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Chapter 2 Securities Markets and Transactions 15
Chapter 3
Investment Information and Securities Transactions
Outline
Learning Goals
I. Investment Research and Planning
A. Getting Started in Investment Research
1. Investment Education Sites
2. Investment Tools
a. Planning
b. Screening
c. Charting
d. Stock Quotes and Portfolio Tracking
B. Pros and Cons of the Internet as an Investment Tool
Concepts in Review
II. Types and Sources of Investment Information
A. Types of Information
B. Sources of Information
1. Economic and Current Event Information
a. Financial Journals
b. General Newspapers
c. Institutional News
d. Business Periodicals
e. Government Publications
f. Special Subscription Services
2. Industry and Company Information
a. Fair Disclosure Rules
b. Stockholders’ Reports
c. Comparative Data Sources
d. Subscription Services
e. Brokerage Reports
f. Investment Letters
3. Price Information
©2017 Pearson Education, Inc.
16 Smart/Gitman/Joehnk • Fundamentals of Investing, Thirteenth Edition
4. Other Online Investment Information Sources
a. Financial Portals
b. Bond Sites
c. Mutual Fund Sites
d. International Sites
e. Investment Discussion Forums
5. Avoiding Scams
Concepts in Review
III. Understanding Market Averages and Indexes
A. Stock Market Averages and Indexes
1. The Dow Jones Averages
2. Standard & Poor’s Indexes
3. NYSE, NYSE MKT, and Nasdaq Indexes
4. Value Line Indexes
5. Other Averages and Indexes
B. Bond Market Indicators
1. Bond Yields
2. Bond Indexes
Concepts in Review
IV. Making Securities Transactions
A. The Role of Stockbrokers
1. Brokerage Services
2. Types of Brokerage Firms
3. Selecting a Stockbroker
4. Opening an Account
a. Single or Joint
b. Cash or Margin
c. Wrap
5. Odd-Lot and Round-Lot Transactions
B. Basic Types of Orders
1. Market Order
2. Limit Order
3. Stop-Loss Orders
C. Online Transactions
1. Day Trading
2. Technical and Service Problems
3. Tips for Successful Online Trades
D. Transaction Costs
E. Investor Protection: SIPC and Arbitration
Concepts in Review
V. Investment Advisers and Investment Clubs
©2017 Pearson Education, Inc.
Chapter 2 Securities Markets and Transactions 17
A. Using Investment Advisers
1. Regulation of Advisers
2. Online Investment Advice
3. The Cost and Use of Investment Advice
B. Investment Clubs
Concepts in Review
Summary
Key Terms
Discussion Questions
Problems
Case Problems
3.1 The Perezes’ Good Fortune
3.2 Paul and Deborah’s Choices of Brokers and Advisers
Excel@Investing
Key Concepts
1. Internet tools to empower individual investors, provide savings in time and money, and make
available current information formerly available only to investing professionals. Free tools such as
financial planning calculators and more make buying and selling online better informed, convenient,
relatively simple, inexpensive, and fast.
2. The role, types, and uses of traditional and online investment information for making investment
decisions
3. Some of the key sources of investment information for economic and current events
4. Sources of information to assess the performance of specific industries/companies
5. The most commonly cited market averages and indexes, their interpretation, and their use in
assessing market conditions; both stock and bond index covered
6. The role of the stockbroker in making security transactions, the types of brokerage services
available, and the various types of brokerage accounts
7. A comparison of full-service, premium, and discount brokerage services
8. The basic types of orders—market, limit, and stop-loss; their use in making security transactions;
and transaction costs
9. The products and services offered, regulation, types, and cost of investment advisers
10. The investment club as a device for pooling knowledge and money to create and manage a jointly
owned portfolio
©2017 Pearson Education, Inc.
18 Smart/Gitman/Joehnk • Fundamentals of Investing, Thirteenth Edition
Overview
1. The Internet and online investing offer individual investors advantages once enjoyed by only the
professional investor. The number of households using online information for investment purposes is
quickly expanding. The challenge now is to use the tools offered by the Internet wisely.
2. Investment information is broadly classified into descriptive and analytical information. It is
important that students understand the difference between these two kinds of information and the
investor’s need for both types. Online investment tools help investors plan, screen, chart individual
securities, and track portfolio performance.
3. The chapter next mentions the benefits and costs of obtaining investment information. The
instructor should drive home the point that although an informed investor may perform better in the
long run, obtaining and analyzing information costs the investor money and time. Therefore, an
investor should analyze the worth of information.
