investment Plans and Information

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On-Line Investing,Investment Plans and
Information

• Gitman-JoehnkChapter 3

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Between 1998 and 1999 the percentage of retail
security trades executed online has jumped from
27 to more than 50 of all security
transactions. Investors have opened more that 16
million online accounts at more than 170
brokerage firms offering online services. About
4 million households manage more than 550
million in assets online.
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There are many online web sites that provide
investor education tools. Several of the best
sites include Motley Fool Fools School AOL
Money Basics Investopedia Zacks Investment
Research Wall Street Journal (WSJ.com) Online
Investing NASDAQ Kiplinger Personal Finance Smart
Money
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Some of the most useful investment tools
available on the internet include Planning
calculators Screening tools Charting tools real
time or delayed security price quotes portfolio
tracking tools
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Investment Information can be either Descriptive
actual data on the past behavior of the
economy, securities markets, industries,
companies, or a specific investment
vehicle Analytical available current data in
conjunction with projections and recommendations
about potential investments.
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Types of Descriptive and Analytical Information
Include Economic and Current Event
Information Industry and Company
Information Information on Alternative
Investments Price Information Information on
Personal Investment Strategies
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One source of information on market conditions
and performance which is also useful for
assessing the comparative perfomances of other
investments are the various market indexes and
averages.
Among the best known of these indexes and
averages are the Dow Jones Industrial
Average Standard Poors 500 Stock Index The
Value Line Composite Index The Russell 2000 The
Morgan Stanley Capital International Europe,
Australia, Far East Index Salomon Brohters
Non-U.S. Dollar World Bond Index Shearson
Lehman Brothers Government/Corporate Bond Index
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For comparison purposes, the indexes selected
should correspond as closely as possible to the
type of investment being evaluated. Standard
Poors 500 Stock Index - is a true index
computed using the stock prices from 500
industrial stocks. The larger companies (in
terms of shares outstanding, S ) count for more
than smaller companies. This index is best
viewed as a measure of blue-chip performance.
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Dow Jones Industrial Average-30 blue chip
stocks, higher price stocks counting more than
the lower priced stocks. The Dow is best used
for judging daily stock market activity, but it
is not as good a standard as the SP for
evaluating mutual fund performance.
The DJIA divisor is an adjustment necessary to
make the DOW the same following a stock split or
a change in the composition of the DOW stocks.
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NYSE Composite Index-includes all 2,900 or so of
the stocks listed on the NYSE. The base of 50
represents the value of stocks listed on the NYSE
beginning Dec. 31, 1965
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The Value Line Composite Index-includes
approximately 1700 stocks treated equally,
regardless of size. This is done by considering
only the percentage changes in stock prices.
Includes stocks from the NYSE, AMEX and OTC
markets. Base of 100 reflects the June 30, 1961
stock prices. It is most useful for benchmarking
smaller, more aggressive growth oriented
companies and mutual funds since it includes many
smaller, more highly speculative stocks.
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The Russell 2000-covers the the 2,000 stocks next
in size to the 1,000 largest stocks, as measured
by market value (share price x shares
outstanding). This is a good measure of what
institutional investors call the secondary
stocks, as opposed to the smaller stocks traded
OTC. Best regarded as a benchmark for the
performance of small companies and small cap
mutual funds.
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Morgan Stanley Capital International Europe,
Australia, Far East Index-computed using more
than 1,000 international stocks. This index,
known as the EAFE, canbe used as a benchmark for
funds invested in foreign stocks. Salomon
Brothers Non-US Dollar World Bond
Index-uses government bonds in nine countries.
The index is published several different
maturities and is a good benchmark for mutual
funds invested in foreign bonds. Global bond
funds, which include US bond investments
might use Salomons World Bond Index
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Shearson Lehman Brothers Government/Corporate
Bond Index-covering investment grade bonds. It
is one of the standard indexes for measureing the
performance of US bond funds. Money Magazines
Small Investor Index-measures the average
investors gains and losses based on a
portfolio of investments that reflect the Federal
Reserves data on the average households
investments. Includes cash, bonds, stocks, real
estate and gold This index is based on the
year-end value from the previous year.
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Trading Securities
Investors must understand the process and
procedures for carrying-out securities
transactions. Role of the Stockbroker aka accoun
t executive investment executive financial
consultant act as middleman between buyers and
sellers of securities
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Role of Stockbroker
Stockbrokers are compensated for their services
as a middleman by charging commissions for
facilitating transactions for their
clients. Must be licensed by the exchange on
which orders are placed Must abide by the
ethical guidelines of the exchange SEC
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Role of Stockbroker
Client orders are transmitted by the broker from
their branch office to the main office. From the
main office orders are transmitted to the
floor of the stock exchange to be
executed. Confirmation of the execution of the
order is then sent back from the floor, through
the home office to the branch office and the
client.
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Role of the Stockbroker
On OTC markets, the stockbroker must execute
