Investing for Organizational Sustainability

The e-Advocate
Monthly
…a Compilation of Works on:
Investing for Organizational
Sustainability
Genesis 41:34-36 | Matthew 25:14-30
Luke 14:28-30 | 1 Corinthians 16:2
Ecclesiastes 11:2 | Proverbs 13:11
Proverbs 16:9 | Proverbs 21:5
“Helping Individuals, Organizations & Communities
Achieve Their Full Potential”
NpA July 2020

Turning the Improbable
Into the Exceptional!
Page 2 of 214

The Advocacy Foundation, Inc.
Helping Individuals, Organizations & Communities
Achieve Their Full Potential
Since its founding in 2003, The Advocacy Foundation has become recognized as an effective
provider of support to those who receive our services, having real impact within the communities
we serve. We are currently engaged in community and faith-based collaborative initiatives,
having the overall objective of eradicating all forms of youth violence and correcting injustices
everywhere. In carrying-out these initiatives, we have adopted the evidence-based strategic
framework developed and implemented by the Office of Juvenile Justice & Delinquency
Prevention (OJJDP).
The stated objectives are:
1. Community Mobilization;
2. Social Intervention;
3. Provision of Opportunities;
4. Organizational Change and Development;
5. Suppression [of illegal activities].
Moreover, it is our most fundamental belief that in order to be effective, prevention and
intervention strategies must be Community Specific, Culturally Relevant, Evidence-Based, and
Collaborative. The Violence Prevention and Intervention programming we employ in
implementing this community-enhancing framework include the programs further described
throughout our publications, programs and special projects both domestically and
internationally.
www.TheAdvocacyFoundation.org
ISBN: ......... ../2017
......... Printed in the USA
Advocacy Foundation Publishers
Philadlephia, PA
(878) 222-0450 | Voice | Data | SMS
Page 3 of 214

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Dedication
______
Every publication in our many series’ is dedicated to everyone, absolutely everyone, who by
virtue of their calling and by Divine inspiration, direction and guidance, is on the battlefield dayafter-day
striving to follow God’s will and purpose for their lives. And this is with particular affinity
for those Spiritual warriors who are being transformed into excellence through daily academic,
professional, familial, and other challenges.
We pray that you will bear in mind:
Matthew 19:26 (NIV)
Jesus looked at them and said, "With man this is impossible,
but with God all things are possible." (Emphasis added)
To all of us who daily look past our circumstances, and naysayers, to what the Lord says we will
accomplish:
Blessings!!
- The Advocacy Foundation, Inc.
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The Transformative Justice Project
Eradicating Juvenile Delinquency Requires a Multi-Disciplinary Approach
The way we accomplish all this is a follows:
The Juvenile Justice system is incredibly overloaded, and
Solutions-Based programs are woefully underfunded. Our
precious children, therefore, particularly young people of
color, often get the “swift” version of justice whenever they
come into contact with the law.
Decisions to build prison facilities are often based on
elementary school test results, and our country incarcerates
more of its young than any other nation on earth. So we at
The Foundation labor to pull our young people out of the
“school to prison” pipeline, and we then coordinate the efforts
of the legal, psychological, governmental and educational
professionals needed to bring an end to delinquency.
We also educate families, police, local businesses, elected
officials, clergy, and schools and other stakeholders about
transforming whole communities, and we labor to change
their thinking about the causes of delinquency with the goal
of helping them embrace the idea of restoration for the young
people in our care who demonstrate repentance for their
mistakes.
1. We vigorously advocate for charges reductions, wherever possible, in the adjudicatory (court)
process, with the ultimate goal of expungement or pardon, in order to maximize the chances for
our clients to graduate high school and progress into college, military service or the workforce
without the stigma of a criminal record;
2. We then enroll each young person into an Evidence-Based, Data-Driven Restorative Justice
program designed to facilitate their rehabilitation and subsequent reintegration back into the
community;
3. While those projects are operating, we conduct a wide variety of ComeUnity-ReEngineering
seminars and workshops on topics ranging from Juvenile Justice to Parental Rights, to Domestic
issues to Police friendly contacts, to CBO and FBO accountability and compliance;
4. Throughout the process, we encourage and maintain frequent personal contact between all
parties;
5 Throughout the process we conduct a continuum of events and fundraisers designed to facilitate
collaboration among professionals and community stakeholders; and finally
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6. 1 We disseminate Quarterly publications, like our e-Advocate series Newsletter and our e-Advocate
Quarterly electronic Magazine to all regular donors in order to facilitate a lifelong learning process
on the ever-evolving developments in the Justice system.
And in addition to the help we provide for our young clients and their families, we also facilitate
Community Engagement through the Restorative Justice process, thereby balancing the interesrs
of local businesses, schools, clergy, elected officials, police, and all interested stakeholders. Through
these efforts, relationships are rebuilt & strengthened, local businesses and communities are enhanced &
protected from victimization, young careers are developed, and our precious young people are kept out
of the prison pipeline.
This is a massive undertaking, and we need all the help and financial support you can give! We plan to
help 75 young persons per quarter-year (aggregating to a total of 250 per year) in each jurisdiction we
serve) at an average cost of under $2,500 per client, per year.*
Thank you in advance for your support!
* FYI:
1. The national average cost to taxpayers for minimum-security youth incarceration, is around
$43,000.00 per child, per year.
2. The average annual cost to taxpayers for maximun-security youth incarceration is well over
$148,000.00 per child, per year.
- (US News and World Report, December 9, 2014);
3. In every jurisdiction in the nation, the Plea Bargain rate is above 99%.
The Judicial system engages in a tri-partite balancing task in every single one of these matters, seeking
to balance Rehabilitative Justice with Community Protection and Judicial Economy, and, although
the practitioners work very hard to achieve positive outcomes, the scales are nowhere near balanced
where people of color are involved.
We must reverse this trend, which is right now working very much against the best interests of our young.
Our young people do not belong behind bars.
- Jack Johnson
1
In addition to supporting our world-class programming and support services, all regular donors receive our Quarterly e-Newsletter
(The e-Advocate), as well as The e-Advocate Quarterly Magazine.
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The Advocacy Foundation, Inc.
Helping Individuals, Organizations & Communities
Achieve Their Full Potential
…a collection of works on
Investing for Organizational
Sustainability
“Turning the Improbable Into the Exceptional”
Atlanta
Philadelphia
______
John C Johnson III
Founder & CEO
(878) 222-0450
Voice | Data | SMS
www.TheAdvocacyFoundation.org
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Biblical Authority
______
Genesis 41:34-36 (MSG)
33-36
“So, Pharaoh needs to look for a wise and experienced man and put him in charge
of the country. Then Pharaoh needs to appoint managers throughout the country of
Egypt to organize it during the years of plenty. Their job will be to collect all the food
produced in the good years ahead and stockpile the grain under Pharaoh’s authority,
storing it in the towns for food. This grain will be held back to be used later during the
seven years of famine that are coming on Egypt. This way the country won’t be
devastated by the famine.”
Matthew 25:14-30
The Story About Investment
14-18
“It’s also like a man going off on an extended trip. He called his servants together
and delegated responsibilities. To one he gave five thousand dollars, to another two
thousand, to a third one thousand, depending on their abilities. Then he left. Right off,
the first servant went to work and doubled his master’s investment. The second did the
same. But the man with the single thousand dug a hole and carefully buried his master’s
money.
19-21
“After a long absence, the master of those three servants came back and settled up
with them. The one given five thousand dollars showed him how he had doubled his
investment. His master commended him: ‘Good work! You did your job well. From now
on be my partner.’
22-23
“The servant with the two thousand showed how he also had doubled his master’s
investment. His master commended him: ‘Good work! You did your job well. From now
on be my partner.’
24-25
“The servant given one thousand said, ‘Master, I know you have high standards
and hate careless ways, that you demand the best and make no allowances for error. I
was afraid I might disappoint you, so I found a good hiding place and secured your
money. Here it is, safe and sound down to the last cent.’
26-27
“The master was furious. ‘That’s a terrible way to live! It’s criminal to live cautiously
like that! If you knew I was after the best, why did you do less than the least? The least
you could have done would have been to invest the sum with the bankers, where at
least I would have gotten a little interest.
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28-30
“‘Take the thousand and give it to the one who risked the most. And get rid of this
“play-it-safe” who won’t go out on a limb. Throw him out into utter darkness.’
Luke 14:28-30
28-30
“Is there anyone here who, planning to build a new house, doesn’t first sit down and
figure the cost so you’ll know if you can complete it? If you only get the foundation laid
and then run out of money, you’re going to look pretty foolish. Everyone passing by will
poke fun at you: ‘He started something he couldn’t finish.’
1 Corinthians 16:2-4
Coming to See You
1-4
Regarding the relief offering for poor Christians that is being collected, you get the
same instructions I gave the churches in Galatia. Every Sunday each of you make an
offering and put it in safekeeping. Be as generous as you can. When I get there you’ll
have it ready, and I won’t have to make a special appeal. Then after I arrive, I’ll write
letters authorizing whomever you delegate, and send them off to Jerusalem to deliver
your gift. If you think it best that I go along, I’ll be glad to travel with them.
Ecclesiastes 11:2
2
Don’t hoard your goods; spread them around.
Be a blessing to others. This could be your last night.
Proverbs 13:11
11
Easy come, easy go,
but steady diligence pays off.
Proverbs 16:9
9
We plan the way we want to live,
but only God makes us able to live it.
Proverbs 21:5
5
Careful planning puts you ahead in the long run;
hurry and scurry puts you further behind.
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Table of Contents
…a compilation of works on
Investing for
Organizational Sustainability
Biblical Authority
I. Introduction: The U.S. Stock Market………………………………….. 15
II. Securities Regulation in The U.S……………………………………… 33
III. The New York Stock Exchange……………………………………….. 59
IV. The Dow Jones Industrial Average…………………………………… 71
V. The S&P 500 Index…………………………………………………….. 87
VI. The NASDAQ……………………….………………………………….. 117
VII. The American Stock Exchange…….…………………………………. 121
VIII. The NYSE vs. The NASDAQ………………………………………..... 129
IX. Online Investing and Stock Selection Criteria………………………… 133
X. List of Stock Exchanges………………………………………………... 169
0
XI. Glossary of Investment Terms…………………………………………. 171
XII.
References…………………………………………………………………185
Attachments
A. Seven Steps to Understanding the Stock Market
B. The Basics for Investing in Stocks
C. Analysis of Stock Market Investment Strategies
Copyright © 2018 The Advocacy Foundation, Inc. All Rights Reserved.
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I. Introduction
The U.S. Stock Market
A Stock Market, Equity Market or Share Market is the aggregation of
buyers and sellers (a loose network of economic transactions, not a physical facility or
discrete entity) of stocks (also called shares), which represent ownership claims on
businesses; these may include securities listed on a public stock exchange as well as
those only traded privately. Examples of the latter include shares of private companies
which are sold to investors through equity crowdfunding platforms. Stock exchanges list
shares of common equity as well as other security types, e.g. corporate bonds and
convertible bonds.
Size of The Market
Stocks are categorised in various ways. One way is by the country where the company
is domiciled. For example, Nestlé and Novartis are domiciled in Switzerland, so they
may be considered as part of the Swiss stock market, although their stock may also be
traded on exchanges in other countries, for example, as American depository receipts
(ADRs) on U.S. stock markets.
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As of mid-2017, the size of the world stock market (total market capitalization) was
about US$76.3 trillion. By country, the largest market was the United States (about
34%), followed by Japan (about 6%) and the United Kingdom (about 6%). These
numbers increased in 2013.
As of 2015, there are a total of 60 stock exchanges in the world with a total market
capitalization of $69 trillion. Of these, there are 16 exchanges with a market
capitalization of $1 trillion or more, and they account for 87% of global market
capitalization. Apart from the Australian Securities Exchange, these 16 exchanges are
based in one of three continents: North America, Europe and Asia.
Stock Exchange
A stock exchange is an exchange (or bourse) [note 1] where stock brokers and traders can
buy and sell shares of stock, bonds, and other securities. Many large companies have
their stocks listed on a stock exchange. This makes the stock more liquid and thus more
attractive to many investors. The exchange may also act as a guarantor of settlement.
Other stocks may be traded "over the counter" (OTC), that is, through a dealer. Some
large companies will have their stock listed on more than one exchange in different
countries, so as to attract international investors.
Stock exchanges may also cover other types of securities, such as fixed interest
securities (bonds) or (less frequently) derivatives which are more likely to be traded
OTC.
Trade
Trade in stock markets means the transfer for money of a stock or security from a seller
to a buyer. This requires these two parties to agree on a price. Equities (stocks or
shares) confer an ownership interest in a particular company.
Participants in the stock market range from small individual stock investors to larger
trader investors, who can be based anywhere in the world, and may include banks,
insurance companies, pension funds and hedge funds. Their buy or sell orders may be
executed on their behalf by a stock exchange trader.
Some exchanges are physical locations where transactions are carried out on a trading
floor, by a method known as open outcry. This method is used in some stock
exchanges and commodity exchanges, and involves traders shouting bid and offer
prices. The other type of stock exchange has a network of computers where trades are
made electronically. An example of such an exchange is the NASDAQ.
A potential buyer bids a specific price for a stock, and a potential seller asks a specific
price for the same stock. Buying or selling at the market means you will accept any ask
price or bid price for the stock. When the bid and ask prices match, a sale takes place,
on a first-come, first-served basis if there are multiple bidders or askers at a given price.
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The purpose of a stock exchange is to facilitate the exchange of securities between
buyers and sellers, thus providing a marketplace. The exchanges provide real-time
trading information on the listed securities, facilitating price discovery.
The New York Stock Exchange (NYSE) is a physical exchange, with a hybrid market for
placing orders electronically from any location as well as on the trading floor. Orders
executed on the trading floor enter by way of exchange members and flow down to a
floor broker, who submits the order electronically to the floor trading post for the
Designated Market Maker ("DMM") for that stock to trade the order. The DMM's job is to
maintain a two-sided market, making orders to buy and sell the security when there are
no other buyers or sellers. If a spread exists, no trade immediately takes place – in this
case the DMM may use their own resources (money or stock) to close the difference.
Once a trade has been made, the details are reported on the "tape" and sent back to
the brokerage firm, which then notifies the investor who placed the order. Computers
play an important role, especially for program trading.
The NASDAQ is a virtual exchange, where all of the trading is done over a computer
network. The process is similar to the New York Stock Exchange. One or more
NASDAQ market makers will always provide a bid and ask price at which they will
always purchase or sell 'their' stock.
The Paris Bourse, now part of Euronext, is an order-driven, electronic stock exchange.
It was automated in the late 1980s. Prior to the 1980s, it consisted of an open outcry
exchange. Stockbrokers met on the trading floor of the Palais Brongniart. In 1986, the
CATS trading system was introduced, and the order matching process was fully
automated.
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People trading stock will prefer to trade on the most popular exchange since this gives
the largest number of potential counterparties (buyers for a seller, sellers for a buyer)
and probably the best price. However, there have always been alternatives such as
brokers trying to bring parties together to trade outside the exchange. Some third
markets that were popular are Instinet, and later Island and Archipelago (the latter two
have since been acquired by Nasdaq and NYSE, respectively). One advantage is that
this avoids the commissions of the exchange. However, it also has problems such as
adverse selection. Financial regulators are probing dark pools.
Market Participant
Market participants include individual retail investors, institutional investors such as
mutual funds, banks, insurance companies and hedge funds, and also publicly traded
corporations trading in their own shares. Some studies have suggested that institutional
investors and corporations trading in their own shares generally receive higher riskadjusted
returns than retail investors.