4. Five different types of information are delineated, and the instructor should point out that an
investor usually needs all five types. For example, knowledge about a particular company alone
would be insufficient for investment decision making. The investor would also require information
about the economy, current events, the industry, and market prices in order to be able to make a good
decision.
5. The text mentions a number of specific sources of information, appropriately beginning with the
Wall Street Journal. Various other financial publications provide information of different types. The
instructor might require students to bring their own copies of the WSJ to class and go through various
sections with them. This is a good way to demonstrate how to read stock price quotations, as well as
bond, option, mutual fund, commodity, and other quotations. The instructor might also find it useful
to bring a company stockholder’s report to class and explain its contents. Presenting current examples
of Internet sites also works well. Many classrooms these days enjoy internet access, so the instructor
may wish to demonstrate the online versions of these information sources as part of a lecture.
6. The popular market averages and indexes are presented next. Movements in market averages and
indexes are important indicators of the state of the economy; the instructor should describe, in class,
stock market averages and indexes such as the Dow Jones, the S&P, and the NYSE Index, explaining
the difference between averages and indexes and specifying what they measure. The bond yield,
which provides additional information about the market and the economy, should be defined and the
listing of various yields pointed out in the WSJ and other sources.
7. The next part examines the role of stockbrokers and the services they provide. Students usually
encounter difficulties with the concepts of margin trading, market, limit, stop-loss orders, and short
selling. Therefore, the instructor should devote adequate time to cover these topics and use examples
for clarification. Assigning end-of chapter problems 5 through 11 will help to solidify these concepts.
8. The role of the SIPC in protecting investors and procedures for settling disputes between investors
and brokerage firms is explained.
9. The nature and functions of investment advisers are discussed next. The structure and regulation
of their activities and the types of information they provide are described. The chapter closes with a
discussion of investment clubs.
©2017 Pearson Education, Inc.
Chapter 2 Securities Markets and Transactions 19
Answers to Concepts in Review
3.1 In addition to providing low-cost investing, the Internet supplies a multitude of information sources
designed to assist the individual investor in the decision-making process. Investment education sites
3.2 The four types of online investment tools are as follows:
a. Planning. Online calculators and worksheets help you find answers to your financial planning
and investing questions.
3.3 As for the advantages of online investing, it is now possible for even novice investors to participate in
the stock markets with a huge amount of information available at their fingertips to assist in making
On the con side, trading on the Internet requires that investors exercise the same caution they
would if they were getting information from a human broker. Furthermore, you don’t have the safety
net of dealing with a human who may be suggesting that you exercise additional caution. The ease of
3.4 Descriptive information is factual information on past behavior of the economy, the market, or a
given investment . Analytical information, on the other hand, tends to analyze existing data and make
projections and is quite often a source of recommendations for potential investments. The investor
3.5 The Wall Street Journal, published by the Dow Jones in both print and online versions, is perhaps the
most popular source of financial news in the United States. Published daily, it provides daily price
quotations on a multitude of securities. It also has a wealth of world reports, national reports, and
regional and corporate news. Regular features, like “Your Money Matters,” address topics of interest
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20 Smart/Gitman/Joehnk • Fundamentals of Investing, Thirteenth Edition
General news is available from a variety of published sources, especially daily newspapers in the
local community. Many business people also rely on daily papers that have national reputations in the
Business news articles and statistics on general business and economic activities in the United
States and abroad can be found in the Wall Street Journal and in such magazines as Newsweek, Time,
U.S. News & World Report, Business Week, Fortune, The Economist, Federal Reserve Bulletin, and
The distinctions between print sources and online sources has been blurring because many of the
print sources now make their information available online. Two advantages of the online sources are
3.6 a. The stockholder’s report, also called the “annual report,” is an annual publication of
publicly held corporations. These reports are usually free and contain a wealth of descriptive and
b. Comparative data sources enable investors to analyze the financial condition of companies and
are typically grouped by industry and size of firm. These include Dun & Bradstreet’s Key
c. Standard & Poor’s Stock Reports is a major service of the Standard & Poor’s Corporation. It
3.7 a. The prospectus is part of the registration statement required by the SEC on a new security
issue. Investors can find the prospectus for any new security issue at the SEC’s Electronic Data
b. Back office research reports present analyses and recommendations on the current and future
prospects for the security markets, specific industries, and specific securities. These are prepared
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Chapter 2 Securities Markets and Transactions 21
c. Investment letters provide the conclusions and recommendations of various analysts. Common
examples of investment letters are Blue Chip Advisors, The Dines Letter, Dow Theory Letters, the
d. Price quotations include the current prices and price statistics for various types of securities.
Almost all brokerage houses have automated devices for obtaining up-to-the-minute quotations.