orders through the marketmakers that are dealers
specializing in that security The NASDAQ system
enables the stockbroker to execute the
transaction at the best available price Trades
are able to executed quickly because the
dealers (marketmakers) maintain inventories of
securities
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Brokerage Services
While the primary activity of stockbrokers is to
facilitate the transactions of clients, they
provide other services as well. Other services
include hold securities for safekeeping free
investment information provide statements of
account activity invest any surplus cash in
MMF provide price quotes access to reference
library
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Securities Held in Street Name
Securities held in street name means the
security is issued in the name of the brokerage
house and held in trust for the client This is
probably the most common way in which securities
are transacted. investors do not have to be
bothered with either handling or safekeeping
and brokerage firm records the details of the
transaction and keeps track of his/her
investments through a series of bookkeeping
entries
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Street Name
All cash disbursements are made to the brokerage
firm and forwarded to the client.
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Selecting a Broker
Selection of a broker should be based primarily
on services offered cost structure of
services investment philosophy avoid brokers
with whom you have a personal relationship
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Opening an Account
Requires completing documents that establish a
legal relationship with the client
(customer) signature card and personal data
card used to identify customers
account Instruction given on transfer and
custody of securities understanding of clients
personal financial situation and investment
goals assessment of clients ability to pay for
securities
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Types of Accounts
Cash Accounts - customer can make only cash
transactions payment for the transaction and de
livery of the securities must take place within 3
days Margin Account - brokerage account in
which a brokerage firm extends borrowing
privileges to creditworthy customers customer is
generally required to leave securities with the
brokerage firm as collateral customer is
permitted to borrow up to a predetermined propor
tion () of a securitys purchase
price customer required to pay interest on funds
borrowed
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Types of Accounts
Wrap Account - arrangement with a brokerage firm
in which customers with large portfolios
(100K) are allowed to shift stock selections
to a professional money manager. Broker selects
a number of investment mgt. firms to be
responsible for managing a portion of the
portfolio of a client costs are known ahead
of time and wrapped into a single yearly
charge to the investor
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Types of Accounts
benefit - broadly diversified portfolio,
professionally managed problem - costs are
high, approximately 3 a year
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Basic Types of Orders
Round-Lot - a 100 share unit or multiple of 100
shares Odd-Lot - less than 100 shares
example, 750 shares 7 round-lots, 1
odd-lot Transactions costs are higher for
odd-lots because of the imposition of an added
fee to cover the extra processing by the
brokerage firm and the assistance of the
specialist Most odd-lot transactions are the
result of small investors, early in their
investment programs
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Types of Orders
Market Orders - an order to buy or sell stock at
the best available price when the order is
placed quickest way to have orders filled thus
will usually produce a price very close to the
price at the time the order is placed
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Types of Orders
Limit orders - an order to buy or sell a stock at
a specified price or better - sell at a
specified price or higher, buy at a specified
price or lower when the limit order is placed
the broker transmits it to a specialist dealing
in the security who makes a notation in his
book indicating number of shares price Limit
order is executed as soon as the specified price
is reached and all other orders with precedence
are executed.
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Types of Orders
Limit orders can be placed as one of the
following types fill-or-kill order - order
which if not executed immediately is
canceled day order - order which if not executed
is automatically canceled at the end of the day
- this type of order is assumed unless otherwise
specified good-till-canceled order - order,
which generally remains in effect for six months
unless executed, canceled or renewed
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Types of Orders
Most limit orders are placed at prices a fair
distance away from the current market
price. Therefore limit orders are most effective
when the price of the stock is highly volatile.
The likelihood of it executing is
increased. Disadvantages of limit orders - the
investor is not sure the transaction will take
place and may miss an opportunity if the
stocks price comes close but does not hit the
limit price
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Types of Orders
Stop Order - specifies a given price at which it
becomes a market order. (usually day or GTC
orders) Stop-Loss Order - or a stop order to
sell stock at a specific price (stop price).
There is no assurance that the sale will
actually take place at the stop price but
should occur reasonably close to it. Stop Order
to buy - used to protect profits or minimize
losses when an investor has sold the stock short
or wants to buy the stock just as its price
starts to rise
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Types of Orders
Stop-limit order - an order to buy or sell stock
at a given price or better once a stipulated stop
price has been met. can be placed to avoid the
market moving against you when your stop order
becomes a market order.
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Examples Types of Orders
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Transactions costs and services can vary
significantly across brokerage firms. Table 3.6
on page 109 provides information for a small
number of firms. Table 3.5 on page 105 provides
an abbreviated list of Full Service Discount
Online Only Brokers Information on services
and costs can found on their web sites.