A few decades ago, most buyers and sellers were individual investors, such as wealthy
businessmen, usually with long family histories to particular corporations. Over time,
markets have become more "institutionalized"; buyers and sellers are largely institutions
(e.g., pension funds, insurance companies, mutual funds, index funds, exchange-traded
funds, hedge funds, investor groups, banks and various other financial institutions).
The rise of the institutional investor has brought with it some improvements in market
operations. There has been a gradual tendency for "fixed" (and exorbitant) fees being
reduced for all investors, partly from falling administration costs but also assisted by
large institutions challenging brokers' oligopolistic approach to setting standardised
fees. A current trend in stock market investments includes the decrease in fees due to
computerized asset management termed Robo Advisers within the industry. Automation
has decreased portfolio management costs by lowering the cost associated with
investing as a whole.
Trends in Market Participation
Stock market participation refers to the number of agents who buy and sell equity
backed securities either directly or indirectly in a financial exchange. Participants are
generally subdivided into three distinct sectors; households, institutions, and foreign
traders. Direct participation occurs when any of the above entities buys or sells
securities on its own behalf on an exchange. Indirect participation occurs when an
institutional investor exchanges a stock on behalf of an individual or household. Indirect
investment occurs in the form of pooled investment accounts, retirement accounts, and
other managed financial accounts.
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Indirect vs. Direct Investment
The total value of equity-backed securities in the United States rose over 600% in the
25 years between 1989 and 2012 as market capitalization expanded from $2,790 billion
to $18,668 billion. Direct ownership of stock by individuals rose slightly from 17.8% in
1992 to 17.9% in 2007, with the median value of these holdings rising from $14,778 to
$17,000. Indirect participation in the form of retirement accounts rose from 39.3% in
1992 to 52.6% in 2007, with the median value of these accounts more than doubling
from $22,000 to $45,000 in that time. Rydqvist, Spizman, and Strebulaev attribute the
differential growth in direct and indirect holdings to differences in the way each are
taxed in the United States. Investments in pension funds and 401ks, the two most
common vehicles of indirect participation, are taxed only when funds are withdrawn
from the accounts. Conversely, the money used to directly purchase stock is subject to
taxation as are any dividends or capital gains they generate for the holder. In this way
the current tax code incentivizes individuals to invest indirectly.
Participation by Income and Wealth Strata
Rates of participation and the value of holdings differs significantly across strata of
income. In the bottom quintile of income, 5.5% of households directly own stock and
10.7% hold stocks indirectly in the form of retirement accounts. The top decile of income
has a direct participation rate of 47.5% and an indirect participation rate in the form of
retirement accounts of 89.6%. The median value of directly owned stock in the bottom
quintile of income is $4,000 and is $78,600 in the top decile of income as of 2007. The
median value of indirectly held stock in the form of retirement accounts for the same two
groups in the same year is $6,300 and $214,800 respectively. Since the Great
Recession of 2008 households in the bottom half of the income distribution have
lessened their participation rate both directly and indirectly from 53.2% in 2007 to 48.8%
in 2013, while over the same time period households in the top decile of the income
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distribution slightly increased participation 91.7% to 92.1%. The mean value of direct
and indirect holdings at the bottom half of the income distribution moved slightly
downward from $53,800 in 2007 to $53,600 in 2013. In the top decile, mean value of all
holdings fell from $982,000 to $969,300 in the same time. The mean value of all stock
holdings across the entire income distribution is valued at $269,900 as of 2013.
Participation by Head of Household Race and Gender
The racial composition of stock market ownership shows households headed by whites
are nearly four and six times as likely to directly own stocks than households headed by
blacks and Hispanics respectively. As of 2011 the national rate of direct participation
was 19.6%, for white households the participation rate was 24.5%, for black households
it was 6.4% and for Hispanic households it was 4.3% Indirect participation in the form of
401k ownership shows a similar pattern with a national participation rate of 42.1%, a
rate of 46.4% for white households, 31.7% for black households, and 25.8% for
Hispanic households. Households headed by married couples participated at rates
above the national averages with 25.6% participating directly and 53.4% participating
indirectly through a retirement account. 14.7% of households headed by men
participated in the market directly and 33.4% owned stock through a retirement account.
12.6% of female headed households directly owned stock and 28.7% owned stock
indirectly.
Determinants and possible explanations of stock market participation
In a 2002 paper Anntte Vissing-Jorgensen from the University of Chicago attempts to
explain disproportionate rates of participation along wealth and income groups as a
function of fixed costs associated with investing. Her research concludes that a fixed
cost of $200 per year is sufficient to explain why nearly half of all U.S. households do
not participate in the market. Participation rates have been shown to strongly correlate
with education levels, promoting the hypothesis that information and transaction costs of
market participation are better absorbed by more educated households. Behavioral
economists Harrison Hong, Jeffrey Kubik and Jeremy Stein suggest that sociability and
participation rates of communities have a statistically significant impact on an
individual’s decision to participate in the market. Their research indicates that social
individuals living in states with higher than average participation rates are 5% more
likely to participate than individuals that do not share those characteristics. This
phenomenon also explained in cost terms. Knowledge of market functioning diffuses
through communities and consequently lowers transaction costs associated with
investing.
Early History
History
In 12th-century France, the courretiers de change were concerned with managing and
regulating the debts of agricultural communities on behalf of the banks. Because these
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men also traded with debts, they could be called the first brokers. A common misbelief
is that, in late 13th-century Bruges, commodity traders gathered inside the house of a
man called Van der Beurze, and in 1409 they became the "Brugse Beurse",
institutionalizing what had been, until then, an informal meeting, but actually, the family
Van der Beurze had a building in Antwerp where those gatherings occurred; the Van
der Beurze had Antwerp, as most of the merchants of that period, as their primary place
for trading. The idea quickly spread around Flanders and neighboring countries and
"Beurzen" soon opened in Ghent and Rotterdam.
In the middle of the 13th century, Venetian bankers began to trade in government
securities. In 1351 the Venetian government outlawed spreading rumors intended to
lower the price of government funds. Bankers in Pisa, Verona, Genoa and Florence also
began trading in government securities during the 14th century. This was only possible
because these were independent city-states not ruled by a duke but a council of
influential citizens. Italian companies were also the first to issue shares. Companies in
England and the Low Countries followed in the 16th century.
Birth of Formal Stock Markets
In the 17th and 18th centuries, the Dutch pioneering several financial innovations that
helped lay the foundations of modern financial system. While the Italian city-states
produced the first transferable government bonds, they did not develop the other
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ingredient necessary to produce a fully fledged capital market: the stock market. In the
early 1600s the Dutch East India Company (VOC) became the first company in history
to issue bonds and shares of stock to the general public. As Edward Stringham (2015)
notes, "companies with transferable shares date back to classical Rome, but these were
usually not enduring endeavors and no considerable secondary market existed (Neal,
1997, p. 61)." The Dutch East India Company (founded in the year of 1602) was also
the first joint-stock company to get a fixed capital stock and as a result, continuous trade
in company stock occurred on the Amsterdam Exchange. Soon thereafter, a lively trade
in various derivatives, among which options and repos, emerged on the Amsterdam
market. Dutch traders also pioneered short selling – a practice which was banned by
the Dutch authorities as early as 1610. Amsterdam-based businessman Joseph de la
Vega's Confusion de Confusiones (1688) was the earliest known book about stock
trading and first book on the inner workings of the stock market (including the stock
exchange).
There are now stock markets in virtually every developed and most developing
economies, with the world's largest markets being in the United States, United Kingdom,
Japan, India, China, Canada, Germany (Frankfurt Stock Exchange), France, South
Korea and the Netherlands.
Importance
As the Austrian School economist Ludwig von Mises noted, "A stock market is crucial to
the existence of capitalism and private property. For it means that there is a functioning
market in the exchange of private titles to the means of production. There can be no
genuine private ownership of capital without a stock market: there can be no true
socialism if such a market is allowed to exist."
Function and Purpose
The stock market is one of the most important ways for companies to raise money,
along with debt markets which are generally more imposing but do not trade publicly.
This allows businesses to be publicly traded, and raise additional financial capital for
expansion by selling shares of ownership of the company in a public market. The
liquidity that an exchange affords the investors enables their holders to quickly and
easily sell securities. This is an attractive feature of investing in stocks, compared to
other less liquid investments such as property and other immoveable assets. Some
companies actively increase liquidity by trading in their own shares.
History has shown that the price of stocks and other assets is an important part of the
dynamics of economic activity, and can influence or be an indicator of social mood. An
economy where the stock market is on the rise is considered to be an up-and-coming
economy. The stock market is often considered the primary indicator of a country's
economic strength and development.
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Rising share prices, for instance, tend to be associated with increased business
investment and vice versa. Share prices also affect the wealth of households and their
consumption. Therefore, central banks tend to keep an eye on the control and behavior
of the stock market and, in general, on the smooth operation of financial system
functions. Financial stability is the raison d'être of central banks.
Exchanges also act as the clearinghouse for each transaction, meaning that they collect
and deliver the shares, and guarantee payment to the seller of a security. This
eliminates the risk to an individual buyer or seller that the counterparty could default on
the transaction.
The smooth functioning of all these activities facilitates economic growth in that lower
costs and enterprise risks promote the production of goods and services as well as
possibly employment. In this way the financial system is assumed to contribute to
increased prosperity, although some controversy exists as to whether the optimal
financial system is bank-based or market-based.
Recent events such as the Global Financial Crisis have prompted a heightened degree
of scrutiny of the impact of the structure of stock markets (called market microstructure),
in particular to the stability of the financial system and the transmission of systemic risk.
Relation to The Modern Financial System
The financial system in most western countries has undergone a remarkable
transformation. One feature of this development is disintermediation. A portion of the
funds involved in saving and financing, flows directly to the financial markets instead of
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eing routed via the traditional bank lending and deposit operations. The general public
interest in investing in the stock market, either directly or through mutual funds, has
been an important component of this process.
Statistics show that in recent decades, shares have made up an increasingly large
proportion of households' financial assets in many countries. In the 1970s, in Sweden,
deposit accounts and other very liquid assets with little risk made up almost 60 percent
of households' financial wealth, compared to less than 20 percent in the 2000s. The
major part of this adjustment is that financial portfolios have gone directly to shares but
a good deal now takes the form of various kinds of institutional investment for groups of
individuals, e.g., pension funds, mutual funds, hedge funds, insurance investment of
premiums, etc.
The trend towards forms of saving with a higher risk has been accentuated by new rules
for most funds and insurance, permitting a higher proportion of shares to bonds. Similar
tendencies are to be found in other developed countries. In all developed economic
systems, such as the European Union, the United States, Japan and other developed
nations, the trend has been the same: saving has moved away from traditional
(government insured) "bank deposits to more risky securities of one sort or another".
A second transformation is the move to electronic trading to replace human trading of
listed securities.
Years to December 31, 2012
United States S&P stock market returns
(assumes 2% annual dividend)
Average Annual Return
%
Average Compounded
Annual Return
%
1 15.5 15.5
3 10.9 11.6
5 4.3 10.1
10 8.8 7.3
15 6.5 5.9
20 10.0 6.4
30 11.6 7.3
40 10.1 8.0
50 10.0 8.1
60 10.5 8.2
Compared to other asset classes Over the long term, investing in a well diversified
portfolio of stocks such as an S&P 500 Index outperforms other investment vehicles
such as Treasury Bills and Bonds, with the S&P 500 having a geometric annual average
of 9.55% from 1928 to 2013.
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Behavior of The Stock Market
Investors may temporarily move financial prices away from market equilibrium. Overreactions
may occur—so that excessive optimism (euphoria) may drive prices unduly
high or excessive pessimism may drive prices unduly low. Economists continue to
debate whether financial markets are generally efficient.
According to one interpretation of the efficient-market hypothesis (EMH), only changes
in fundamental factors, such as the outlook for margins, profits or dividends, ought to
affect share prices beyond the short term, where random 'noise' in the system may
prevail. The 'hard' efficient-market hypothesis does not explain the cause of events such
as the crash in 1987, when the Dow Jones Industrial Average plummeted 22.6
percent—the largest-ever one-day fall in the United States.
This event demonstrated that share prices can fall dramatically even though no
generally agreed upon definite cause has been found: a thorough search failed to detect
any 'reasonable' development that might have accounted for the crash. (Note that such
events are predicted to occur strictly by chance, although very rarely.) It seems also to
be the case more generally that many price movements (beyond that which are
predicted to occur 'randomly') are not occasioned by new information; a study of the fifty
largest one-day share price movements in the United States in the post-war period
seems to confirm this.
A 'soft' EMH has emerged which does not require that prices remain at or near
equilibrium, but only that market participants not be able to systematically profit from
any momentary market 'inefficiencies'. Moreover, while EMH predicts that all price
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movement (in the absence of change in fundamental information) is random (i.e., nontrending),
many studies have shown a marked tendency for the stock market to trend
over time periods of weeks or longer. Various explanations for such large and
apparently non-random price movements have been promulgated. For instance, some
research has shown that changes in estimated risk, and the use of certain strategies,
such as stop-loss limits and value at risk limits, theoretically could cause financial
markets to overreact. But the best explanation seems to be that the distribution of stock
market prices is non-Gaussian (in which case EMH, in any of its current forms, would
not be strictly applicable).
Other research has shown that psychological factors may result in exaggerated
(statistically anomalous) stock price movements (contrary to EMH which assumes such
behaviors 'cancel out'). Psychological research has demonstrated that people are
predisposed to 'seeing' patterns, and often will perceive a pattern in what is, in fact, just
noise, e.g. seeing familiar shapes in clouds or ink blots. In the present context this
means that a succession of good news items about a company may lead investors to
overreact positively, driving the price up. A period of good returns also boosts the
investors' self-confidence, reducing their (psychological) risk threshold.
Another phenomenon—also from psychology—that works against an objective
assessment is group thinking. As social animals, it is not easy to stick to an opinion that
differs markedly from that of a majority of the group. An example with which one may be
familiar is the reluctance to enter a restaurant that is empty; people generally prefer to
have their opinion validated by those of others in the group.
In one paper the authors draw an analogy with gambling. In normal times the market
behaves like a game of roulette; the probabilities are known and largely independent of
the investment decisions of the different players. In times of market stress, however, the
game becomes more like poker (herding behavior takes over). The players now must
give heavy weight to the psychology of other investors and how they are likely to react
psychologically.
In the period running up to the 1987 crash, less than 1 percent of the analyst's
recommendations had been to sell (and even during the 2000–2002 bear market, the
average did not rise above 5%). In the run-up to 2000, the media amplified the general
euphoria, with reports of rapidly rising share prices and the notion that large sums of
money could be quickly earned in the so-called new economy stock market.
Stock markets play an essential role in growing industries that ultimately affect the
economy through transferring available funds from units that have excess funds
(savings) to those who are suffering from funds deficit (borrowings) (Padhi and Naik,
2012). In other words, capital markets facilitate funds movement between the abovementioned
units. This process leads to the enhancement of available financial
resources which in turn affects the economic growth positively. Moreover, both
economic and financial theories argue that stock prices are affected by macroeconomic
trends.
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Many different academic researchers have stated companies with low P/E ratios and
smaller sized companies have a tendency to outperform the market. Research carried
out states mid-sized companies outperform large cap companies and smaller
companies have higher returns historically.
