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13 Cards in this Set
- Front
- Back
Pros and Cons of Using the Internet as an Investment Tool
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- 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 |
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Types of Investment Information
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- 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 - Economic and current events - Industry and company information - Information on alternative investments - Price information - Information on personal investment strategies |
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Protect Yourself by Asking Three Key Questions:
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- Is the investment registered?
- Is the person licensed and law-abiding? - Does the investment sound too good to be true? |
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Understanding Market Averages and Indexes
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- 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 Dow Jones Industrial Average * 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 - 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 - 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 - Value Line Composite Index Includes all 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 |
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Bond Market Indicators
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- 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 |
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Role of Stockbrokers
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- 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 - 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 |
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Types of Brokerage Firms
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- 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 - Basic Discount Brokers *Main focus is executing trades electronically online *No research or investment advice *Commissions are at deep-discount |
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Types of Brokerage Accounts
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- 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 |
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Basic Types of Orders
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- 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 - 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 - 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 |
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Day Trader
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- 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 |
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Trading Considerations
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- 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 - 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 |
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Using an Investment Advisor
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- 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) |
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Paying an Investment Advisor
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- 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 |