Invest Chap 2

Investments:
Theory and Applications

Mark Hirschey
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.
Chapter 2
Sources of Investment
Information
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc.
CHAPTER 2 OUTLINE
2.1 Ways of Wall Street

2.2 Internet Revolution
2.3 Investment Information on the Internet
2.4 Financial Press
2.5 Wall Street Research
2.6 Investments as a Profession
Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 2-3
KEY TERMS
 Chartist/Technician  Stock Message Board
 Head and Shoulders  Bullish/Bearish
 Stock Quotes  Stock Broker
 Real Time
 Security Analyst
 EDGAR
 Portfolio Managers
 Ticker Symbol
 Certified Financial
 10Q Report
Planner
 10K Report
 Investment Banker
 Proxy Statements
Ways of Wall Street
 Let the Buyer Beware
 Buy Recommendation: assume that the

author has some stocks or bonds to sell
 Sell Recommendation: assume that the

commentator is looking to buy at a
lower price
Ways of Wall Street
 Recent experience gives investors a useful context with

which to form return expectations for stocks and bonds
in the 21st century
 However, the most bullish U.S. stock market

environment of this century was during the 1950’s
 Peacetime economy geared up to satisfy pent-up

consumer demand for new cars, homes, household
goods, and other consumer products
Ways of Wall Street
 Wall Street is a real place with real people
 Corner of Wall Street and Broad Street in New

York City, in the borough of Manhattan lies a
building that houses the New York Stock Exchange
(NYSE).
 Heart of the financial district for the United States

and the world
Wall Street Has a
Language of Its Own
 Trader Terms
 Internet Terms
 Technician’s Terms
 Table 2.1, Page 35 provides the:
 Top Financial and Investing Glossaries on the

Internet
TECHNICIANS or
CHARTISTS
 Chartists – Are Wall Street analysts who study trading
volume to develop successful trading strategies
 Chartist pick stocks based on patterns of “past” price and
volume data
 Tend to look at day-to-day stock movements, often with
20/20 hindsight
 However, you can’t count on past patterns of price and
volume data to indicate the future!
TECHNICIANS or
CHARTISTS
 “Head and Shoulders” Formation: Chart
formation that resembles an Upper Torso
 The stock price reaches a peak and declines (shoulder)
 Rises above its former peak and again declines (head)
 Rises again, but not to the second peak, and then again
declines (shoulder)
 The Head and Shoulders Formation is considered a
“Bearish Indicator”
TECHNICIANS or
CHARTISTS
 Bearish – Pessimistic – prospect of falling prices
 Metaphor –> Bear - “Go into Hibernation”
 Underperform the market
 Potential to go down
 Bullish – Optimistic – prospect of rising prices
 Metaphor –> Bull – “Charge ahead like a raging
bull”
 Outperform the market
 items and derived items copyright © 2001 by Harcourt, Inc.
Harcourt, Inc. Potential to go up 2-11
Internet Revolution
 Widespread dissemination of  Made financial markets

information more democratic
 Two-way method of  information barriers
communication crumbled
 Similar to a phone  Reduced information-

gathering costs
 Has potential for feedback
from one investor to another.  However: the internet is
Etc. also a fertile space for stock
 Cheaper and more timely price manipulation by
than print sources misinformation, rumor and
gossip.
Internet Revolution
So Powerful, It Brings Down Walls
 The Internet reduces information-related