Irrational Behavior
Sometimes, the market seems to react irrationally to economic or financial news, even if
that news is likely to have no real effect on the fundamental value of securities itself.
However, this market behavior may be more apparent than real, since often such news
was anticipated, and a counteraction may occur if the news is better (or worse) than
expected. Therefore, the stock market may be swayed in either direction by press
releases, rumors, euphoria and mass panic.
Over the short-term, stocks and other securities can be battered or buoyed by any
number of fast market-changing events, making the stock market behavior difficult to
predict. Emotions can drive prices up and down, people are generally not as rational as
they think, and the reasons for buying and selling are generally accepted.
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Behaviorists argue that investors often behave irrationally when making investment
decisions thereby incorrectly pricing securities, which causes market inefficiencies,
which, in turn, are opportunities to make money. However, the whole notion of EMH is
that these non-rational reactions to information cancel out, leaving the prices of stocks
rationally determined.
The Dow Jones Industrial Average biggest gain in one day was 936.42 points or 11%.
Crashes
A stock market crash is often defined as a sharp dip in share prices of stocks listed on
the stock exchanges. In parallel with various economic factors, a reason for stock
market crashes is also due to panic and investing public's loss of confidence. Often,
stock market crashes end speculative economic bubbles.
There have been famous stock market crashes that have ended in the loss of billions of
dollars and wealth destruction on a massive scale. An increasing number of people are
involved in the stock market, especially since the social security and retirement plans
are being increasingly privatized and linked to stocks and bonds and other elements of
the market. There have been a number of famous stock market crashes like the Wall
Street Crash of 1929, the stock market crash of 1973–4, the Black Monday of 1987, the
Dot-com bubble of 2000, and the Stock Market Crash of 2008.
One of the most famous stock market crashes started October 24, 1929, on Black
Thursday. The Dow Jones Industrial Average lost 50% during this stock market crash. It
was the beginning of the Great Depression. Another famous crash took place on
October 19, 1987 – Black Monday. The crash began in Hong Kong and quickly spread
around the world.
By the end of October, stock markets in Hong Kong had fallen 45.5%, Australia 41.8%,
Spain 31%, the United Kingdom 26.4%, the United States 22.68%, and Canada 22.5%.
Black Monday itself was the largest one-day percentage decline in stock market history
– the Dow Jones fell by 22.6% in a day. The names "Black Monday" and "Black
Tuesday" are also used for October 28–29, 1929, which followed Terrible Thursday—
the starting day of the stock market crash in 1929.
The crash in 1987 raised some puzzles – main news and events did not predict the
catastrophe and visible reasons for the collapse were not identified. This event raised
questions about many important assumptions of modern economics, namely, the theory
of rational human conduct, the theory of market equilibrium and the efficient-market
hypothesis. For some time after the crash, trading in stock exchanges worldwide was
halted, since the exchange computers did not perform well owing to enormous quantity
of trades being received at one time. This halt in trading allowed the Federal Reserve
System and central banks of other countries to take measures to control the spreading
of worldwide financial crisis. In the United States the SEC introduced several new
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measures of control into the stock market in an attempt to prevent a re-occurrence of
the events of Black Monday.
Since the early 1990s, many of the largest exchanges have adopted electronic
'matching engines' to bring together buyers and sellers, replacing the open outcry
system. Electronic trading now accounts for the majority of trading in many developed
countries. Computer systems were upgraded in the stock exchanges to handle larger
trading volumes in a more accurate and controlled manner. The SEC modified the
margin requirements in an attempt to lower the volatility of common stocks, stock
options and the futures market. The New York Stock Exchange and the Chicago
Mercantile Exchange introduced the concept of a circuit breaker. The circuit breaker
halts trading if the Dow declines a prescribed number of points for a prescribed amount
of time. In February 2012, the Investment Industry Regulatory Organization of Canada
(IIROC) introduced single-stock circuit breakers.
New York Stock Exchange (NYSE) circuit breakers
% drop time of drop close trading for
10 before 2 pm one hour halt
10 2 pm – 2:30 pm half-hour halt
10 after 2:30 pm market stays open
20 before 1 pm halt for two hours
20 1 pm – 2 pm halt for one hour
20 after 2 pm close for the day
30 any time during day close for the day
Stock Market Prediction
Tobias Preis and his colleagues Helen Susannah Moat and H. Eugene Stanley
introduced a method to identify online precursors for stock market moves, using trading
strategies based on search volume data provided by Google Trends. Their analysis of
Google search volume for 98 terms of varying financial relevance suggests that
increases in search volume for financially relevant search terms tend to precede large
losses in financial markets.
Stock Market Index
The movements of the prices in a market or section of a market are captured in price
indices called stock market indices, of which there are many, e.g., the S&P, the FTSE
and the Euronext indices. Such indices are usually market capitalization weighted, with
the weights reflecting the contribution of the stock to the index. The constituents of the
index are reviewed frequently to include/exclude stocks in order to reflect the changing
business environment.
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Derivative Instruments
Financial innovation has brought many new financial instruments whose pay-offs or
values depend on the prices of stocks. Some examples are exchange-traded funds
(ETFs), stock index and stock options, equity swaps, single-stock futures, and stock
index futures. These last two may be traded on futures exchanges (which are distinct
from stock exchanges—their history traces back to commodity futures exchanges), or
traded over-the-counter. As all of these products are only derived from stocks, they are
sometimes considered to be traded in a (hypothetical) derivatives market, rather than
the (hypothetical) stock market.
Leveraged Strategies
Stock that a trader does not actually own may be traded using short selling; margin
buying may be used to purchase stock with borrowed funds; or, derivatives may be
used to control large blocks of stocks for a much smaller amount of money than would
be required by outright purchase or sales.
Short Selling
In short selling, the trader borrows stock (usually from his brokerage which holds its
clients' shares or its own shares on account to lend to short sellers) then sells it on the
market, betting that the price will fall. The trader eventually buys back the stock, making
money if the price fell in the meantime and losing money if it rose. Exiting a short
position by buying back the stock is called "covering." This strategy may also be used
by unscrupulous traders in illiquid or thinly traded markets to artificially lower the price of
a stock. Hence most markets either prevent short selling or place restrictions on when
and how a short sale can occur. The practice of naked shorting is illegal in most (but not
all) stock markets.
Margin Buying
In margin buying, the trader borrows money (at interest) to buy a stock and hopes for it
to rise. Most industrialized countries have regulations that require that if the borrowing is
based on collateral from other stocks the trader owns outright, it can be a maximum of a
certain percentage of those other stocks' value. In the United States, the margin
requirements have been 50% for many years (that is, if you want to make a $1000
investment, you need to put up $500, and there is often a maintenance margin below
the $500).
A margin call is made if the total value of the investor's account cannot support the loss
of the trade. (Upon a decline in the value of the margined securities additional funds
may be required to maintain the account's equity, and with or without notice the
margined security or any others within the account may be sold by the brokerage to
protect its loan position. The investor is responsible for any shortfall following such
forced sales.)
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Regulation of margin requirements (by the Federal Reserve) was implemented after the
Crash of 1929. Before that, speculators typically only needed to put up as little as 10
percent (or even less) of the total investment represented by the stocks purchased.
Other rules may include the prohibition of free-riding: putting in an order to buy stocks
without paying initially (there is normally a three-day grace period for delivery of the
stock), but then selling them (before the three-days are up) and using part of the
proceeds to make the original payment (assuming that the value of the stocks has not
declined in the interim).
New Issuance
Global issuance of equity and equity-related instruments totaled $505 billion in 2004, a
29.8% increase over the $389 billion raised in 2003. Initial public offerings (IPOs) by US
issuers increased 221% with 233 offerings that raised $45 billion, and IPOs in Europe,
Middle East and Africa (EMEA) increased by 333%, from $9 billion to $39 billion.
ASX Share Market Game
ASX Share Market Game is a platform for Australian school students and beginners to
learn about trading stocks. The game is a free service hosted on ASX (Australian
Securities Exchange) website. Each year more than 70,000 students enroll in the game.
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For the vast majority, this is an introduction to stock market investing. Students once
enrolled, are given $50,000 of virtual money and can buy and sell up to 20 times a day.
The game runs for 10 weeks. Many similar programs are found in secondary
educational institutions across the world.
Investment Strategies
There are many different approaches to investing. Many strategies can be classified as
either fundamental analysis or technical analysis. Fundamental analysis refers to
analyzing companies by their financial statements found in SEC filings, business trends,
general economic conditions, etc. Technical analysis studies price actions in markets
through the use of charts and quantitative techniques to attempt to forecast price trends
regardless of the company's financial prospects. One example of a technical strategy is
the Trend following method, used by John W. Henry and Ed Seykota, which uses price
patterns and is also rooted in risk control and diversification.
Additionally, many choose to invest via the index method. In this method, one holds a
weighted or unweighted portfolio consisting of the entire stock market or some segment
of the stock market (such as the S&P 500 or Wilshire 5000). The principal aim of this
strategy is to maximize diversification, minimize taxes from too frequent trading, and
ride the general trend of the stock market (which, in the U.S., has averaged nearly 10%
per year, compounded annually, since World War II).
Taxation
According to much national or state legislation, a large array of fiscal obligations are
taxed for capital gains. Taxes are charged by the state over the transactions, dividends
and capital gains on the stock market, in particular in the stock exchanges. These fiscal
obligations vary from jurisdiction to jurisdiction. Some countries avoid taxing profits on
stocks as the profits are already taxed when companies file returns, but double taxation
is common at some level in many countries.
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II. Securities Regulation in The U.S.
Securities Regulation in The United States is the field of U.S. law that
covers transactions and other dealings with securities. The term is usually understood
to include both federal- and state-level regulation by purely governmental regulatory
agencies, but sometimes may also encompass listing requirements of exchanges like
the New York Stock Exchange and rules of self-regulatory organizations like the
Financial Industry Regulatory Authority (FINRA).
On the federal level, the primary securities regulator is the Securities and Exchange
Commission (SEC). Futures and some aspects of derivatives are regulated by the
Commodity Futures Trading Commission (CFTC).
Overview
FINRA, a self-regulatory organization, promulgates rules that govern broker-dealers and
certain other professionals in the securities industry. It was formed when the
enforcement divisions of the National Association of Securities Dealers (NASD), now
FINRA, and of the New York Stock Exchange merged into one organization. FINRA, like
the stock exchanges and the Securities Investor Protection Corporation (SIPC), is
overseen by the SEC, and in general FINRA's rules are subject to SEC approval.
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All brokers and dealers registered with the SEC under 15 U.S.C. § 78o, with some
exceptions, are required to be members of SIPC (pursuant to 15 U.S.C. § 78ccc) and
are subject to its regulations.
The federal securities laws were largely created as part of the New Deal in the 1930s.
There are five major federal securities laws:
1. Securities Act of 1933 – regulating distribution of new securities
2. Securities Exchange Act of 1934 – regulating trading securities, brokers, and
exchanges
3. Trust Indenture Act of 1939 – regulating debt securities
4. Investment Company Act of 1940 – regulating mutual funds
5. Investment Advisers Act of 1940 – regulating investment advisers
Since these laws were originally enacted, Congress has amended them many times.
The Holding Company Act and the Trust Indenture Act in particular have changed
significantly since then. The titles listed above, including the year of original enactment,
are the so-called "popular names" of these laws, and practitioners in this area reference
these statutes using these popular names (e.g., "Section 10(b) of the Exchange Act" or
"Section 5 of the Securities Act"). When they do so, they do not generally mean the
provisions of the original Acts; they mean the Acts as amended to date.
When Congress amends the securities laws, those amendments have their own popular
names (a few prominent examples include Securities Investor Protection Act of 1970,
the Insider Trading Sanctions Act of 1984, the Insider Trading and Securities Fraud
Enforcement Act of 1988 and the Dodd-Frank Act). These acts often include provisions
that state that they are amending one of the five primary laws. Other laws passed since
then include Private Securities Litigation Reform Act (1995), Sarbanes–Oxley Act
(2002), Jumpstart Our Business Startups Act (2012), and various other federal
securities laws.
Although practitioners in this area use these popular names to refer to the federal
securities laws, like many U.S. statutes these laws are generally codified in the U.S.
Code, the official codification of U.S. statutory law. They are contained in Title 15 of the
U.S. Code. Thus, for example, the official code citation for Section 5 of the Securities
Act of 1933 is 15 U.S.C. section 77e. Not every law adopted by Congress is codified,
because some are not appropriate for codification. For example, appropriations statutes
are not codified.
There are also extensive regulations under these laws, largely made by the SEC. One
of the most famous and often used SEC rules is Rule 10b-5, which prohibits fraud in
securities transactions as well as insider trading. Because interpretations under rule
10b-5 often deem silence to be fraudulent in certain circumstances, efforts to comply
with Rule 10b-5 and avoid lawsuits under 10b-5 have been responsible for a large
amount of corporate disclosure.
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The federal securities laws govern the offer and sale of securities and the trading of
securities, activities of certain professionals in the industry, investment companies (such
as mutual funds), tender offers, proxy statements, and generally the regulation of public
companies. Public company regulation is largely a disclosure-driven regime, but it has
grown in recent years to the point that it begins to dictate certain issues of corporate
governance.
State laws governing issuance and trading of securities are commonly referred to as
blue sky laws.
History
Before the Wall Street Crash of 1929, there was little regulation of securities in the
United States at the federal level. The crash spurred Congress to hold hearings, known
as the Pecora Commission, after Ferdinand Pecora.
After the hearings Congress passed the Securities Act of 1933 prescribing rules for the
interstate sales of securities, and made it illegal to sell securities in a state without
complying with that state's laws. The statute requires a publicly-traded company to
register with the U.S. Securities and Exchange Commission (SEC). The registration
statement provides a broad range of information about the company and is a public
record. The SEC does not approve or disapprove the issue of securities, but rather
permits the filing statement to "become effective" if sufficient required detail is provided,
including risk factors. The company can then begin selling the stock issue, usually
through investment bankers.
The following year, Congress passed the Securities Exchange Act of 1934, to regulate
the secondary market (general-public) trading of securities. Initially, the 1934 Act
applied only to stock exchanges and their listed companies, as the name implies. In the
late 1930s, it was amended to provide regulation of the over-the-counter (OTC) market
(i.e., trades between individuals with no stock exchange involved). In 1964, the Act was
amended to apply to companies traded in the OTC market.
Courts interpreted the laws, assembling a body of United States securities case law. In
1988 the Supreme Court of the United States decided Basic Inc. v. Levinson, which
allowed class action lawsuits under SEC Rule 10b-5 and the "fraud-on-the-market"
theory, which resulted in an increase in securities class actions. The Private Securities
Litigation Reform Act and the state model law Securities Litigation Uniform Standards
Act was a response to class actions.
In October 2000, the SEC issued the Regulation Fair Disclosure regulation (Reg FD),
which required publicly traded companies to disclose material information to all
investors at the same time. Reg FD helped level the playing field for all investors by
helping to reduce the problem of selective disclosure.
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In 2010, the Dodd–Frank Wall Street Reform and Consumer Protection Act was passed
to reform securities law in the wake of the financial crisis of 2007–2008.
The U.S. Securities
and Exchange Commission
The U.S. Securities and Exchange Commission (SEC)
is an independent agency of the United States federal
government. The SEC holds primary responsibility
for enforcing the federal securities laws, proposing
securities rules, and regulating the securities
industry, the nation's stock and options
exchanges, and other activities and
organizations, including the electronic securities
markets in the United States.
