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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 u Chartist/Technician u Head and Shoulders u Stock Message Board u Stock Quotes u Real Time u Stock Broker u EDGAR u Ticker Symbol u Portfolio Managers u 10 Q Report u 10 K Report u Proxy Statements u Bullish/Bearish u Security Analyst u Certified Financial Planner u Investment Banker Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 2 -4
Ways of Wall Street u Let the Buyer Beware w Buy Recommendation: assume that the author has some stocks or bonds to sell w Sell Recommendation: assume that the commentator is looking to buy at a lower price Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 2 -5
Ways of Wall Street u Recent experience gives investors a useful context with which to form return expectations for stocks and bonds in the 21 st century u However, the most bullish U. S. stock market environment of this century was during the 1950’s w Peacetime economy geared up to satisfy pent-up consumer demand for new cars, homes, household goods, and other consumer products Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 2 -6
Ways of Wall Street u Wall Street is a real place with real people w 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). w Heart of the financial district for the United States and the world Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 2 -7
Wall Street Has a Language of Its Own u Trader Terms u Internet Terms u Technician’s Terms u Table 2. 1, Page 35 provides the: w Top Financial and Investing Glossaries on the Internet Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 2 -8
TECHNICIANS or CHARTISTS u Chartists – Are Wall Street analysts who study trading volume to develop successful trading strategies u Chartist pick stocks based on patterns of “past” price and volume data u Tend to look at day-to-day stock movements, often with 20/20 hindsight u However, you can’t count on past patterns of price and volume data to indicate the future! Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 2 -9
TECHNICIANS or CHARTISTS Chart formation that resembles an Upper Torso u “Head and Shoulders” Formation: w The stock price reaches a peak and declines (shoulder) w Rises above its former peak and again declines (head) w Rises again, but not to the second peak, and then again declines (shoulder) w The Head and Shoulders Formation is considered a “Bearish Indicator” Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 2 -10
TECHNICIANS or CHARTISTS u Bearish – Pessimistic – prospect of falling prices w Metaphor –> Bear - “Go into Hibernation” w Underperform the market w Potential to go down u Bullish – Optimistic – prospect of rising prices w Metaphor –> Bull – “Charge ahead like a raging bull” w Outperform the market Potential to go up w Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 2 -11
Internet Revolution u Widespread dissemination of u Made financial markets more information u Two-way method of democratic w communication w Similar to a phone w Has potential for feedback from one investor to another. Etc. u Cheaper and more timely than print sources information barriers crumbled u Reduced information- gathering costs u However: the internet is also a fertile space for stock price manipulation by misinformation, rumor and gossip. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 2 -12
Internet Revolution So Powerful, It Brings Down Walls u The Internet reduces information-related barriers to entry: u With a click of the mouse the following are spread around the globe: w w w Up-to-the minute consumer news and information attitudes impressions ideas Variety of new products, product quality, prices, performance, and services information Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 2 -13
Internet Commerce u The Internet is the enemy of high prices and high profit margins: w Brings down geographical boundaries w 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. u The Internet is a tool for the consumer: w Improves access to info about products, quality, prices, and performance. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 2 -14
Internet Commerce u The Internet can also be a tool for companies: w Reduce costs and therefore prices: w Get closer to more customers: w Potential to reduce: # of locations, inventory levels, distribution facilities and shipping networks, catalogs and special direct mailings. open anytime, anywhere, more info Find out how to better meet and exceed customer needs and aspirations site feedback Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 2 -15
Financial Information on the Internet (Pg 39) u Financial News and information is a big interest on the Internet u Stock Quotes (Share prices) in Real Time (Up to the minute, current) are sought by investors several times during the trading day. u Several sites provide: Pertinent financial data on individual companies, industries, and the overall economy. w Late-breaking news tied to individual companies on a realtime basis w Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 2 -16
Financial Information on the Internet (Pg 39) u Access to more detailed and timely info than Wall Street professionals previously enjoyed. u Some sites provide: w w w Charts Stock research reports Earnings estimates Magazine articles and fundamentals Securities and Exchange Commission (SEC) filings
Financial Information on the Internet (Pg 39) u Table 2. 2 (Pg 40) w “Where to Look for Investments Information on the Internet” Provides a list of Web Sites to obtain Financial Information Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 2 -18
WHO IS EDGAR? (Pg 39, 40) u EDGAR: An Electronic retrieval analysis system for SEC Filings (government reports filed by individual companies) u “For-profit” company that specializes in providing investor access to SEC reports and filings u A trusted source of SEC report information on the Internet
