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Unit 9
Getting Help: Investing Resources Review Questions & Answers
1.What is an investment club? How does an investment club operate?
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?
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?
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 http://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) Better Investing Community Stock Selection Guide and the NAIC Better Investing magazine.
4.Why has the Internet grown in popularity with investors?
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.
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, bonds, 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.
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?
“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?
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?
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?
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?
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.
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