In addition to the Securities Exchange Act of
1934, which created it, the SEC enforces the
Securities Act of 1933, the Trust Indenture Act of
1939, the Investment Company Act of 1940, the
Investment Advisers Act of 1940, the Sarbanes–
Oxley Act of 2002, and other statutes. The SEC was
created by Section 4 of the Securities Exchange Act of 1934
(now codified as 15 U.S.C. § 78d and commonly referred to as the Exchange Act or the
1934 Act).
Overview
The SEC has a three-part mission: to protect investors; maintain fair, orderly, and
efficient markets; and facilitate capital formation.
To achieve its mandate, the SEC enforces the statutory requirement that public
companies and other regulated companies submit quarterly and annual reports, as well
as other periodic reports. In addition to annual financial reports, company executives
must provide a narrative account, called the "management discussion and analysis"
(MD&A), that outlines the previous year of operations and explains how the company
fared in that time period. MD&A will usually also touch on the upcoming year, outlining
future goals and approaches to new projects. In an attempt to level the playing field for
all investors, the SEC maintains an online database called EDGAR (the Electronic Data
Gathering, Analysis, and Retrieval system) online from which investors can access this
and other information filed with the agency.
Quarterly and semiannual reports from public companies are crucial for investors to
make sound decisions when investing in the capital markets. Unlike banking,
investment in the capital markets is not guaranteed by the federal government. The
potential for big gains needs to be weighed against that of sizable losses. Mandatory
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disclosure of financial and other information about the issuer and the security itself gives
private individuals as well as large institutions the same basic facts about the public
companies they invest in, thereby increasing public scrutiny while reducing insider
trading and fraud.
The SEC makes reports available to the public through the EDGAR system. The SEC
also offers publications on investment-related topics for public education. The same
online system also takes tips and complaints from investors to help the SEC track down
violators of the securities laws. The SEC adheres to a strict policy of never commenting
on the existence or status of an ongoing investigation.
History
Prior to the enactment of the federal securities laws and the creation of the SEC, there
existed so-called blue sky laws. They were enacted and enforced at the state level, and
regulated the offering and sale of securities to protect the public from fraud. Though the
specific provisions of these laws varied among states, they all required the registration
of all securities offerings and sales, as well as of every U.S. stockbroker and brokerage
firm.
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However, these blue sky laws were generally found to be ineffective. For example, the
Investment Bankers Association told its members as early as 1915 that they could
"ignore" blue sky laws by making securities offerings across state lines through the mail.
After holding hearings on abuses on interstate frauds (commonly known as the Pecora
Commission), Congress passed the Securities Act of 1933 (15 U.S.C. § 77a), which
regulates interstate sales of securities (original issues) at the federal level. The
subsequent Securities Exchange Act of 1934 (15 U.S.C. § 78d) regulates sales of
securities in the secondary market. Section 4 of the 1934 act created the U.S. Securities
and Exchange Commission to enforce the federal securities laws; both laws are
considered parts of Franklin D. Roosevelt's New Deal raft of legislation.
The Securities Act of 1933 is also known as the "Truth in Securities Act" and the
"Federal Securities Act", or just the "1933 Act". Its goal was to increase public trust in
the capital markets by requiring uniform disclosure of information about public securities
offerings. The primary drafters of 1933 Act were Huston Thompson, a former Federal
Trade Commission (FTC) chairman, and Walter Miller and Ollie Butler, two attorneys in
the Commerce Department's Foreign Service Division, with input from Supreme Court
Justice Louis Brandeis. For the first year of the law's enactment, the enforcement of the
statute rested with the Federal Trade Commission, but this power was transferred to the
SEC following its creation in 1934.
In 1934, Roosevelt named his friend Joseph P. Kennedy, a self-made multimillionaire
financier and a leader among the Irish-American community, as the insider-as-chairman
who knew Wall Street well enough to clean it up. Two of the other five commissioners
were James M. Landis (one of the architects of the 1934 Act and other New Deal
legislation) and Ferdinand Pecora (Chief Counsel to the Senate Committee on Banking
and Currency during its investigation of Wall Street banking and stock brokerage
practices). Kennedy added a number of intelligent young lawyers, including William O.
Douglas and Abe Fortas, both of whom later became Supreme Court justices.
Kennedy's team defined the mission and operating mode for the SEC, making full use of
its wide range of legal powers. The SEC had four missions. First and most important
was to restore investor confidence in the securities market, which had practically
collapsed because of doubts about its internal integrity, and fears of the external threats
supposedly posed by anti-business elements in the Roosevelt administration. Second,
in terms of integrity, the SEC had to get rid of the penny-ante swindles based on fake
information, fraudulent devices, and unsound get-rich-quick schemes. That unsavory
element had to be prosecuted and shut down. Thirdly, and much more important than
the outright frauds, the SEC had to end the million-dollar insider maneuvers by top
officials of major corporations, whereby insiders with access to much better information
about the condition of the company knew when to buy or sell their own securities. A
crackdown on insider trading was given high priority. Finally, the SEC had to set up a
complex system of registration for all securities sold in America, with a clear-cut set of
deadlines, rules and guidelines that everyone had to follow. Drafting precise rules was
the main challenge faced by the bright young lawyers. The SEC succeeded in its four
missions, as Kennedy reassured the American business community that they would no
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longer be deceived and tricked and taken advantage of by Wall Street. He became a
cheerleader for ordinary investors to return to the market and enable the economy to
grow again.
The law requires that issuing companies register distributions of securities with the SEC
prior to interstate sales of these securities, so that investors may have access to basic
financial information about issuing companies and risks involved in investing in the
securities in question. Since 1994, most registration statements (and associated
materials) filed with the SEC can be accessed via the SEC's online system, EDGAR.
The Securities Exchange Act of 1934 is also known as "the Exchange Act" or "the 1934
Act". This act regulates secondary trading between individuals and companies which
are often unrelated to the original issuers of securities. Entities under the SEC's
authority include securities exchanges with physical trading floors such as the New York
Stock Exchange (NYSE), self-regulatory organizations (SROs) such as the National
Association of Securities Dealers (NASD), the Municipal Securities Rulemaking Board
(MSRB), online trading platforms such as the NASDAQ Stock Market (NASDAQ) and
alternative trading systems (ATSs), and any other persons (e.g., securities brokers)
engaged in transactions for the accounts of others.
Later SEC commissioners and chairmen include William O. Douglas, Jerome Frank
(one of the leaders of the legal realism movement), and William J. Casey (who later
headed the Central Intelligence Agency under President Ronald Reagan).
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Organizational Structure
Commission Members
Non-partisan, no more than three Commissioners may belong to the same political
party. The President also designates one of the Commissioners as Chairman, the
SEC's top executive. However, the President does not possess the power to fire the
appointed Commissioners, a provision that was made to ensure the independence of
the SEC. This issue arose during the 2008 presidential election in connection with the
ensuing financial crises.
Currently, the SEC Commissioners are:
Name Title Party Took office Term expires
Jay Clayton Chairman Independent May 4, 2017 2021
Michael Piwowar Commissioner Republican August 15, 2013 2018
Kara Stein Democratic August 9, 2013 2017
Robert J. Jackson Jr. Democratic January 11, 2018 2019
Hester Peirce Republican 2020
Divisions
Within the SEC, there are five divisions. Headquartered in Washington, D.C., the SEC
has 11 regional offices throughout the US.
The SEC's divisions are:
Corporation Finance
Trading and Markets
Investment Management
Enforcement
Economic and Risk Analysis
Corporation Finance is the division that oversees the disclosure made by public
companies, as well as the registration of transactions, such as mergers, made by
companies. The division is also responsible for operating EDGAR.
The Trading and Markets division oversees self-regulatory organizations such as the
Financial Industry Regulatory Authority (FINRA) and Municipal Securities Rulemaking
Board (MSRB) and all broker-dealer firms and investment houses. This division also
interprets proposed changes to regulations and monitors operations of the industry. In
practice, the SEC delegates most of its enforcement and rulemaking authority to FINRA.
In fact, all trading firms not regulated by other SROs must register as a member of
FINRA. Individuals trading securities must pass exams administered by FINRA to
become registered representatives.
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The Investment Management Division oversees registered investment companies,
which include mutual funds, as well as registered investment advisors. These entities
are subject to extensive regulation under various federal securities laws. The Division of
Investment Management administers various federal securities laws, in particular the
Investment Company Act of 1940 and Investment Advisers Act of 1940. This division's
responsibilities include:
assisting the Commission in interpreting laws and regulations for the public and
SEC inspection and enforcement staff;
responding to no-action requests and requests for exemptive relief;
reviewing investment company and investment adviser filings;
assisting the Commission in enforcement matters involving investment
companies and advisers; and
advising the Commission on adapting SEC rules to new circumstances.
The Enforcement Division works with the other three divisions, and other Commission
offices, to investigate violations of the securities laws and regulations and to bring
actions against alleged violators. The SEC generally conducts investigations in private.
The SEC's staff may seek voluntary production of documents and testimony, or may
seek a formal order of investigation from the SEC, which allows the staff to compel the
production of documents and witness testimony. The SEC can bring a civil action in a
U.S. District Court, or an administrative proceeding which is heard by an independent
administrative law judge (ALJ). The SEC does not have criminal authority, but may refer
matters to state and federal prosecutors. The director of the SEC's Enforcement
Division Robert Khuzami left the office in February 2013.
Among the SEC's offices are:
The Office of General Counsel, which acts as the agency's "lawyer" before
federal appellate courts and provides legal advice to the Commission and other
SEC divisions and offices;
The Office of the Chief Accountant, which establishes and enforces accounting
and auditing policies set by the SEC. This office has played a role in such areas
as working with the Financial Accounting Standards Board to develop Generally
Accepted Accounting Principles, the Public Company Accounting Oversight
Board in developing audit requirements, and the International Accounting
Standards Board in advancing the development of International Financial
Reporting Standards;
The Office of Compliance, Inspections and Examinations, which inspects brokerdealers,
stock exchanges, credit rating agencies, registered investment
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companies, including both closed-end and open-end (mutual funds) investment
companies, money funds. and Registered Investment Advisors;
The Office of International Affairs, which represents the SEC abroad and which
negotiates international enforcement information-sharing agreements, develops
the SEC's international regulatory policies in areas such as mutual recognition,
and helps develop international regulatory standards through organizations such
as the International Organization of Securities Commissions and the Financial
Stability Forum;
The Office of Investor Education and Advocacy, which helps educate the public
about securities markets and warns investors of fraud and stock market scams;
The Office of Economic Analysis, which helps the SEC estimate the economic
costs and benefits of its various rules and regulations; and
The Office of Information Technology, which supports the Commission and staff
in information technology, including application development, infrastructure
operations. and engineering, user support, IT program management, capital
planning, security, and enterprise architecture.
The Inspector General. The SEC announced in January 2013 that it had named
Carl Hoecker the new inspector general. He has a staff of 22.
The SEC Office of the Whistleblower provides assistance and information from a
whistleblower who knows of possible securities law violations: this can be among
the most powerful weapons in the law enforcement arsenal of the Securities and
Exchange Commission. Created by Section 922 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act Dodd–Frank Wall Street Reform and
Consumer Protection Act amended the Securities Exchange Act of 1934 (the
"Exchange Act") by, among other things, adding Section 21F, entitled "Securities
Whistleblower Incentives and Protection." Section 21F directs the Commission to
make monetary awards to eligible individuals who voluntarily provide original
information that leads to successful Commission enforcement actions resulting in
the imposition of monetary sanctions over $1,000,000, and certain successful
related actions.
SEC Communications
Comment Letters
Comment letters are issued by the SEC's Division of Corporation Finance in response
to a company's public filing. This letter, initially private, contains an itemized list of
requests from the SEC. Each comment in the letter asks the filer to provide additional
information, modify their submitted filing, or change the way they disclose in future
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filings. The filer must reply to each item in the comment letter. The SEC may then reply
back with follow-up comments. This correspondence is later made public.
In October 2001 the SEC wrote to CA, Inc., covering 15 items, mostly about CA's
accounting, including 5 about revenue recognition. The chief executive officer of CA, to
whom the letter was addressed, pleaded guilty to fraud at CA in 2004.
In June 2004, the SEC announced that it would publicly post all comment letters, to give
investors access to the information in them. An analysis of regulatory filings in May
2006 over the prior 12 months indicated, that the SEC had not accomplished what it
said it would do. The analysis found 212 companies that had reported receiving
comment letters from the SEC, but only 21 letters for these companies were posted on
the SEC's website.
John W. White, the head of the Division of Corporation Finance, told the New York
Times in 2006: "We have now resolved the hurdles of posting the information.... We
expect a significant number of new postings in the coming months."
No-Action Letters
No-action letters are letters by the SEC staff indicating that the staff will not recommend
to the Commission that the SEC undertake enforcement action against a person or
company if that entity engages in a particular action. These letters are sent in response
to requests made when the legal status of an activity is not clear. These letters are
publicly released and increase the body of knowledge on what exactly is and is not
allowed. They represent the staff's interpretations of the securities laws and, while
persuasive, are not binding on the courts.
One such use, from 1975 to 2007, was with the nationally recognized statistical rating
organization (NRSRO), a credit rating agency that issues credit ratings that the SEC
permits other financial firms to use for certain regulatory purposes.
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Freedom of Information Act Processing Performance
In the latest Center for Effective Government analysis of 15 federal agencies which
receive the most Freedom of Information Act (United States) (FOIA) requests published
in 2015 (using 2012 and 2013 data, the most recent years available), the SEC was
among the 5 lowest performers, earned a D- by scoring 61 out of a possible 100 points,
i.e. did not earn a satisfactory overall grade. It had deteriorated from a D- in 2013.
Operations
List of Major SEC Enforcement Actions (2009–12)
The SEC's Enforcement Division brought a number of major actions in 2009–12.
Regulatory Action in The Credit Crunch
The SEC announced on September 17, 2008, strict new rules to prohibit all forms of
"naked short selling" as a measure to reduce volatility in turbulent markets.
The SEC investigated cases involving individuals attempting to manipulate the market
by passing false rumors about certain financial institutions. The Commission has also
investigated trading irregularities and abusive short-selling practices. Hedge fund
managers, broker-dealers, and institutional investors were also asked to disclose under
oath certain information pertaining to their positions in credit default swaps. The
Commission also negotiated the largest settlements in the history of the SEC
(approximately $51 billion in all) on behalf of investors who purchased auction rate
securities from six different financial institutions.
Regulatory Failures
The SEC has been criticized "for being too 'tentative and fearful' in confronting
wrongdoing on Wall Street", and for doing "an especially poor job of holding executives
accountable".
Christopher Cox, the former SEC chairman, has recognized the organization's multiple
failures in relation to the Bernard Madoff fraud. Starting with an investigation in 1992
into a Madoff feeder fund that only invested with Madoff, and which, according to the
SEC, promised "curiously steady" returns, the SEC did not investigate indications that
something was amiss in Madoff's investment firm. The SEC has been accused of
missing numerous red flags and ignoring tips on Madoff's alleged fraud.
As a result, Cox said that an investigation would ensue into "all staff contact and
relationships with the Madoff family and firm, and their impact, if any, on decisions by
staff regarding the firm". SEC Assistant Director of the Office of Compliance
Investigations Eric Swanson had met Madoff's niece, Shana Madoff, when Swanson
was conducting an SEC examination of whether Bernard Madoff was running a Ponzi
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scheme because she was the firm's compliance attorney. The investigation was closed,
and Swanson subsequently left the SEC, and married Shana Madoff.