Many firms still use a ticker, a lighted screen on which stock transactions made on the floor of
3.8 Online investment information allows individual investors to get timely historical and current
information, such as stock quotes and economic and financial information. Online information is
generally more timely, as it is updated more frequently, and offers more educational resources for the
3.9Stock market averages and indexes are used to measure the general behavior of securities markets.
Averages reflect the arithmetic average price behavior of a certain group of stocks at a given point in
Averages and indexes provide a convenient way of capturing the general mood of the market.
3.10 a. The four Dow Jones Averages include the Dow Jones Industrial Average (30 widely held
stocks issued by large firms), the Dow Jones Transportation Average (20 transportation stocks),
b. The five Standard & Poor’s (S&P) Indexes include the 500 Index comprising 500 large
companies, the 100 Index comprising 100 large companies each having stock options available
3.11 a. The New York Stock Exchange Composite Index includes the approximately 1,900 stocks
b. The NYSE Market Composite Index includes all stocks listed on the NYSE. It generally tends
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22 Smart/Gitman/Joehnk • Fundamentals of Investing, Thirteenth Edition
c. The Nasdaq Stock Market Indexes reflect the behavior of the Nasdaq stock market. The most
popular, the Nasdaq Composite Index, is calculated using more than 3000 common stocks traded
d. The Value Line Composite Average includes the approximately 1,700 stocks in the Value Line
Investment Survey, which are traded on a broad cross section of exchanges as well as in the
3.12 a. Bond yields capture the behavior of market interest rates and represent a type of summary
measure of the return an investor would receive on a bond if it were held to maturity. Barron’s
b. Bond indexes are meant to track the overall performance of the bond market, just as stock
3.13 Stockbrokers help investors buy and sell securities. Besides this major role, full-service stockbrokers
provide clients with several other benefits. For example, most brokerage firms offer their clients a
wide variety of information. Many of them have research staffs who periodically review published
economic, market, industry, or company behavior forecasts and make recommendations to their
The major role of a stockbroker is to execute a client’s transactions at the best possible price.
While
it is not necessary to know your stockbroker personally, he or she should understand your investment
3.14 a. A brokerage account may be either single or joint. Joint accounts are typically between
married couples or between parent and child.
©2017 Pearson Education, Inc.
Chapter 2 Securities Markets and Transactions 23
e. A wrap account is an account in which customers with large portfolios pay the brokerage firm a
flat annual fee, typically between 1% and 3% of their portfolio’s total asset value, to cover the
3.15 A market order is an order to buy or sell a security at the best price available at the time the order is
placed. It is the quickest way to make securities transactions. A limit order is an order to buy stock at
3.16 Typically, brokers charge fixed commissions in return for facilitating the purchase or sale of
securities. Negotiated commissions are also available to investors who maintain large accounts with
the broker. The commissions usually vary depending on the services the broker provides to the
Full-service brokers provide personalized, timely research and information. Basic discounters
provide low costs and fast trades. Premium discount brokers are in between these extremes. As with
3.17 Day trading is the opposite of a buy-and-hold strategy since true day traders do not even own stocks
overnight. The method is highly risky because short-term price movements can be erratic and because
You should consider several important factors before trading securities. First, know how to place
and confirm your order before you begin trading. Second, verify the stock symbol of the security you
Many investors set aside an amount of their capital that is designated for purely speculative
3.18 Most firms use a fixed-commission schedule for individual investors with accounts less than $50,000.
Traditional brokers generally charge on the basis of the number of shares and price per share
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24 Smart/Gitman/Joehnk • Fundamentals of Investing, Thirteenth Edition
3.19 The Securities Investor Protection Corporation (SIPC), a nonprofit membership corporation, was
authorized to protect customer accounts against the consequences of financial failure of the brokerage
Mediation is an informal, voluntary approach in which you and the broker agree to a third party
who facilitates negotiations between the two of you to resolve disputes. If mediation is not pursued or
3.20 Investment advisers are individuals or firms who advise clients about portfolio management. This
may be done on a discretionary basis, in which case the adviser has complete control over the client’s
portfolio. In other cases, the adviser provides investment information and advice, and the client
makes his or her own investment decisions. Professional investment advisers are required to register
and file regular reports with the SEC under the Investment Advisers Act of 1940; a 1960 amendment
gave the SEC broader powers to monitor their activities. However, those who provide investment
3.21 Investment clubs offer the individual investor access to information and/or advice from a broad range
of differently experienced people who have similar attitudes, investments strategies, and goals. Also,
through the investment club, the individual investor can participate in a larger and probably more
©2017 Pearson Education, Inc.
