Unit
9
Getting Help: Investing Resources
1. What
is an investment club? How does an
investment club operate? (See page 9-1)
An investment club is a “partnership” of members
organized to learn about investments and to pool funds to invest with the
objective of potential financial gain.
Clubs offer a fun way to gain knowledge and experience investing. Rules govern the payment of fees to the club
and the withdrawal of funds paid in or profits made. Meetings typically include a treasurer’s report on the status of
the club, an educational program, and member reports on securities recommended
for purchase as well as securities other members are analyzing for future
purchase.
2. What
are the advantages and disadvantages of an investment club? (See pages 9-1 and 9-2)
Advantages of
investment club participation include the opportunities to:
·
learn from others with
investing experience,
·
pool funds with others
and share investment decisions,
·
develop disciplined
investment habits as a result of the monthly “dues” payment (typically $25 to
$100), and
·
develop confidence in
making investment decisions as a result of the group efforts.
Investment club disadvantages focus primarily on the
group policy-making structure and operation of the club. Asking questions about these policies before
joining can help to insure a good fit between the individual investor and the
club. To avoid problems, the investor
must be willing to adhere to club policies regarding the:
·
year-round obligation
to take responsibility for, and participate in, club activities;
·
investment decisions
of the group, often made by a simple majority rule;
·
club operations
regarding dues structure, meeting schedules, admission of new members,
membership tenure in the club, and methods to pay out members leaving the club;
·
portfolio
diversification and asset allocation models chosen for the group; and
·
decisions on “social
or ethical investment choices” such as considering company policies on
employment, human rights, products produced (e.g., alcohol or tobacco), or the
environment.
3. What
sources of information might an investment club consult, or utilize, when
making investment decisions? (See pages
9-2 and 9-3)
Investment clubs may utilize a variety of resources
when making securities selections, including the following.
·
The club, or members,
may subscribe to business periodicals, magazines, or the Value Line
Investment Survey, which analyzes and summarizes company annual report
data.
·
Public libraries offer
investment reference sections as well as Internet access.
·
A broker, or other
financial professional, may assist the club with educational information, hold
the funds, and place buy and sell orders.
·
Annual reports
available directly from the company or available online from the Public
Registrars Report Service www.prars.com or
the EDGAR database www.sec.gov/edgarhp.htm/
maintained by the SEC for company annual reports and other documents.
·
A club stock selection
committee may conduct the initial research to narrow the search to a small
number of securities consistent with club investment criteria.
·
The National
Association of Investors, Corp. (NAIC) Stock Selection Guide and the
NAIC Better Investing magazine.
4. Why
has the Internet grown in popularity with investors? (See page 9-4)
The Internet provides investors with access to:
1.
a wealth of
investment information ranging from
basic investment education to real-time and historical security performance
information and sophisticated analytical tools as well as
2.
online trading of securities.
Aside from the initial hardware, software, and modem
connection costs, future costs of using the Internet for investment information
or trading is relatively low, and, in many cases, the information is free. Additionally, public use computers, such as
at a library, make the resources available to everyone who wants to learn.
5. Summarize
the advantages of using online investment resources. (See pages 9-4 and 9-5)
Online investment resources offer the following
advantages for the individual investor:
·
Complete control
and privacy to make and implement securities decisions at any time.
·
Access to buy and
sell stocks, bond, and mutual
funds, as well as other financial products, including online banking services.
·
Access to real-time
information on investment products, including your own portfolio or a “mock
portfolio” that you establish online.
·
Personal risk and
responsibility for investment decisions by eliminating the “middle man”
and the associated costs for commissions or fees.
·
Access to a variety
of investment information sources traditionally only available as print
(e.g., newspapers, magazines, periodicals) and media resources (e.g., newswire
services, television broadcasters).
·
Access to “personalized”
updates for targeted securities or companies as well other business or
industry news on your “watch list.”
·
Access to participate,
or simply follow, investment “chat rooms” or discussion forums to
gain the perspective or opinion of other investors.