Approximately 45 per cent of institutional investors thought that better oversight by the
SEC could have prevented the Madoff fraud. Harry Markopolos complained to the
SEC's Boston office in 2000, telling the SEC staff they should investigate Madoff
because it was impossible to legally make the profits Madoff claimed using the
investment strategies that he said he used.
A similar failure occurred in the case of Allen Stanford, who sold fake certificates of
deposit to tens of thousands of people, many of them working-class retirees. In 1997,
the SEC's own examiners spotted the fraud and warned about it. But the Enforcement
division would not pursue Stanford, despite repeated warnings by SEC examiners over
the years. After the Madoff fraud emerged, the SEC finally took action against Stanford
in 2009.
In June 2010, the SEC settled a wrongful termination lawsuit with former SEC
enforcement lawyer Gary J. Aguirre, who was terminated in September 2005 following
his attempt to subpoena Wall Street figure John J. Mack in an insider trading case
involving hedge fund Pequot Capital Management; Mary Jo White, who was at the time
representing Morgan Stanley later nominated as chair of the SEC, was involved in this
case. While the insider case was dropped at the time, a month prior to the SEC's
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settlement with Aguirre the SEC filed charges against Pequot. The Senate released a
report in August 2007 detailing the issue and calling for reform of the SEC.
On September 26, democratic senator Mark Warner in a letter asked the SEC to
evaluate whether the current disclosure regime was adequate, citing the low number of
companies' disclosures to date.
Others have criticized the SEC for taking an overly rule-based and enforcement-focused
approach to regulation, rather than an approach that emphasizes industry-wide safety
and learning and thus ensures the reliability of the national securities trading system.
Inspector General Office Failures
In 2009, the Project on Government Oversight, a government watchdog group, sent a
letter to Congress criticizing the SEC for failing to implement more than half of the
recommendations made to it by its Inspector General. According to POGO, in the prior
two years, the SEC had taken no action on 27 out of 52 recommended reforms
suggested in Inspector General reports, and still had a "pending" status on 197 of the
312 recommendations made in audit reports. Some of the recommendations included
imposing disciplinary action on SEC employees who receive improper gifts or other
favors from financial companies, and investigating and reporting the causes of the
failures to detect the Madoff ponzi scheme.
In a 2011 article by Matt Taibbi in Rolling Stone, former SEC employees were
interviewed and commented negatively on the SEC's Office of the Inspector General
(OIG). Going to the OIG was "well-known to be a career-killer".
Because of concerns raised by David P. Weber, former SEC Chief Investigator,
regarding conduct by SEC Inspector General H. David Kotz, Inspector General David C.
Williams of the U.S. Postal Service was brought in to conduct an independent, outside
review of Kotz's alleged improper conduct in 2012. Williams concluded in his 66-page
Report that Kotz violated ethics rules by overseeing probes that involved people with
whom he had conflicts of interest due to "personal relationships." The report questioned
Kotz's work on the Madoff investigation, among others, because Kotz was a "very good
friend" with Markopolos. It concluded that while it was unclear when Kotz and
Markopolos became friends, it would have violated U.S. ethics rules if their relationship
began before or during Kotz's Madoff investigation. The report also found that Kotz
himself "appeared to have a conflict of interest" and should not have opened his
Standford investigation, because he was friends with a female attorney who
represented victims of the fraud.
Destruction of Documents
According to former SEC employee and whistleblower Darcy Flynn, also reported by
Taibbi, the agency routinely destroyed thousands of documents related to preliminary
investigations of alleged crimes committed by Deutsche Bank, Goldman Sachs,
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Lehman Brothers, SAC Capital, and other financial companies involved in the Great
Recession that the SEC was supposed to have been regulating. The documents
included those relating to "Matters Under Inquiry", or MUI, the name the SEC gives to
the first stages of the investigation process. The tradition of destruction began as early
as the 1990s. This SEC activity eventually caused a conflict with the National Archives
and Records Administration when it was revealed to them in 2010 by Flynn. Flynn also
described a meeting at the SEC in which top staff discussed refusing to admit the
destruction had taken place, because it was possibly illegal.
Iowa Republican Senator Charles Grassley, among others, took note of Flynn's call for
protection as a whistleblower, and the story of the agency's document-handling
procedures. The SEC issued a statement defending its procedures. NPR quoted
University of Denver Sturm College of Law professor Jay Brown as saying: "My initial
take on this is it's a tempest in a teapot," and Jacob Frenkel, a securities lawyer in the
Washington, D.C., area, as saying in effect "there's no allegation the SEC tossed
sensitive documents from banks it got under subpoena in high-profile cases that
investors and lawmakers care about". NPR concluded its report:
The debate boils down to this: What does an investigative record mean to Congress?
And the courts? Under the law, those investigative records must be kept for 25 years.
But federal officials say no judge has ruled that papers related to early-stage SEC
inquiries are investigative records. The SEC's inspector general says he's conducting a
thorough investigation into the allegations. [Kotz] tells NPR that he'll issue a report by
the end of September.
Relationship to Other Agencies
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In addition to working with various self-regulatory organizations such as the Financial
Industry Regulatory Authority (FINRA), the Securities Investor Protection Corporation
(SIPC), and Municipal Securities Rulemaking Board (MSRB), the SEC also works with
other federal agencies, state securities regulators, international securities agencies and
law enforcement agencies.
In 1988 Executive Order 12631 established the President's Working Group on Financial
Markets. The Working Group is chaired by the Secretary of the Treasury and includes
the Chairman of the SEC, the Chairman of the Federal Reserve and the Chairman of
the Commodity Futures Trading Commission. The goal of the Working Group is to
enhance the integrity, efficiency, orderliness, and competitiveness of the financial
markets while maintaining investor confidence.
The Securities Act of 1933 was originally administered by the Federal Trade
Commission. The Securities Exchange Act of 1934 transferred this responsibility from
the FTC to the SEC. The main mission of the FTC is to promote consumer protection
and to eradicate anti-competitive business practices. The FTC regulates general
business practices, while the SEC focuses on the securities markets.
The Temporary National Economic Committee was established by joint resolution of
Congress 52 Stat. 705 on June 16, 1938. It was in charge of reporting to Congress on
abuses of monopoly power. The committee was defunded in 1941, but its records are
still under seal by order of the SEC.
The Municipal Securities Rulemaking Board (MSRB) was established in 1975 by
Congress to develop rules for companies involved in underwriting and trading municipal
securities. The MSRB is monitored by the SEC, but the MSRB does not have the
authority to enforce its rules.
While most violations of securities laws are enforced by the SEC and the various SROs
it monitors, state securities regulators can also enforce statewide securities blue sky
laws. States may require securities to be registered in the state before they can be sold
there. National Securities Markets Improvement Act of 1996 (NSMIA) addressed this
dual system of federal-state regulation by amending Section 18 of the 1933 Act to
exempt nationally traded securities from state registration, thereby pre-empting state
law in this area. However, NSMIA preserves the states' anti-fraud authority over all
securities traded in the state.
The SEC also works with federal and state law enforcement agencies to carry out
actions against actors alleged to be in violation of the securities laws.
The SEC is a member of International Organization of Securities Commissions
(IOSCO), and uses the IOSCO Multilateral Memorandum of Understanding as well as
direct bilateral agreements with other countries' securities commissions to deal with
cross-border misconduct in securities markets.
Related legislation
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1933: Securities Act of 1933
1934: Securities Exchange Act of 1934
1938: Temporary National Economic Committee (establishment)
1939: Trust Indenture Act of 1939
1940: Investment Advisers Act of 1940
1940: Investment Company Act of 1940
1968: Williams Act (Securities Disclosure Act)
1982: Garn–St. Germain Depository Institutions Act
1999: Gramm–Leach–Bliley Act
2000: Commodity Futures Modernization Act of 2000
2002: Sarbanes–Oxley Act
2003: Fair and Accurate Credit Transactions Act of 2003
2006: Credit Rating Agency Reform Act of 2006
2010: Dodd–Frank Wall Street Reform and Consumer Protection Act
2012: Volcker Rule (a specific section of the Dodd–Frank Act)
Title 17 of the Code of Federal Regulations
Securities Market Participants
in The United States
Securities Market Participants in the United States include corporations
and governments issuing securities, persons and corporations buying and selling a
security, the broker-dealers and exchanges which facilitate such trading, banks which
safe keep assets, and regulators who monitor the markets' activities. Investors buy and
sell through broker-dealers and have their assets retained by either their executing
broker-dealer, a custodian bank or a prime broker. These transactions take place in the
environment of equity and equity options exchanges, regulated by the U.S. Securities
and Exchange Commission (SEC), or derivative exchanges, regulated by the
Commodity Futures Trading Commission (CFTC). For transactions involving stocks and
bonds, transfer agents assure that the ownership in each transaction is properly
assigned to and held on behalf of each investor.
Supporting these transactions, there are three central securities depositories and four
clearing organizations that assure the settlement of large volumes of trades. Market
data consolidators inform investors and regulators in real time of the bid and offer prices
of each security through one of two securities information processing systems. The
basis for these transactions is controlled both through self-regulatory organizations and
the two securities commissions, the SEC and the CFTC.
This article covers those who deal in securities and futures in US markets. Securities
include equities (stocks), bonds (US Government, corporate and municipal), and
options thereon. Derivatives include futures and options thereon as well as swaps. The
distinction in the US relates to having two regulators. Markets in other countries have
similar categories of securities and types of participants, though not two regulators.
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Parties to Transactions
Parties to investment transactions include corporations and governments which raise
capital by issuing equity and debt, the selling and buying investors, the broker-dealers
and stock exchanges that have the means to transact those deals.
Issuers
An issuer is a corporation or government which raises capital by issuing either debt or
equity. They can also be referred to as the surplus unit of the economy. Debt and equity
may be issued in various forms, such as bonds, notes and debentures for debt; and
common or preferred shares for equity. Issues may be sold privately to investors, or
sold to the public via the various markets described below.
Investor
An investor is a person or corporate entity that makes an investment by buying and
selling securities. There are two sub-categories: retail (persons) and institutional
(investment managers and hedge funds). Investment managers are either investment
companies such as mutual funds or investment advisers which invest for clients.
Investors may not be members of stock exchanges. Rather they must buy and sell
securities through broker-dealers which are registered with the appropriate regulatory
body for that purpose. In accepting investors as clients, broker-dealers take on the risks
of their clients not being able to meet their financial obligations. Hence retail (individual)
investors generally are required to keep their investment assets in custody with the
broker-dealer through which they buy and sell securities. A broker-dealer would
normally not accept an order to buy from a retail clients unless there is sufficient cash
on deposit with the broker-dealer to cover the cost of the order, nor sell unless the client
already has the security in the broker-dealer's custody.
Institutional investors buy and sell on behalf of their individual clients, be they pension
funds, endowments and the like, or pooled funds such as mutual funds, unit trusts or
hedge funds. As such, their client assets are safe kept with either custodian banks or
broker-dealers (Prime brokerage). Furthermore, institutional investors may buy and sell
through any number of broker-dealers which in turn settle such trades at the designated
custodians and prime brokers. Investment managers generally differ from hedge funds
on how much risk each pursues in its investment strategies. For example, investment
managers generally do not sell short, but hedge funds do.
Buying and selling can be either long or short:
Transaction Long Short
Buy Buyer pays for securities
outright.
Buyer borrows funds to complete the
transaction.
Sell Seller has securities to sell Seller borrows securities to complete the
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outright.
transaction.
Retail clients may buy or sell short only under specific agreement with their brokerdealers
under a margin account, in which case the broker-dealer either finances the buy
or borrows the security for the sell.
Institutional investors must inform their executing broker-dealers as to whether orders
are long or short, since those brokers have no way of knowing their clients' positions are
in each security.
Were investors able either to buy short naked (without borrowing money to pay), or sell
short naked (without borrowing securities to deliver), such practices could easily lead to
market manipulation of stock prices: since buyers or sellers would not have the restraint
of providing cash or securities, they could conceivably have unlimited buys or sells,
which would drive prices up or down. Naked short buying is not a problem because
custodians and prime brokers have their own finances from which to lend money to their
clients in order to settle the trades. Naked short selling can be a problem. It occurs
when a prime broker is unable to borrow the stock simply because there is none
available for that purpose. Hedge funds are expected to find sources of stock which can
be borrowed before executing short sell orders. If they fail to do so, and their prime
broker cannot borrow for them, then the settlement of such trades cannot take place on
the settlement date. Whether such a "fail" is due to poor co-ordination among the
various parties (hedge fund, lending entity and prime broker) or to a naked short sale is
impossible to determine. In the US the SEC effectively ended such instances by making
the cost of a failed short sell too expensive for the hedge fund to risk. If on the morning
the short sell is scheduled to settle the prime broker cannot deliver the securities to the
executing broker, then the latter is obligated to buy-in the shares (in effect, making the
delivery). The buy-in occurs at the then prevailing market price. This may be much
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higher than the price at which the hedge fund first sold the securities, resulting in a
potentially substantial loss to the hedge fund.
Broker-Dealers
The thousands of US broker-dealers must all be registered with FINRA or a national
securities exchange, or both. Commodity brokers include Futures Commission
Merchants, Commodity Trading Advisors and Commodity Pool Operators, which
register with the National Futures Association. Firms may register both as a brokerdealer
and a commodity broker. In addition, each person employed by these firms who
deals with the public must pass industry examinations such as the Series 3 for futures,
Series 4 for options and Series 7 exam for equities and bonds. Investors can learn
about individual brokers and broker-dealers on the FINRA BrokerCheck website.
Stock Exchanges
A stock exchange is a physical or digital place to which brokers and dealers send buy
and sell orders in stocks (also called shares), bonds, and other securities. Price
discovery is optimized by bringing together at one point in time and place all buy and
sell orders for a particular security.
Securities traded on a stock exchange include stock issued by listed companies, unit
trusts, derivatives, pooled investment products and bonds. Stock exchanges often
function as "continuous auction" markets, with buyers and sellers consummating
transactions at a central location, such as the floor of the exchange.
To qualify for trading on an exchange, a security must first be listed, having met the
requirements of the listing exchange. Trade on an exchange is restricted to brokers who
are members of the exchange. In recent years, various other trading venues, such as
electronic communication networks, alternative trading systems and "dark pools" have
taken much of the trading activity away from traditional stock exchanges.
Exchanges for equities, options, futures and derivatives include:
Equities - multiple exchanges (NYSE, Nasdaq, BATS Global Markets and others)
compete for order flow from brokers with different products and pricing
Options on equities - similar to equities but including the Chicago Board Options
Exchange and the International Securities Exchange
Futures and derivatives - the Chicago Mercantile Exchange, including its
acquisitions of similar exchanges, is the sole venue for many derivative
contracts, which must be cleared at the same exchanges
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Energy related derivatives - the Intercontinental Exchange (which now owns the
NYSE among a number of acquisitions) dominates energy related derivative
trading, again with its own clearing arrangements.
US government debt does not trade on exchanges. Rather there are a number of
primary dealers which buy directly from the government and resell to other brokerdealers
and institutional investors.
Post-Trade Environment
Custodian banks, prime brokers, transfer agents, and central securities depositories
provide a medium for performing trades and providing safekeeping of securities.
Custodian Banks
Custodian banks offer active safekeeping and administration of clients' securities
portfolios. Banks also offer passive safekeeping with safety deposit boxes, but this
service is limited to clients' accessing their rented storage boxes. Active safekeeping
(custody) involves:
Receiving securities against payment or free delivery, based on client
instructions
Delivering securities against payment or free delivery, based on client
instructions
Providing clients with monthly statements of all holdings
Crediting client accounts with dividends, interests and other types of income
Alerting clients to pending corporate actions and acting on client instructions
Providing annual tax related information
Clients of custodians are generally institutional investors.
