Chapter 3- Investment Information and Securities Transactions.pptx (Gitman)

Chapter 3

Investment
Information and Securities Transactions
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
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 (cont'd)
Basic Discount Brokers
Main focus is executing trades electronically online
No research or investment advice
Commissions are at deep-discount
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
Orders 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 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
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
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

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
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
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
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
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
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
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
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
Price Information
Quotations: use ticker symbols to obtain current price data and statistics on companies
TV sources: Bloomberg TV, CNBC, CNN Headline News
Figure 3.3
A Report Containing
Descriptive Information
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
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
Table 3.3 Symbols for Some Well-Known Companies
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
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Chapter 3- Investment Information and Securities Transactions.pptx (Gitman)

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