·
Access to annual
reports and other company data, securities comparison data, and a variety of analytical
tools to aid investor decisions.
6. Summarize
the disadvantages of using online investment resources. (See page 9-5)
Investing is a long-term proposition. But for some
investors, online resources have significantly reduced that time line, often to
the detriment of the longer-term investment plan and the overall return.
Investors should be aware of the following disadvantages of online investment
resources:
·
Ease of trading and
the addictive nature of the activity can cause some investors to lose sight of
investment discipline and adherence to a long-term investment strategy.
·
“Real time” news
updates and “hot tips” can create problems for investors who act impulsively or
quickly react to “chase profits” in response to market volatility. Know the expected volatility of your
securities and don’t react impulsively to changing market prices.
·
“Churning,” or
frequent trading, by the investor can increase trading costs and, in the long
run, reduce investment return.
7. Explain
“churning.” Why is an individual online
investor susceptible to this practice? (See page 9-5)
“Churning” refers to the frequency of turnover, or
buying and selling, of securities within a portfolio, allegedly for the purpose
of generating commissions for an investment professional. “Churning” is an unprofessional
practice that does not serve the best interests of the client. Individual investors can subject themselves
to the pitfalls of “churning” through excessive buying and selling within their
own portfolio. Accessibility to
information and the “low cost” of online trading may override the sensibility
of sticking to the long-term investment plan. Chasing profits as a short-term (e.g., daily or weekly) investment
strategy should not occur at the expense of a longer-term plan.
8. What
major considerations, and features, are important when choosing an online
broker? (See page 9-6)
When choosing an online brokerage trading service,
consider these four issues.
1. Cost,
including:
·
Low commissions per
share traded, which may vary by round or odd lot
·
Low flat fee per
trade, if charged, in addition to the commission per share charge
·
Low monthly fees for trading
access
·
No “activity fee” or a
low fee, if your trading levels require you to pay this fee
·
Special price
considerations for investment club accounts
2. Access, including
24-hour access to place trades
3. Service,
including:
·
Variety of products
and research links
· Free and unlimited real-time quotes
4. Support, including access to available technical support
9. What
is the difference in a market order for a round lot and a market order for an
odd lot? Why might the fees vary? (See
page 9-6)
A market order is simply an order to buy or sell
stock at the best possible price available when the order is received in the
marketplace. Round lot orders are based
on even units of 100 shares. Odd lot
orders are for any “odd” number of shares.
Thus, 2,500 shares is a round lot, while 125 shares is an odd lot. Brokerage firms historically have charged
higher fees for handling odd lots than round lots and online brokerage services
have followed that tradition.
10. Online
brokerages share security issues with traditional brokers in addition to
security issues that are unique to online trading. What are these issues and what strategies are in place to protect
the online investor? (See page 9-6)
Two security issues are of concern, and should be
thoroughly explored when choosing an online brokerage service.
·
Protection. Insurance
coverage through the Securities Investor Protection Corporation (SIPC) protects
an investor against a failing, or bankrupt, broker or securities dealer. The investor is protected up to $500,000 in
securities and cash (maximum of $100,000) held in any one account with the
firm. Investment losses are not
covered; SIPC protects investors only in the event of bankruptcy of the
brokerage firm.
·
Online security.
Encryption, or special coding, between the browser used to access the
Internet and the Internet site, or in this case the brokerage service, is
designed to protect account information and prevent unauthorized usage. In addition, a system of single and dual
password networks can be established to insure that only authorized persons can
gain access to the information or can execute account activity.
11. How
does an investor open an online account? (See pages 9-6 and 9-7)
To open an online account, you should:
· Do your homework on online brokerage services, fees, and security measures.
· Take a “test drive” or user demonstration to gain experience with the system.
· Complete an account application, either online or by printing and mailing with a check. Online applications may be processed more quickly but must be paid with a credit card not a debit card.
· Wait for an email confirmation that the account is available for trading.