Prime Brokers
Prime brokers are broker-dealers which offer custody and other services to hedge
funds. Prime brokerage has generally been considered as more risky than traditional
custody, primarily because hedge funds have been viewed as more risky than
institutional investors. Moreover, in the US a hedge fund may execute trades through
any number of broker-dealers. But in the settlement process, those trades become the
trades of the prime broker, as though the hedge fund had executed the trades only
through that broker. The risk of the hedge fund's inability to settle those trades becomes
that of the prime broker.
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The "prime" in the term originally referred to a hedge fund having one broker-dealer for
its custody and borrowing purposes. With the events of 2008, most large hedge funds
have diversified their holdings among several prime brokers in an effort to limit their
risks of a prime broker's failure, such as with Lehman Brothers Europe in 2008.
Transfer Agent
Transfer agents provide a variety of services to issuing companies, including:
maintaining a registry of all shareholders, paying dividends and conducting proxy
campaigns. Most investments in US equities, corporate bonds and municipal bonds are
now held in book entry form, rather than certificates as was the case as recently as the
early 1970s when Depository Trust & Clearing Corporation (DTCC) began operations.
Thus with the general acceptance of stock immobilization at the central depository, most
of the registry function has shifted to reconciling daily immobilized positions with
DTCC's nominee firm, Cede & Co. For example, a company has issued 10 million
shares. One hundred thousand have been issued in certificated form to a variety of
investors. The transfer agent keeps detailed records of these, and verifies the legitimacy
of any certificate presented to it. The other 9,900,000 have been purchased by investors
who hold them in book entry form through accounts at broker-dealers (retail),
custodians and prime brokers (institutional). The "owner" of those 9,900,000 shares on
the transfer agent's registry would be Cede & Co., DTCCC's nominee company.
Central Securities Depository
There are three central securities depositories and four clearing organizations in the US:
Central Securities Depositories
The main securities depository is Depository Trust Company, a subsidiary of the
Depository Trust & Clearing Corporation (DTCC)
The Federal Reserve for all US government bonds and notes
Chicago Mercantile Exchange CME for futures and other derivative contracts
Clearing Organizations
National Securities Clearing Corporation, a subsidiary of DTCC, for markettraded
stocks and corporate bonds
Fixed Income Clearing Corporation, also a subsidiary of DTCC, for government
bonds and mortgage-backed securities
Options Clearing Corporation OCC for all equities related options
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Intercontinental Exchange ICE for energy related derivative contracts
US equities, corporate and municipal bonds can be issued in certificated form, though
this practice has been largely replaced due to the costs and inefficiencies of keeping
them. Rather holdings are kept as "immobilized" or "street name", with the beneficial
owners keeping them in accounts at broker-dealers and banks, just as they do for
currencies. DTCC uses a nominee firm, Cede & Co., in whose name a share certificate
is held in the DTCC vaults. Each day DTCC reconciles with the relevant transfer agent
the number of shares held in its accounts for its member banks and broker-dealers. In
turn, other banks and broker-dealers hold accounts with DTCC member firms, creating
a chain of ownership down to the beneficial owner.
The great advantage of this approach is the efficiency and low cost involved in settling
large volumes of trades. The inconvenience is that the issuing corporation no longer
knows who its owners are, since its transfer agent has all the immobilized shares
recorded as the owner being Cede & Co. For purposes of sending proxy notices and
other communications with beneficial owners, the transfer agent, acting on a request of
the issuing corporation, sends an inquiry to DTCC, which in turn sends inquiries to its
members and so on down the chain.
Options, futures and other derivatives are traded based on contracts, rather than
certificates. OCC, CME and ICE act as clearing agents and repositories, keeping track
of book entry positions among the various clearing brokers.
US government bonds and notes are uncertificated (dematerialized), which means that
certificates are never issued. Instead, the clearing brokers keep book entry positions at
the Federal Reserve on behalf of their various clients.
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The Financial Stability Oversight Council has designated each of these institutions, with
the exception of the Federal Reserve, as a Systemically important financial market utility
Market Data Consolidators
Market data consolidators address the needs of investors and regulators who wish to
know, at any instant during the trading day, what the National Best Bid and Offer is for
any security, the last sale price and other pertinent information related to trading the
security. Since both the equity and equity options markets have multiple exchanges,
quotation and last trades data from all must be consolidated in real time to provide a
market view, rather than an individual exchange view.
Two Security Information Processors (SIPs) consolidate this data in real time: the
Consolidated Quotation System run by the Intercontinental Exchange (NYSE affiliate)
and the OTC/UTP Plan. Each processes data for half of all such securities, based on
the ticker symbol of each. All the equity and equity options exchanges broadcast in real
time their quotations, last trade and other data to these organizations, which in turn
calculate the best bid and offer and redistribute the data to market participants.
The names for these organizations originated several decades ago, when the NYSE
and American Stock Exchange were the two venues for corporations to list their stocks.
Data from these listings are known as Tape A (NYSE listed) and Tape B (AMEX). At the
time, Nasdaq was a quotation system and not an exchange. This explains the name still
used: Over the Counter/Unlisted Trading Privilege for data known as Tape C (Nasdaq).
Revenues from market data amount to a half billion dollars a year, apportioned to each
exchange based on the amount of quote and other data broadcast by each. A group of
companies, under the banner NetCoalition, along with the Securities Industry and
Financial Markets (SIFMA) tried to force the exchanges to price market data based on
their costs of producing it, but ultimately lost the argument before the SEC in 2016.
Oversight
The securities markets are overseen by the SEC, by individual state securities
commissions established under blue sky laws, and the self-regulatory organizations,
which are overseen by the SEC. The CFTC and NFA also have a role with respect to
security futures and security-based swaps. In turn, the CFTC and NFA oversee the
derivative markets.
Self-Regulatory Organizations
The exchanges and clearing organizations are self-regulatory organizations (SRO's), as
are the three sector agencies:
Financial Industry Regulatory Authority (FINRA)
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National Futures Association (NFA)
Municipal Securities Rulemaking Board (MSRB)
Securities Commissions
There are two commissions regulating the trading of securities, the U.S. Securities and
Exchange Commission (SEC), which governs equities, equity options, corporate bonds,
and municipal bonds, and the Commodity Futures Trading Commission (CFTC), which
governs activities in the derivatives markets generally.
The SEC is an independent agency of the United States federal government. It holds
primary responsibility for enforcing the federal securities laws, proposing securities
rules, and regulating the securities industry, the nation's stock and options exchanges,
and other activities and organizations, including the electronic securities markets in the
United States. The SEC falls under the responsibility of the US Senate Committee on
Banking.
The CFTC oversees designated contract markets (DCMs) or exchanges, swap
execution facilities (SEFs), derivatives clearing organizations, swap data repository,
swap dealers, futures commission merchants, commodity pool operators and other
intermediaries. The CFTC falls under the oversight of the Senate Agriculture
Committee.
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III. The New York Stock Exchange
The New York Stock Exchange (abbreviated as NYSE and nicknamed "The Big
Board"), is an American stock exchange located at 11 Wall Street, Lower
Manhattan, New York City, New York. It is by far the world's largest stock
exchange by market capitalization of its listed companies at US$21.3 trillion as of June
2017. The average daily trading value was approximately US$169 billion in 2013. The
NYSE trading floor is located at 11 Wall Street and is composed of 21 rooms used for
the facilitation of trading. A fifth trading room, located at 30 Broad Street, was closed in
February 2007. The main building and the 11 Wall Street building were
designated National Historic Landmarks in 1978.
The NYSE is owned
by Intercontinental
Exchange, an American holding
company that it also lists (NYSE: ICE).
Previously, it was part of NYSE Euronext
(NYX), which was formed by the NYSE's
2007 merger with Euronext.
The NYSE has been
the subject of several
lawsuits regarding fraud or breach of
duty and in 2004 was
sued by its former CEO
for breach of contract
and defamation.
History
The earliest recorded organization of securities trading in New York among brokers
directly dealing with each other can be traced to the Buttonwood Agreement. Previously
securities exchange had been intermediated by the auctioneers who also conducted
more mundane auctions of commodities such as wheat and tobacco. On May 17, 1792
twenty four brokers signed the Buttonwood Agreement which set a floor commission
rate charged to clients and bound the signers to give preference to the other signers in
securities sales. The earliest securities traded were mostly governmental securities
such as War Bonds from the Revolutionary War and First Bank of the United
States stock, although Bank of New York stock was a non-governmental security traded
in the early days. The Bank of North America along with the First Bank of the United
States and the Bank of New York were the first shares traded on the New York Stock
Exchange.
In 1817 the stockbrokers of New York operating under the Buttonwood Agreement
instituted new reforms and reorganized. After sending a delegation to Philadelphia to
observe the organization of their board of brokers, restrictions on manipulative trading
were adopted as well as formal organs of governance. After re-forming as the New York
Stock and Exchange Board the broker organization began renting out space exclusively
for securities trading, which previously had been taking place at the Tontine Coffee
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House. Several locations were used between 1817 and 1865, when the present location
was adopted.
The invention of the electrical telegraph consolidated markets, and New York's market
rose to dominance over Philadelphia after weathering some market panics better than
other alternatives. The Open Board of Stock Brokers was established in 1864 as a
competitor to the NYSE. With 354 members, the Open Board of Stock Brokers rivaled
the NYSE in membership (which had 533) "because it used a more modern, continuous
trading system superior to the NYSE’s twice-daily call sessions." The Open Board of
Stock Brokers merged with the NYSE in 1869. Robert Wright of Bloomberg writes that
the merger increased the NYSE's members as well as trading volume, as "several
dozen regional exchanges were also competing with the NYSE for customers. Buyers,
sellers and dealers all wanted to complete transactions as quickly and cheaply as
technologically possible and that meant finding the markets with the most trading, or the
greatest liquidity in today’s parlance. Minimizing competition was essential to keep a
large number of orders flowing, and the merger helped the NYSE to maintain its
reputation for providing superior liquidity." The Civil Wargreatly stimulated speculative
securities trading in New York. By 1869 membership had to be capped, and has been
sporadically increased since. The latter half of the nineteenth century saw rapid growth
in securities trading.
Securities trade in the latter nineteenth and early twentieth centuries was prone to
panics and crashes. Government regulation of securities trading was eventually seen as
necessary, with arguably the most dramatic changes occurring in the 1930s after a
major stock market crash precipitated an economic depression.
The Stock Exchange Luncheon Club was situated on the seventh floor from 1898 until
its closure in 2006.
The NYSE announced its plans to merge with Archipelago on April 21, 2005, in a deal
intended to reorganize the NYSE as a publicly traded company. NYSE's governing
board voted to merge with rival Archipelago on December 6, 2005, and became a forprofit,
public company. It began trading under the name NYSE Group on March 8, 2006.
A little over one year later, on April 4, 2007, the NYSE Group completed its merger with
Euronext, the European combined stock market, thus forming NYSE Euronext, the first
transatlantic stock exchange.
Wall Street is the leading US money center for international financial activities and the
foremost US location for the conduct of wholesale financial services. "It comprises a
matrix of wholesale financial sectors, financial markets, financial institutions, and
financial industry firms" (Robert, 2002). The principal sectors are securities industry,
commercial banking, asset management, and insurance.
Prior to the acquisition of NYSE Euronext by the ICE in 2013, Marsh Carter was the
Chairman of the NYSE and the CEO was Duncan Niederauer. Presently, [when?] the
chairman is Jeffrey Sprecher. In 2016, NYSE owner Intercontinental Exchange Inc.
earned $419 million in listings-related revenues.
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Notable Events
The exchange was closed shortly after the beginning of World War I (July 31, 1914), but
it partially re-opened on November 28 of that year in order to help the war effort by
trading bonds, and completely reopened for stock trading in mid-December.
On September 16, 1920, a bomb exploded on Wall Street outside the NYSE building,
killing 33 people and injuring more than 400. The perpetrators were never found. The
NYSE building and some buildings nearby, such as the JP Morgan building, still have
marks on their façades caused by the bombing.
The Black Thursday crash of the Exchange
on October 24, 1929, and the sell-off panic
which started on Black Tuesday, October 29,
are often blamed for precipitating the Great
Depression. In an effort to try to restore
investor confidence, the Exchange unveiled a
fifteen-point program aimed to upgrade
protection for the investing public on October
31, 1938.
On October 1, 1934, the exchange was
registered as a national securities exchange
with the U.S. Securities and Exchange
Commission, with a president and a thirtythree-member
board. On February 18, 1971,
the non-profit corporation was formed, and
the number of board members was reduced
to twenty-five.
One of Abbie Hoffman's well-known publicity
stunts took place in 1967, when he led
members of the Yippie movement to the
Exchange's gallery. The provocateurs hurled
fistfuls of dollars toward the trading floor
below. Some traders booed, and some
laughed and waved. Three months later the
stock exchange enclosed the gallery with
bulletproof glass. Hoffman wrote a decade
later, "We didn't call the press; at that time we really had no notion of anything called a
media event."
On October 19, 1987, the Dow Jones Industrial Average (DJIA) dropped 508 points, a
22.6% loss in a single day, the second-biggest one-day drop the exchange had
experienced. Black Monday was followed by Terrible Tuesday, a day in which the
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Exchange's systems did not perform well and some people had difficulty completing
their trades.
Subsequently, there was another major drop for the Dow on October 13, 1989—
the Mini-Crash of 1989. The crash was apparently caused by a reaction to a news story
of a $6.75 billion leveraged buyout deal for UAL Corporation, the parent company
of United Airlines, which broke down. When the UAL deal fell through, it helped trigger
the collapse of the junk bondmarket causing the Dow to fall 190.58 points, or 6.91
percent.
Similarly, there was a panic in the financial world during the year of 1997; the Asian
Financial Crisis. Like the fall of many foreign markets, the Dow suffered a 7.18% drop in
value (554.26 points) on October 27, 1997, in what later became known as the 1997
Mini-Crash but from which the DJIA recovered quickly. This was the first time that the
"circuit breaker" rule had operated.
On January 26, 2000, an altercation during filming of the music video for "Sleep Now in
the Fire," which was directed by Michael Moore, caused the doors of the exchange to
be closed and the band Rage Against the Machine to be escorted from the site by
security after band members attempted to gain entry into the exchange.
In the aftermath of the September 11 attacks, the NYSE was closed for 4 trading
sessions, resuming on Monday, September 17, one of the rare times the NYSE was
closed for more than one session and only the third time since March 1933. On the first
day, the NYSE suffered a 7.1% drop in value (684 points), after a week, it dropped by
14% (1370 points). An estimated of $1.4 trillion was lost within five days of trading. The
NY Stock Exchange is only 5 blocks from Ground Zero.
On May 6, 2010, the Dow Jones Industrial Average posted its largest intraday
percentage drop since the October 19, 1987, crash, with a 998-point loss later being
called the 2010 Flash Crash (as the drop occurred in minutes before rebounding). The
SEC and CFTC published a report on the event, although it did not come to a
conclusion as to the cause. The regulators found no evidence that the fall was caused
by erroneous ("fat finger") orders.
On October 29, 2012, the stock exchange was shut down for 2 days due to Hurricane
Sandy. [30] The last time the stock exchange was closed due to weather for a full two
days was on March 12 and 13 in 1888.
