Lesson 5
Unit Objectives
Both before and after you make an investment you should gather and use information. You will want to know such things as earnings history, risk factors, quality of management and potential for future growth income in order to select appropriate investments. After you buy, you will want to track the investment’s market price and earnings compared with other investment options.
INFORMATION ABOUT MARKETS AND SECURITIES
Investments provide opportunities for movement both up (bull) and down (bear) in the markets. History has shown that many small investors do the exact opposite of what the signals indicate. They buy high and sell low, and often lose both money and confidence.
Experienced investors realize that no one really knows where the market highs and lows will be. Yet many investors watch market trends, read corporate reports and follow leading economic indicators. They want to know whether the economy is in an up or down cycle and weather interest rates are climbing, holding or falling. These market signals can be used to forecast market prices in the next few months. Investors use this information as they make decisions about buying, selling or holding specific investments.
PROSPECTUS
The prospectus, or offering circular, is a legal document describing an investment offered for sale. The prospectus usually contains a short statement or objectives of the company or mutual fund. It also contains a financial statement showing assets and liabilities, performance (profit or loss) over a period of years, and any fees the investor must pay.
Investors often make the mistake of investing in a stock of a mutual fund that is currently at the top of the earnings charts without evaluating whether it will do as well in the future. Past performance does not guarantee future results.
FINANCIAL NEWS
Information and advice on how to invest your money is available in many forms. Newspapers, periodicals, books, radio talk-shows, television and news broadcasts, video tapes, and computer software are examples that illustrate the diversity in delivery techniques. The old saying "don’t believe everything that you read in the newspapers" is true and can apply to other media as well.
INVESTMENT CLUBS
Another way to learn about investing is through investment clubs. An investment club consists of a group of people who pool funds and investment knowledge. A specific amount of money is invested each month. Some investment clubs handle large sums of money and extensive stock portfolios. Others invest small amounts with the primary objective of learning about the stock market.
UNDERSTANDING PRICE QUOTATIONS
Investors can follow the changing prices of investments by reading price quotations in the financial pages of newspapers. Many newspapers print market prices daily, others list prices weekly.
An investor needs to know not only the current price of the investment, but also a history of the investment’s prices. Investors can easily track prices by recording daily price changes from data in the newspaper. You can also do this on your computer at school. Check www.cnnfn.com. Set up your portfolio on their site. It will keep track of your stocks. Or you can try THE SEARCH ENGINE YAHOO AND GO TO THE FINANCIAL SECTION.
Stock prices are quoted in fractions of sixteenths. By the year 2000, it is likely that the stock markets will be quoting stock prices in cents rather than fractions.
Mutual funds quote a net asset value (NAV) per share. NAV is the market value of all the securities owned by the fund, less liabilities, divided by the numbers of shares. The price you pay to buy a share of a mutual fund (offer price) is the NAV plus any sales charges from the mutual fund or a broker.
SELECTING FINANCIAL PROFESSIONALS
The selection of professionals deserves careful thought. The first question to ask is whether you really need financial advice in the first place. Could you make appropriate financial decisions without the help of a specialist? Have you explored alternatives such as attending classes, self-study, reading financial pages in newspapers and periodicals, and using financial planning services provided by your employer? Taking this course is putting you on the Road to making your own financial decisions.
BROKERS
Brokers represent investors in the purchase and sale of stocks and bonds. Some brokerage firms have satellite office locations in the bank lobbies, office buildings and retail stores.
Securities brokers are licensed in the state where their clients reside and are registered with the National Association of Securities Dealers (NASD). Futures brokers are licensed by and registered with the National Futures Association (NFA). Brokers and financial planners doing business in Maine are licensed by the Maine Securities Division. You can get a background check on a broker in Maine by calling 877-624-8551. Investors can also call the NASD Public Disclosure Hotline at 1-800-289-9999. The service is available weekdays from 8AM to 6PM EST.
There are two types of brokers:
-Discount brokers buy and sell stocks and bonds at lower rates than full-service brokers. These brokers are paid a salary or small commission.
-Full-service brokers give investment advice, as well as buy and sell securities. They are paid on a commission basis.
As mention earlier trading on-line may be the way to go.
The broker’s commission for buying or selling securities or commodities is based on the dollar amount of the transaction. Before you buy or sell, ask the broker what the transaction costs will be. All brokers have a minimum fee per transaction, but fees are negotiable. Full-service broker commissions are understandably higher than those of discount brokers.
FINANCIAL PLANNERS
Another type of financial advisor is the financial planner. Financial planning requires a working knowledge of budgeting, financial record keeping, saving and investing, insurance, taxes, and retirement and estate planning. The planner may work with a team of financial professionals including attorneys and accountants.
Since nearly anyone can call themselves a financial planner, it is important to choose a financial planner who is qualified through training and experience, and who puts the investor’s financial well-being ahead of the desire for personal gain trough commissions on the sale financial products and services.
A recent Wall Street Journal article reported that comprehensive financial planning services from fee-only planners can range from $100 to $250 an hour or more. The minimum amount of time spent is usually 10 to 15 hours, so the total bill for planning services could range from $1,000 to nearly $4,000.
INSURANCE AGENTS
Although the traditional role of insurance agents is to sell insurance products, that role has expanded in recent years to include other financial products and services. As with all types of financial advisers, who sell products, the consumer should be aware of possible bias. Be skeptical. Ask questions. Compare costs and expected yields.
QUESTIONS TO ASK BEFORE YOU HIRE A FINANCIAL PLANNER
AFTER YOU HAVE ABSORBED THE ABOVE INFORMATION PLEASE UPDATE YOUR PERSONAL INVESTMENT PORTFOLIO. REMEMBER TO CALL ME OR E-MAIL ME IF YOU HAVE ANY QUESTIONS. HAVE A GREAT DAY.