barriers to entry:
 With a click of the mouse the following are
spread around the globe:
 Up-to-the minute consumer news and
information
 attitudes
 impressions
 ideas
 Variety of new products, product quality, prices,
performance, and services information
Internet Commerce
 The Internet is the enemy of high prices and high profit
margins:
 Brings down geographical boundaries
 Increases competition
 Consumers can jump on the internet, do a search, get info
on hundreds of providers willing to sell high-quality
products at extremely attractive prices.
 The Internet is a tool for the consumer:
 Improves access to info about products, quality, prices, and
performance.
Internet Commerce
 The Internet can also be a tool for companies:
 Reduce costs and therefore prices:
 Potential to reduce: # of locations, inventory levels,
distribution facilities and shipping networks,
catalogs and special direct mailings.
 Get closer to more customers:
 open anytime, anywhere, more info
 Find out how to better meet and exceed customer
needs and aspirations
 site feedback
Financial Information
on the Internet (Pg 39)
 Financial News and information is a big interest on the
Internet
 Stock Quotes (Share prices) in Real Time (Up to the
minute, current) are sought by investors several times
during the trading day.
 Several sites provide:
 Pertinent financial data on individual companies, industries,
and the overall economy.
 Late-breaking news tied to individual companies on a real-
time basis
 Access to more detailed and timely info than
Wall Street professionals previously enjoyed.
 Some sites provide:
 Charts
 Stock research reports
 Earnings estimates
 Magazine articles and fundamentals
 Securities and Exchange Commission (SEC) filings
 <http://cbs.marketwatch.com>
 <http://www.dailystocks.com>
 Table 2.2 (Pg 40)
 “Where to Look for Investments Information on
the Internet”
 Provides a list of Web Sites to obtain Financial
Information
WHO IS EDGAR? (Pg 39, 40)
 EDGAR: An Electronic retrieval analysis system for SEC
Filings (government reports filed by individual companies)
 “For-profit” company that specializes in providing
investor access to SEC reports and filings
 A trusted source of SEC report information on the
Internet
<http://www.edgar-online.com>
 Ticker symbol: unique 2,3,or 4 letter
code for a company (MSFT -
Microsoft)
SEC
REQUIRED FILINGS
 SEC required filings are:
 Filed in plain text
 Emphasize the the firm’s:
 Investment Risks
 Legal Challenges,
 Major Competitors, etc.
 As compared to the “colorful” Annual Report:
 “marketing” document which often seems to tell
investors “buy this stock”
SEC
REQUIRED FILINGS
 10Q: Quarterly Accounting Information filed with
the SEC
 10K: Annual Accounting Information filed with the
SEC
 13D: Filing made to the SEC within 10 days of an
entity attaining a 5% or more position in any class of a
company’s securities
 Typically regarded as bullish
SEC
REQUIRED FILINGS
 14A or Proxy Statement: Annual meeting
announcement
 Contains information regarding:
 Who are members of top management
 The board of directors
 Other large investors in the firm
 How much company stock is owned by
management and the board of directors
Ownership Positions by
Management
 Significant “insider” stock ownership
suggests:
 Management has a “positive” view of company
prospects
 Strong incentives for management to maximize
shareholder value
 Especially, if management has a large portion of its
current income, in terms of salary and bonus,
dependent on the company’s stock price performance.
 Aligns management’s self-interest with stockholder
interests
Ownership Positions by
Management
 “Immaterial” insider stock ownership:
 Difficult to argue that -
 Management has a positive view of company
prospects
 Or strong incentives to maximize the stock’s price
REAL TIME QUOTES
 Fast-moving markets require Up-to-

the-minute quotes and news
 Free quote information:
<http://freerealtime.com>
MUTUAL FUND
INFORMATION (Pg 45)
<http://www.morningstar.com>
 Morningstar—watchdog
group for mutual fund
industry
 Comprehensive, timely
information and analysis
 Also provides
information on top-
yielding money market
accounts
STOCK MESSAGE
BOARDS (Pg 45)
<http://quote.yahoo.com>
 Stock Message Boards: Websites where anonymous
individuals post information about individual
companies or investments styles.
 Timely “views” of other investors on company
prospects:
 Late-breaking news
 A company’s investment potential
 Risks facing investors
STOCK MESSAGE
BOARDS (Pg 45)
 Info can be manipulated:
 Misinformation
 Rumor
 Gossip
 Anonymous tips communicated on Internet message

boards are prone to increase stock market volatility
 Volatility – refers to variability (the ups and downs of a
stock price)
FINANCIAL PRESS (Pg 46)
 Financial Newspapers:
 The Wall Street Journal
 Published daily by Dow Jones, Inc.
 Print & interactive (internet) versions
 Investor’s Business Daily – stock picking, charting, investor
education
 New York Times
 San Francisco Chronicle – well know for its coverage of
tech stocks
 USA Today – Money Section
FINANCIAL PRESS (Pg 46)
 Financial Periodicals: (Pgs 49, 50, 51)
 Barron’s – market commentary and portfolio
analysis, trends
 Weekly publication published by Dow Jones, Inc.
 Business Week – info on sectors of the economy,
careers, and small business opportunities
 Forbes – commentary on economics and the
financial markets
Financial Periodicals:
 Financial Periodicals (con’t): (Pgs 49, 50, 51)
 Fortune – top 1000 U.S. companies (Fortune 1000) &
Global cos.
 Published by Time-Warner, Inc.
 Good career opportunity source
 Provides trends and strategies followed by the management of
top corporations
 Money – personal financial advice for the “novice”
investor
 Worth – consumer and personal finance for both the
“novice” and “experienced” investor, mutual fund info
 Television:
 CNBC
 Bloomberg Television
 CNN FN
WALL STREET RESEARCH
 Analyst Opinion Summaries:

 (Analysts employed by Wall Street trading firms such as
Merrill Lynch)
 Buy/sell recommendations
 Bullish Consensus – Optimistic prospect of rising prices (charge
ahead like a raging bull)
– May drive stock prices up
 Bearish Sentiment – Pessimistic prospect of falling prices or
expectations the the stock will under-perform the market (go into
hibernation like a bear)
– May drive stock prices down
WALL STREET RESEARCH
 Company Reports
 Industry Reports
 U.S. Market Outlook
 Global Outlooks
Investments As a Profession
 Financial Job Market Overview

 Employment opportunities in financial services are expected
to grow in the years ahead
 The amount of “financial sophistication” demanded is
expected to rise for both finance:
 Specialists
 (Corporate Treasurers/CFOs)
 Non-Specialists
 (Personnel/Human Resources Directors – who assist employees
with 401k plans, etc.)
 Commercial banks and savings institutions

 Info processing, financial planning, investment advice
 Insurance carriers
 Institutional and individual investor
 Variable and fixed annuity products
 Life insurance risk assessment
 Agents, brokers
 Real estate companies
 Brokerage Business
 Stock Broker: financial agent who acts as a go-between
for stock buyers and sellers
 Usually works with individual investors and institutions in
advising and executing orders for individual common stocks or
bonds
 Investment Management
 Security Analyst: financial specialist who seeks to identify
investment “opportunities”
 Portfolio Managers: financial specialist engaged in
managing investments for others
 Financial Planning
 Certified Financial Planner: financial
professional who helps “individuals” identify and
meet financial needs
 The planner gets to know the individual client and tries
to match client risk and return preferences with
appropriate investment opportunities.
 Certified Financial Planner (CFP) Designation: Financial
plan processing and insurance, investment planning, income
tax planning, retirement planning and employee benefits, and
estate planning.
 Investment Banking
 Investment Banker: financial professional who helps

“companies” meet financial needs (e.g., issue stock).
 Arrange to sell new securities to general public
– Acts as an intermediary between individual investors and the issuing

corporations.
 Advise corporate clients on financial strategies and often help arrange

mergers and acquisitions
 Aggressively seek out corporate clients who need financial advice.
 Compensation in the “field of investments” is

performance based.
 Rewards for success are substantial.
 Penalties for underperformance are swift.
Chapter 2
Answers to Selected
End of Chapter Questions
 1. (a)  11. (d)

 2. (b)  12. (a)
 3. (d)  15. (b)
 4. (a)  16. (b)
 5. (b)  17. (d)
 9. (c)  18. (a)
 10. (d)  19. (c)
 20. (c)

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Invest Chap 2

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Investments:

Theory and Applications

2.1 Ways of Wall Street

 Let the Buyer Beware

 Buy Recommendation: assume that the

 Sell Recommendation: assume that the

 Recent experience gives investors a useful context with

 However, the most bullish U.S. stock market

 Peacetime economy geared up to satisfy pent-up

 Corner of Wall Street and Broad Street in New

 Heart of the financial district for the United States

 Table 2.1, Page 35 provides the:

 Top Financial and Investing Glossaries on the

 Widespread dissemination of  Made financial markets

 Similar to a phone  Reduced information-

 The Internet reduces information-related

 Fast-moving markets require Up-to-

 Anonymous tips communicated on Internet message

 Analyst Opinion Summaries:

 U.S. Market Outlook

 Financial Job Market Overview

 Commercial banks and savings institutions

 Real estate companies

 Investment Banker: financial professional who helps

– Acts as an intermediary between individual investors and the issuing

 Advise corporate clients on financial strategies and often help arrange

 Aggressively seek out corporate clients who need financial advice.

 Compensation in the “field of investments” is

 1. (a)  11. (d)

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