On May 1, 2014, the stock exchange was fined $4.5 million by the Securities and
Exchange Commission to settle charges it violated market rules.
On August 14, 2014, Berkshire Hathaway's A Class shares, the highest priced shares
on the NYSE, hit $200,000 a share for the first time.
On July 8, 2015, technical issues affected the stock exchange, halting trading at
11:32 am ET. The NYSE reassured stock traders that the outage was "not a result of a
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cyber breach," and the Department of Homeland Security confirmed that there was "no
sign of malicious activity." Trading eventually resumed at 3:10 pm ET the same day.
Official Holidays
The New York Stock Exchange is closed on New Years Day, Martin Luther King, Jr.
Day, Washington's Birthday, Good Friday, Memorial Day, Fourth of July, Labor
Day, Thanksgiving and Christmas. When those holidays occur on a weekend, the
holiday is observed on the closest weekday. In addition, the Stock Exchange closes
early on the day before Independence Day, the day after Thanksgiving, and the day
before Christmas.
Trading
The New York Stock Exchange (sometimes referred to as "the Big Board") provides a
means for buyers and sellers to trade shares of stock in companies registered for public
trading. The NYSE is open for trading Monday through Friday from 9:30 am –
4:00 pm ET, with the exception of holidays declared by the Exchange in advance.
The NYSE trades in a continuous auction format, where traders can execute stock
transactions on behalf of investors. They will gather around the appropriate post where
a specialist broker, who is employed by a NYSE member firm (that is, he/she is not an
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employee of the New York Stock Exchange), acts as an auctioneer in an open
outcry auction market environment to bring buyers and sellers together and to manage
the actual auction. They do on occasion (approximately 10% of the time) facilitate the
trades by committing their own capital and as a matter of course disseminate
information to the crowd that helps to bring buyers and sellers together. The auction
process moved toward automation in 1995 through the use of wireless hand held
computers (HHC). The system enabled traders to receive and execute orders
electronically via wireless transmission. On September 25, 1995, NYSE member
Michael Einersen, who designed and developed this system, executed 1000 shares of
IBM through this HHC ending a 203-year process of paper transactions and ushering in
an era of automated trading.
As of January 24, 2007, all NYSE stocks can be traded via its electronic hybrid
market (except for a small group of very high-priced stocks). Customers can now send
orders for immediate electronic execution, or route orders to the floor for trade in the
auction market. In the first three months of 2007, in excess of 82% of all order volume
was delivered to the floor electronically. NYSE works with US regulators like
the SEC and CFTC to coordinate risk management measures in the electronic trading
environment through the implementation of mechanisms like circuit breakers and
liquidity replenishment points.
Until 2005, the right to directly trade shares on the exchange was conferred upon
owners of the 1366 "seats." The term comes from the fact that up until the 1870s NYSE
members sat in chairs to trade. In 1868, the number of seats was fixed at 533, and this
number was increased several times over the years. In 1953, the number of seats was
set at 1,366. These seats were a sought-after commodity as they conferred the ability to
directly trade stock on the NYSE, and seat holders were commonly referred to as
members of the NYSE. The Barnes family is the only known lineage to have five
generations of NYSE members: Winthrop H. Barnes (admitted 1894), Richard W.P.
Barnes (admitted 1926), Richard S. Barnes (admitted 1951), Robert H. Barnes
(admitted 1972), Derek J. Barnes (admitted 2003). Seat prices varied widely over the
years, generally falling during recessions and rising during economic expansions. The
most expensive inflation-adjusted seat was sold in 1929 for $625,000, which, today,
would be over six million dollars. In recent times, seats have sold for as high as
$4 million in the late 1990s and as low as $1 million in 2001. In 2005, seat prices shot
up to $3.25 million as the exchange entered into an agreement to merge with
Archipelago and became a for-profit, publicly traded company. Seat owners received
$500,000 in cash per seat and 77,000 shares of the newly formed corporation. The
NYSE now sells one-year licenses to trade directly on the exchange. Licenses for floor
trading are available for $40,000 and a license for bond trading is available for as little
as $1,000 as of 2010. Neither are resell-able, but may be transferable during a change
of ownership of a corporation holding a trading license.
Following the Black Monday market crash in 1987, NYSE imposed trading curbs to
reduce market volatility and massive panic sell-offs. Following the 2011 rule change, at
the start of each trading day, the NYSE sets three circuit breaker levels at levels of 7%
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(Level 1), 13% (Level 2), and 20% (Level 3) of the average closing price of the S&P
500 for the preceding trading day. Level 1 and Level 2 declines result in a 15-minute
trading halt unless they occur after 3:25 pm, when no trading halts apply. A Level 3
decline results in trading being suspended for the remainder of the day. (The biggest
one-day decline in the S&P 500 since 1987 was the 9.0% drop on October 15, 2008.)
NYSE Composite Index
In the mid-1960s, the NYSE Composite Index (NYSE: NYA) was created, with a base
value of 50 points equal to the 1965 yearly close. This was done to reflect the value of
all stocks trading at the exchange instead of just the 30 stocks included in the Dow
Jones Industrial Average. To raise the profile of the composite index, in 2003 the NYSE
set its new base value of 5,000 points equal to the 2002 yearly close. Its close at the
end of 2013 was 10,400.32.
Timeline
In 1792, NYSE acquires its first traded securities.
In 1817, the constitution of the New York Stock and Exchange Board is adopted,
it had also been established by the New York brokers as a formal organization.
In 1865, New York Gold Exchange was acquired by the NYSE.
In 1867, Stock tickers were first introduced.
In 1885, the 400 NYSE members in the Consolidated Stock Exchange withdraw
from Consolidated over disagreements on exchange trade areas.
In 1896, DJIA first published in The Wall Street Journal.
In 1903, NYSE moves into new quarters at 18 Broad Street.
In 1906, DJIA exceeds 100 on January 12.
In 1907, Panic of 1907.
In 1909, Trading in bonds.
In 1914, World War I causes the longest exchange shutdown: four months, two
weeks; re-opening December 12 brings the largest one-day percentage drop in
the DJIA (24.4%).
In 1915, Basis of quoting and trading in stocks changed from % of par value to
dollars.
In 1920, a bomb exploded on Wall Street outside the NYSE building. Thirty killed
and over 100 injured.
In 1929, central quote system established; Black Thursday, October 24
and Black Tuesday, October 29 signal the end of the Roaring Twenties bull
market.
In 1943, trading floor is opened to women.
In 1949, the longest (eight-year) bull market begins.
In 1954, DJIA surpasses its 1929 peak in inflation-adjusted dollars.
In 1956, DJIA closes above 500 for the first time on March 12.
In 1966, NYSE begins a composite index of all listed common stocks. This is
referred to as the "Common Stock Index" and is transmitted daily. The starting
point of the index is 50. It is later renamed the NYSE Composite Index.
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In 1967, Muriel Siebert becomes the first female member of the New York Stock
Exchange.
In 1967, protesters led by Abbie Hoffman throw mostly fake dollar bills at traders
from gallery, leading to the installation of bullet-proof glass.
In 1970, Securities Investor Protection Corporation established.
In 1971, NYSE incorporated and recognized as Not-for-Profit organization.
In 1972, DJIA closes above 1,000 for the first time on November 14.
In 1977, foreign brokers are admitted to NYSE.
In 1980, New York Futures Exchange established.
In 1987, Black Monday, October 19, sees the second-largest one-day DJIA
percentage drop (22.6%, or 508 points) in history.
In 1991, DJIA exceeds 3,000.
In 1995, DJIA exceeds 5,000.
In 1996, real-time ticker introduced.
In 1997, on October 27, a sell-off in Asia's stock markets hurts the U.S. markets
as well; DJIA sees the largest one-day point drop of 554 (or 7.18%) in history.
In 1999, DJIA exceeds 10,000 on March 29.
In 2000, DJIA peaks at 11,722.98 on January 14; first NYSE global index is
launched under the ticker NYIID.
In 2001, trading in fractions ( n ⁄ 16) ends, replaced by decimals (increments of $0.01,
see Decimalization); September 11 attacks occur causing NYSE to close for four sessions.
In 2003, NYSE Composite Index relaunched and value set equal to 5,000 points.
In 2006, NYSE and ArcaEx merge, creating NYSE Arca and forming the publicly owned, forprofit
NYSE Group, Inc.; in turn, NYSE Group merges with Euronext, creating the first trans-
Atlantic stock exchange group; DJIA tops 12,000 on October 19.
In 2007, US President George W. Bush shows up unannounced to the Floor about an hour
and a half before a Federal Open Market Committee interest-rate decision on January
31; [54] NYSE announces its merger with the American Stock Exchange; NYSE Composite closes
above 10,000 on June 1; DJIA exceeds 14,000 on July 19 and closes at a peak of 14,164.53 on
October 9.
In 2008, DJIA loses more than 500 points on September 15 amid fears of bank failures,
resulting in a permanent prohibition of naked short selling and a three-week temporary ban on
all short selling of financial stocks; in spite of this, record volatility continues for the next two
months, culminating at 5½-year market lows.
In 2009, DJIA closes at 6,547.05 on March 9 reaching a 12-year low; DJIA returns to
10,015.86 on October 14.
In 2013, DJIA closes above 2007 highs on March 5; DJIA closes above 16,500 to end the
year.
In 2014, DJIA closes above 17,000 on July 3 and above 18,000 on December 23.
In 2015, DJIA achieved an all-time high of 18,351.36 on 19 May.
In 2015, DJIA dropped over 1,000 points to 15,370.33 soon after open on August 24, 2015,
before bouncing back and closing at 15,795.72, a drop of over 669 points.
In 2016, DJIA hits an all-time high of 18,873.6.
In 2017, DJIA reaches 20,000 for the first time (on January 25).
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Merger, Acquisition, and Control
In October 2008 NYSE Euronext completed acquisition of the American Stock
Exchange (AMEX) for $260 million in stock.
On February 15, 2011, NYSE and Deutsche Börse announced their merger to form a
new company, as yet unnamed, wherein Deutsche Börse shareholders will have 60%
ownership of the new entity, and NYSE Euronext shareholders will have 40%.
On February 1, 2012, the European Commission blocked the merger of NYSE with
Deutsche Börse, after commissioner Joaquin Almunia stated that the merger "would
have led to a near-monopoly in European financial derivatives worldwide." Instead,
Deutsche Börse and NYSE will have to sell either their Eurex derivatives
or LIFFE shares in order to not create a monopoly. On February 2, 2012, NYSE
Euronext and Deutsche Börse agreed to scrap the merger.
In April 2011, Intercontinental Exchange (ICE), an American futures exchange,
and NASDAQ OMX Group had together made an unsolicited proposal to buy NYSE
Euronext for approximately US $11,000,000,000, a deal in which NASDAQ would have
taken control of the stock exchanges. NYSE Euronext rejected this offer twice, but it
was finally terminated after the United States Department of Justice indicated their
intention to block the deal due to antitrust concerns.
In December 2012, ICE had proposed to buy NYSE Euronext in a stock swap with a
valuation of $8 billion. NYSE Euronext shareholders would receive either $33.12 in
cash, or $11.27 in cash and approximately a sixth of a share of ICE. The chairman and
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CEO of ICE, Jeffrey Sprecher, will retain those positions, but four members of the NYSE
board of directors will be added to the ICE board.
Opening and Closing Bells
The NYSE's opening and closing bells mark the beginning and the end of each trading
day. The 'opening bell' is rung at 9:30 am ET to mark the start of the day's trading
session. At 4 pm ET the 'closing bell' is rung and trading for the day stops. There are
bells located in each of the four main sections of the NYSE that all ring at the same time
once a button is pressed. There are three buttons that control the bells, located on the
control panel behind the podium which overlooks the trading floor. The main bell, which
is rung at the beginning and end of the trading day, is controlled by a green button. The
second button, colored orange, activates a single-stroke bell that is used to signal a
moment of silence. A third, red button controls a backup bell which is used in case the
main bell fails to ring.
History
The signal to start and stop trading was not always a bell. The original signal was
a gavel (which is still in use today along with the bell), but during the late 1800s, the
NYSE decided to switch the gavel for a gong to signal the day's beginning and end.
After the NYSE changed to its present location at 18 Broad Street in 1903, the gong
was switched to the bell format that is currently being used.
A common sight today is the highly publicized events in which a celebrity or executive
from a corporation stands behind the NYSE podium and pushes the button that signals
the bells to ring. Many consider the act of ringing the bells to be quite an honor and a
symbol of a lifetime of achievement. Furthermore, due to the amount of coverage that
the opening/closing bells receive, many companies coordinate new product launches
and other marketing-related events to start on the same day as when the company's
representatives ring the bell. This daily tradition wasn't always this highly publicized
either. In fact, it was only in 1995 that the NYSE began having special guests ring the
bells on a regular basis. Prior to that, ringing the bells was usually the responsibility of
the exchange's floor managers.
Notable Bell-Ringers
Many of the people who ring the bell are business executives whose companies trade
on the exchange. However, there have also been many famous people from outside the
world of business that have rung the bell. Athletes such as Joe DiMaggio of the New
York Yankees and Olympic swimming champion Michael Phelps, entertainers such
as rapper Snoop Dogg, singer and actress Liza Minnelli and members of the band Kiss,
and politicians such as Mayor of New York City Rudy Giuliani and President of South
Africa Nelson Mandela have all had the honor of ringing the bell. Two United Nations
Secretaries General have also rung the bell. On April 27, 2006, Secretary-General Kofi
Annan rang the opening bell to launch the United Nations Principles for Responsible
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Investment. On July 24, 2013, Secretary-General Ban Ki-moon rang the closing bell to
celebrate the NYSE joining the United Nations Sustainable Stock Exchanges Initiative.
In addition there have been many bell-ringers who are famous for heroic deeds, such as
members of the New York police and fire departments following the events of 9/11,
members of the United States Armed Forces serving overseas, and participants in
various charitable organizations.
There have also been several fictional characters that have rung the bell,
including Mickey Mouse, the Pink Panther, Mr. Potato Head, the Aflac Duck, and Darth
Vader.
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Page 70 of 214

IV. The Dow Jones Industrial Average
The Dow Jones Industrial Average /ˌdaʊ ˈdʒoʊnz/ (DJIA), or simply the Dow, is
a stock market index that shows how 30 large publicly owned companies based in the
United States have traded during a standard trading session in the stock market.
The value of the Dow is not a weighted arithmetic mean and does not represent its
component companies' market capitalization, but rather the sum of the price of one
stock for each component company. The sum is corrected by a factor which changes
whenever one of the component stocks has a stock split or stock dividend, so as to
generate a consistent value for the index.
It is the second-oldest U.S. market index after the Dow Jones Transportation Average,
created by Wall Street Journal editor and Dow Jones & Company co-founder Charles
Dow. Currently owned by S&P Dow Jones Indices, which is majority owned by S&P
Global, it is the most notable of the Dow Averages, of which the first (non-industrial) was
originally published on February 16, 1885.
The averages are named after Dow and one of his business associates,
statistician Edward Jones. The industrial average was first calculated on May 26, 1896.
The Industrial portion of the name is largely historical, as many of the modern 30
components have little or nothing to do with traditional heavy industry. Since
the divisor is currently less than one, the value of the index is larger than the sum of the
component prices.
Although the Dow is compiled to gauge the performance of the industrial sector within
the American economy, the index's performance continues to be influenced by not only
corporate and economic reports, but also by domestic and foreign political events such
as war and terrorism, as well as by natural disasters that could potentially lead to
economic harm.
