Chapter 3
Investment Information and Securities Transactions
◼ Outline
Learning Goals
I. Online Investing
A. Getting Started in Online Investing
1. Investment Education Sites
2. Investment Tools
a. Planning
b. Screening
c. Charting
d. Stock Quotes and Portfolio Tracking
B. Pros and Cons of Using 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
34 Gitman/Joehnk/Smart • Fundamentals of Investing, Eleventh 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 Online 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, Amex, 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 or Round-Lot Transactions
B. Basic Types of Orders
1. Market Order
2. Limit Order
3. Stop-Loss Order
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
Chapter 3 Investment Information and Securities Transactions 35
Concepts in Review
V. Investment Advisers and Investment Clubs
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 Peter and Deborah’s Choices of Brokers and Advisers
Excel with Spreadsheets
◼ Key Concepts
1. The Internet empowers individual investors, provides savings in time and money, and offers current
information formerly available only to investing professionals. Tools such as financial planning
calculators and more are free, making buying and selling online 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
36 Gitman/Joehnk/Smart • Fundamentals of Investing, Eleventh Edition
10. The investment club as a device for pooling knowledge and money to create and manage a jointly
owned portfolio
◼ Overview
1. The Internet and online investing offer the individual investor 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.
6. The popular market averages and indexes are presented next. Movements in market averages are
important indicators of the state of the economy; the instructor should describe, in class, stock market
indexes such as the Dow Jones, the S&P, and the NYSE Index, specifying what these indexes
measure and showing how to find recent listings in the WSJ. 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.
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.
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.
Chapter 3 Investment Information and Securities Transactions 37
◼ Answers to Concepts in Review
1. In addition to providing low cost investing, the Internet supplies a multitude of information sources
2. The four types of online investment tools are as follows:
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
5. The Wall Street Journal, published by the Dow Jones, is perhaps the most popular source of financial
news in this country. Published daily, it provides daily price quotations on a multitude of securities. It
38 Gitman/Joehnk/Smart • Fundamentals of Investing, Eleventh 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
There has been a blurring of the distinctions between print sources and online sources, because many
of the print sources now make their information available online. Two advantages of the online
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
(c) Standard & Poor’s Stock Reports is a major service of the Standard & Poor’s Corporation. It
contains up-to–date reports on numerous firms, including a summary of the firm’s financial
(e) Value Line Investment Survey offers ratings for all widely held stocks with full-page reports
7. (a) The prospectus is part of the registration statement required by the SEC on a new security issue.
It describes in detail the key aspects of the issuer, its management and financial position, and the
Chapter 3 Investment Information and Securities Transactions 39
(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,
8. Electronic and online investment information allows individual investors to get timely historical
and current information such as stock quotes and economic and financial information. In addition,
9. Stock market averages and indexes are used to measure the general behavior of securities markets.
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), the
11. (a) The New York Stock Exchange Index includes the 2,100 stocks listed on the New York Stock
40 Gitman/Joehnk/Smart • Fundamentals of Investing, Eleventh Edition
©2011 Pearson Education, Inc. Publishing as Prentice Hall
(b) The American Stock Exchange Index reflects the price of shares on the American Stock
Exchange relative to a base of 550 set on December 29, 1995.
Chapter 3 Investment Information and Securities Transactions 41
(c) The Nasdaq Stock Market Indexes reflect the behavior of the Nasdaq stock market. The most
(d) The Value Line Composite Average includes the approximately 1,700 stocks in the Value Line
12. (a) Bond yields capture the behavior of market interest rates and represent a type of summary
(b) The Dow Jones Corporate Bond Index, quoted in The Wall Street Journal and Barron’s, is the
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
The major role of a stockbroker is to execute a client’s transactions at the best possible price. While
14. (a) A brokerage account may be either single or joint. Joint accounts are typically between married
couples or between parent and child.
Chapter 3 Investment Information and Securities Transactions 43
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 it
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
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,
◼ Suggested Answers to Ethics in Investing Question
Did Martha Stewart Cross the Line?
In light of the Insider Trading and Fraud Act of 1988, does Martha Stewart, or any other investor,
have the right to sell stock any time a broker advises him or her to?
Answer:
◼ Suggested Answers to Discussion Questions
Questions 1 to 4 and 6 will have answers that will vary depending on the choices made by the student.
5. You should ask a broker about how much experience they have and whether they have been involved
©2011 Pearson Education, Inc. Publishing as Prentice Hall
46 Gitman/Joehnk/Smart • Fundamentals of Investing, Eleventh Edition
(b) The SP-6 Index has moved from 100 in the base year to 214.4 on January 1, 2010, and 206.4 on
4. Market average =
++
. . .
Closing price of Stock A Closing price of Stock F
Divisor
+ + + + +
+ + + + +
= = =
+ + + + +
= = =
2005
2008
$50 $10 $7 $26 $45 $32 $170
1.00 1.00
$40 $36 $23 $61 $70 $30 $260
Market average 361.11
.72 .72
$46 $37 $20 $59 $82 $32 $260
Market average 394.29
.70 .70
(b)
++
=
++
Current closing market Current closing market
value of Stock A value of Stock F
Market average Base period current market Base period current market
value of Stock A value of Stock F
=  =
1.624 10 16.24
(c) Both the market average and the market index show a general upward trend, indicating a bull
market.
The numbers differ because one is an average of stock prices on a particular day and the other is
an index compared to a base period value.
5. Mr. Cromwell’s market order to buy would have been filled at the lowest price available at the time,
while a sell order would have been filled at the highest price available at that time. However, since
48 Gitman/Joehnk/Smart • Fundamentals of Investing, Eleventh Edition
©2011 Pearson Education, Inc. Publishing as Prentice Hall
(b) Since there are no budget constraints for Angel, and he is willing to spend a substantial amount on
getting information, he should consider the S&P Financial Reports and Services. The S&P Stock
Reports, for example, contain up-to-date reports on numerous firms. Their trade and security service
(c) Financial portals, such as Yahoo! and Excite, are among the more popular services that give investors
access to a wide range of information. MSN MoneyCentral provides more editorial analysis than most
(d) While the basic role of the stockbroker would be to buy and sell securities on Angel’s behalf,
stockbrokers also provide additional services. For example, stockbrokers often advise clients and
(e) Angel can obtain investment advice from a variety of sources: stockbrokers, bankers, subscription
services, and individual advisers and advisory firms. At this point, it is very difficult to advise him as
Chapter 3 Investment Information and Securities Transactions 49
©2011 Pearson Education, Inc. Publishing as Prentice Hall
In this case, it seems that Angel could become more proficient at managing his own portfolio. He will
have more time to devote to it than most advisers. With the help of a good stockbroker and the sources
of information mentioned above, Angel can probably do without the advisory service.
Case 3.2 Peter and Deborah’s Choices of Brokers and Advisors
(a) Peter would best be served by online services such as Ameritrade because they give him the access to
information he may want but the freedom to execute his trades over the Internet.
(b) Both of them should go with the brokerage that answers their needs. While Peter gets the speed,
(c) Deborah would still prefer someone who did not offer online trading of any kind.
(d) Day trading is a highly risky strategy that is meant for those who have the ability to focus 100% of
(e) There are many sources of information and advice available to Peter and Deborah, from stockbrokers
and investment advisers to investment clubs and online investment education sites. Peter may consider