SEC REQUIRED FILINGS u SEC required filings are: w Filed in plain text w Emphasize the firm’s: Investment Risks Legal Challenges, Major Competitors, etc. w As compared to the “colorful” Annual Report: “marketing” document which often seems to tell investors “buy this stock” Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 2 -20
SEC REQUIRED FILINGS u 10 Q: Quarterly Accounting Information filed with the SEC u 10 K: Annual Accounting Information filed with the SEC u 13 D: 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 w Typically regarded as bullish Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 2 -21
SEC REQUIRED FILINGS u 14 A or Proxy Statement: Annual meeting announcement u Contains information regarding: Who are members of top management w The board of directors w Other large investors in the firm w How much company stock is owned by management and the board of directors w Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 2 -22
Ownership Positions by Management u Significant “insider” stock ownership suggests: Management has a “positive” view of company prospects w Strong incentives for management to maximize shareholder value w 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 Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 2 -23
Ownership Positions by Management u “Immaterial” insider stock ownership: w Difficult to argue that Management has a positive view of company prospects Or strong incentives to maximize the stock’s price Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 2 -24
REAL TIME QUOTES u Fast-moving markets require Up-to- the-minute quotes and news u Free quote information:
MUTUAL FUND INFORMATION (Pg 45)
STOCK MESSAGE BOARDS (Pg 45)
STOCK MESSAGE BOARDS (Pg 45) u Info can be manipulated: w Misinformation w Rumor w Gossip u Anonymous tips communicated on Internet message boards are prone to increase stock market volatility w Volatility – refers to variability (the ups and downs of a stock price) Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 2 -28
FINANCIAL PRESS (Pg 46) u Financial Newspapers: w The Wall Street Journal Published daily by Dow Jones, Inc. Print & interactive (internet) versions w Investor’s Business Daily – stock picking, charting, investor education w New York Times w San Francisco Chronicle – well know for its coverage of tech stocks w USA Today – Money Section Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 2 -29
FINANCIAL PRESS (Pg 46) u Financial Periodicals: (Pgs 49, 50, 51) w Barron’s – market commentary and portfolio analysis, trends Weekly publication published by Dow Jones, Inc. w Business Week – info on sectors of the economy, careers, and small business opportunities w Forbes – commentary on economics and the financial markets Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 2 -30
Financial Periodicals: u Financial Periodicals (con’t): (Pgs 49, 50, 51) w 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 w Money – personal financial advice for the “novice” investor w Worth – consumer and personal finance for both the “novice” and “experienced” investor, mutual fund info Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 2 -31
Financial Information u Television: w CNBC w Bloomberg Television w CNN FN Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 2 -32
WALL STREET RESEARCH u Analyst Opinion Summaries: (Analysts employed by Wall Street trading firms such as Merrill Lynch) w Buy/sell recommendations w 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 stock will under-perform the market (go into hibernation like a bear) – May drive stock prices down Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 2 -33
WALL STREET RESEARCH u Company Reports u Industry Reports u U. S. Market Outlook u Global Outlooks Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 2 -34
Investments As a Profession u Financial Job Market Overview Employment opportunities in financial services are expected to grow in the years ahead w The amount of “financial sophistication” demanded is expected to rise for both finance: w Specialists w w (Corporate Treasurers/CFOs) Non-Specialists (Personnel/Human Resources Directors – who assist employees with 401 k plans, etc. ) Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 2 -35
Investments As a Profession w Commercial banks and savings institutions w Info processing, financial planning, investment advice Insurance carriers Institutional and individual investor Variable and fixed annuity products Life insurance risk assessment w Agents, brokers Real estate companies Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 2 -36
Investments As a Profession u Brokerage Business w 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 u Investment Management w Security Analyst: financial specialist who seeks to identify investment “opportunities” w Portfolio Managers: financial specialist engaged in managing investments for others Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 2 -37
Investments As a Profession u Financial Planning w 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. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 2 -38
Investments As a Profession u Investment Banking w 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. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 2 -39
Investments As a Profession u Compensation in the “field of investments” is performance based. u Rewards for success are substantial. u Penalties for underperformance are swift. Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 2 -40
Chapter 2 Answers to Selected End of Chapter Questions u 1. (a) u 11. (d) u 2. (b) u 12. (a) u 3. (d) u 15. (b) u 4. (a) u 16. (b) u 5. (b) u 17. (d) u 9. (c) u 18. (a) u 10. (d) u 19. (c) u 20. (c) Harcourt, Inc. items and derived items copyright © 2001 by Harcourt, Inc. 2 -41