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Components
Since the close on September 1, 2017, the Dow Jones Industrial Average has consisted
of the following 30 major companies:
Company Exchange Symbol Industry
3M NYSE MMM Conglomerate
American
Express
NYSE AXP Consumer finance
Apple NASDAQ AAPL Consumer electronics
Boeing NYSE BA Aerospace and defense
Caterpillar NYSE CAT
Construction and mining
equipment
Chevron NYSE CVX Oil & gas
Cisco
Systems
NASDAQ CSCO Computer networking
Coca-Cola NYSE KO Beverages
DowDuPont NYSE DWDP Chemical industry
ExxonMobil NYSE XOM Oil & gas
General
Electric
Goldman
Sachs
The Home
Depot
NYSE GE Conglomerate
NYSE GS Banking, Financial services
NYSE HD Home improvement retailer
Date
Added
1976-08-
09
1982-08-
30
2015-03-
19
1987-03-
12
1991-05-
06
2008-02-
19
2009-06-
08
1987-03-
12
2017-09-
01
1928-10-
01
1907-11-
07
2013-09-
20
1999-11-
01
Notes
as Minnesota
Mining and
Manufacturing
also 1930-07-18
to 1999-11-01
also 1932-05-26
to 1935-11-20
Essentially, as
continuation
of E.I. du Pont de
Nemours &
Company's
appearance since
1935-11-20, but
officially a new
company due to
its merger
with Dow
Chemical
Company on the
same day. [6]
as Standard Oil of
New Jersey
also 1896-05-26
to 1898-10 and
1899-04-21 to
1901-04-01
Page 72 of 214

Company Exchange Symbol Industry
IBM NYSE IBM Computers and technology
Intel NASDAQ INTC Semiconductors
Johnson &
Johnson
JPMorgan
Chase
NYSE JNJ Pharmaceuticals
NYSE JPM Banking
McDonald's NYSE MCD Fast food
Merck NYSE MRK Pharmaceuticals
Microsoft NASDAQ MSFT Software
Nike NYSE NKE Apparel
Pfizer NYSE PFE Pharmaceuticals
Procter &
Gamble
NYSE PG Consumer goods
Travelers NYSE TRV Insurance
UnitedHealth
Group
United
Technologies
NYSE UNH Managed health care
NYSE UTX Conglomerate
Verizon NYSE VZ Telecommunication
Visa NYSE V Consumer banking
Walmart NYSE WMT Retail
Walt Disney NYSE DIS Broadcasting and entertainment
Date
Added
1979-06-
29
1999-11-
01
1997-03-
17
1991-05-
06
1985-10-
30
1979-06-
29
1999-11-
01
2013-09-
20
2004-04-
08
1932-05-
26
2009-06-
08
2012-09-
24
1939-03-
14
2004-04-
08
2013-09-
20
1997-03-
17
1991-05-
06
Notes
also 1932-05-26
to 1939-03-04
as United Aircraft
Former Components
The components of the DJIA have changed 51 times since its beginning in May 26,
1896. General Electric has had the longest continuous presence on the index, with its
latest addition being in 1907. More recent changes to the index include the following:
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On April 8, 2004, American International Group Incorporated, Pfizer
Incorporated, and Verizon Communications Incorporated replaced AT&T
Corporation, Eastman Kodak Company, and International Paper Company.
On February 19, 2008, Chevron and Bank of America replaced Altria
Group and Honeywell. Chevron was previously a Dow component from July 18,
1930, to November 1, 1999. During Chevron's absence, its split-adjusted price
per share went from $44 to $85, while the price of petroleum rose from $24 to
$100.
On September 22, 2008, Kraft Foods Inc replaced the American International
Group (AIG) in the index.
On June 8, 2009, General Motors Corporation and Citigroup were replaced by
The Travelers Companies and Cisco Systems, the latter of which became the
third company traded on the NASDAQ to be part of the Dow.
On September 24, 2012, UnitedHealth Group replaced Kraft Foods Inc following
Kraft's split into Mondelēz International and Kraft Foods Group.
On September 20, 2013, Goldman Sachs, Nike, and Visa replaced Alcoa, Bank
of America, and Hewlett-Packard. Visa replaced Hewlett-Packard because of the
split into HP Inc. and Hewlett Packard Enterprise
On March 19, 2015, Apple replaced AT&T, which had been a component of the
DJIA since November 1916. Apple became the fourth company traded on the
NASDAQ to be part of the Dow.
On September 1, 2017, DowDuPont replaced DuPont. DowDuPont was formed
by the merger of Dow Chemical Company with DuPont.
History
Precursor
In 1884, Charles Dow composed his first stock average, which contained nine railroads
and two industrial companies that appeared in the Customer's Afternoon Letter, a daily
two-page financial news bulletin which was the precursor to The Wall Street Journal. On
January 2, 1886, the number of stocks represented in what we now call the Dow Jones
Transportation Average dropped from 14 to 12, as the Central Pacific
Railroad and Central Railroad of New Jersey were dropped from that index. Though
comprising the same number of stocks, this index contained only one of the original
twelve industrials that would eventually form Dow's most famous index.
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Initial Components
Dow calculated his first average purely of industrial stocks on May 26, 1896, creating
what is now known as the Dow Jones Industrial Average. Of the original 12 industrials,
only General Electric currently remains part of that index. The other 11 were:
American Cotton Oil Company, a predecessor company to Bestfoods, now part
of Unilever.
American Sugar Company, became Domino Sugar in 1900, now Domino
Foods, Inc.
American Tobacco Company, broken up in a 1911 antitrust action.
Chicago Gas Company, bought by Peoples Gas Light in 1897, now an
operating subsidiary of Integrys Energy Group.
Distilling & Cattle Feeding Company, now Millennium Chemicals, formerly a
division of LyondellBasell, the latter of which recently emerged from Chapter 11
bankruptcy.
Laclede Gas Company, still in operation as Spire Inc, removed from the Dow
Jones Industrial Average in 1899.
National Lead Company, now NL Industries, removed from the Dow Jones
Industrial Average in 1916.
North American Company, an electric utility holding company, broken up by
the U.S. Securities and Exchange Commission (SEC) in 1946.
Tennessee Coal, Iron and Railroad Company in Birmingham, Alabama,
bought by U.S. Steel in 1907; U.S. Steel was removed from the Dow Jones
Industrial Average in 1991.
U.S. Leather Company, dissolved in 1952.
United States Rubber Company, changed its name to Uniroyal in 1961,
merged with private B.F. Goodrich in 1986, bought by Michelin in 1990.
Early Years
When it was first published in the mid-1880s, the index stood at a level of 62.76. It
reached a peak of 78.38 during the summer of 1890, but ended up hitting its all-time low
of 28.48 in the summer of 1896 during the depths of what later became known as
the Panic of 1896. Many of the biggest percentage price moves in the Dow occurred
early in its history, as the nascent industrial economy matured. A brief war in 1898
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etween the United States and the Spanish Empire had only a minor impact in the
Dow's direction.
The 1900s (decade) would see the Dow halt its momentum as it worked its way through
a pair of cataclysmic financial crises; the Panic of 1901 and the Panic of 1907. The Dow
would remain stuck in a trading range between 53 and 103 points until late 1914. The
negativity surrounding the 1906 San Francisco earthquake did little to improve the
economic climate.
At the start of the 1910s, the decade would begin with the Panic of 1910–1911 stifling
economic growth for a lengthy period of time. History would later take its course on July
30, 1914; as the average stood at a level of 71.42 when a decision was made to close
down the New York Stock Exchange, and suspend trading for a span of four and a half
months. Some historians believe the exchange closed because of a concern that
markets would plunge as a result of panic over the onset of World War I. An alternative
explanation is that the Secretary of the Treasury, William Gibbs McAdoo, closed the
exchange because he wanted to conserve the U.S. gold stock in order to launch
the Federal Reserve System later that year, with enough gold to keep the United States
at par with the gold standard. When the markets reopened on December 12, 1914, the
index closed at 74.56, a gain of 4.4 percent. This is frequently reported as a large drop,
due to using a later redefinition. Reports from the time say that the day was
positive. Following World War I, the United States would experience another downturn
in economic activity in what became known as the post-World War I recession. The
Dow's performance would remain virtually unchanged from the closing value of the
previous decade, adding only 8.26%, from 99.05 points at the beginning of 1910, to a
level of 107.23 points at the end of 1919.
During the 1920s, specifically in 1928, the components of the Dow were increased to 30
stocks near the economic height of that decade, which was nicknamed the Roaring
Twenties. The prosperous nature of the economic climate, muted the negative influence
of an early 1920s recession plus certain international conflicts such as the Polish-Soviet
war, the Irish Civil War, the Turkish War of Independence and the initial phase of
the Chinese Civil War. The Crash of 1929 in October and the ensuing Great
Depression over the next several years returned the average to its starting point, almost
90% below its peak. By July 8, 1932, following its intra-day low of 40.56, the Dow would
end up closing the session at 41.22. The high of 381.17 on September 3, 1929, would
not be surpassed until 1954, in inflation-adjusted numbers. However, the bottom of the
1929 Crash came just 2½ months later on November 13, 1929, when intra-day it was at
the 195.35 level, closing slightly higher at 198.69. For the decade, the Dow would end
off with a healthy 131.7% gain, from 107.23 points at the beginning of 1920, to a level of
248.48 points at the end of 1929, just before the bulk of the Crash.
Marked by global instability and the Great Depression, the 1930s contended with
several consequential European and Asian outbreaks of war, leading up to
catastrophic World War II in 1939. Other conflicts during the decade which affected the
stock market included the 1936–1939 Spanish Civil War, the 1935–1936 Second Italo-
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Abyssinian War, the Soviet-Japanese Border War of 1939 and the Second Sino-
Japanese War from 1937. On top of that, the United States dealt with a painful
recession in 1937 and 1938 which temporarily brought economic recovery to a halt.
The largest one-day percentage gain in the index, 15.34%, happened on March 15,
1933, in the depths of the 1930s bear market when the Dow gained 8.26 points to close
at 62.10. However, as a whole throughout the Great Depression, the Dow posted some
of its worst performances, for a negative return during most of the 1930s for new and
old stock market investors. For the decade, the Dow Jones average was down from
248.48 points at the beginning of 1930, to a stable level of 150.24 points at the end of
1939, a loss of about 40%.
Post-War Years
Post-war reconstruction during the 1940s, along with renewed optimism of peace and
prosperity, brought about a 39% surge in the Dow from around the 148 level to 206. The
strength in the Dow occurred despite a brief recession in 1949 and other global conflicts
which started a short time later including the latter stages of the Chinese Civil War,
the Greek Civil War, the Indo-Pakistani War of 1947 and the 1948 Arab–Israeli War.
During the 1950s, the Korean War, the Algerian War, the Cold War and other political
tensions such as the Cuban Revolution, as well as widespread political and economic
changes in Africa during the initial stages of European Decolonization, did not stop the
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Dow's bullish climb higher. Additionally, the U.S. would also make its way through two
grinding recessions; one in 1953 and another in 1958. A 200% increase in the average
from a level of 206 to 616 ensued over the course of that decade.
The Dow's bullish behavior began to stall during the 1960s as the U.S. became
entangled with foreign political issues such as U.S. military excursions including the Bay
of Pigs Invasion involving Cuba, the Vietnam War, the Portuguese Colonial War,
the Colombian civil war which the U.S. assisted with short-lived counter-guerrilla
campaigns, as well as domestic issues such as the Civil Rights Movement and several
influential political assassinations. For the decade though, and despite a mild recession
between 1960 and 1961, the average still managed a respectable 30% gain from the
616 level to 800.
The 1970s marked a time of economic uncertainty and troubled relations between the
U.S. and certain Middle-Eastern countries. To begin with, the decade started off with the
ongoing Recession of 1969–70. Following that, the 1970s Energy Crisis ensued which
included the 1973–75 recession, the 1973 Oil Crisis as well as the 1979 energy
crisis beginning as a prelude to a disastrous economic climate injected with stagflation;
the combination between high unemployment and high inflation. However, on
November 14, 1972, the average closed above the 1,000 mark (1,003.16) for the first
time, during a brief relief rally in the midst of a lengthy bear market. Between January
1973 and December 1974, the average lost 48% of its value in what became known as
the 1973–1974 Stock Market Crash; with the situation being exacerbated by the events
surrounding the Yom Kippur War. The index closed at 577.60, on December 4, 1974.
During 1976, the index went above 1000 several times, and it closed the year at
1,004.75. Although the Vietnam War ended in 1975, new tensions arose
towards Iran surrounding the Iranian Revolution in 1979. Other notable disturbances
such as the Lebanese Civil War, the Ethiopian Civil War, the Indo-Pakistani War of
1971 and the Angolan Civil War which the U.S. and Soviet Union considered critical to
the global balance of power, seemed to have had little influence towards the financial
markets. Performance-wise for the decade, gains remained virtually flat, rising less than
5% from about the 800 level to 838.
The 1980s decade started with the early 1980s recession. In early 1981, it broke above
1000 several times, but then retreated. The largest one-day percentage drop occurred
on Black Monday; October 19, 1987, when the average fell 22.61%. There were no
clear reasons given to explain the crash, but program trading may have been a major
contributing factor. On October 13, 1989, the Dow stumbled into another downfall,
the 1989 Mini-Crash which initiated the collapse of the junk bond market as the Dow
registered a loss of almost 7%.
For the decade, the Dow made a 228% increase from the 838 level to 2,753; despite
the market crashes, Silver Thursday, an early 1980s recession, the 1980s oil glut,
the Japanese asset price bubble and other political distractions such as the Soviet war
in Afghanistan, the Falklands War, the Iran–Iraq War, the Second Sudanese Civil
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War and the First Intifada in the Middle East. The index had only two negative years,
which were in 1981 and 1984.
Dot-Com Boom
The 1990s brought on rapid advances in technology along with the introduction of the
dot-com era. To start off, the markets contended with the 1990 oil price
shock compounded with the effects of the Early 1990s recession and a brief European
situation surrounding Black Wednesday. Certain influential foreign conflicts such as
the 1991 Soviet coup d'état attempt which took place as part of the initial stages of
the Dissolution of the USSR and the Fall of Communism; the First and Second Chechen
Wars, the Persian Gulf War and the Yugoslav Wars failed to dampen economic
enthusiasm surrounding the ongoing Information Age and the "irrational exuberance" (a
phrase coined by Alan Greenspan) of the Internet Boom. Even the occurrences of
the Rwandan Genocide and the Second Congo War, termed as "Africa's World
War" that involved 8 separate African nations which together between the two killed
over 5 million people, didn't seem to have any noticeable negative financial impact on
the Dow either. Between late 1992 and early 1993, the Dow staggered through the
3,000 level making only modest gains as the Biotechnology sector suffered through the
downfall of the Biotech Bubble; as many biotech companies saw their share prices
rapidly rise to record levels and then subsequently fall to new all-time lows.
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On November 21, 1995, the DJIA closed above the 5,000 level (5,023.55) for the first
time. Over the following two years, the Dow would rapidly tower above the 6,000 level
during the month of October in 1996, and the 7,000 level in February 1997. On its
march higher into record territory, the Dow easily made its way through the 8,000 level
in July 1997. However, later in that year during October, the events surrounding
the Asian Financial Crisis plunged the Dow into a 554-point loss to a close of 7,161.15;
a retrenchment of 7.18% in what became known as the 1997 Mini-Crash. Although
internationally there was negativity surrounding the 1998 Russian financial crisis along
with the subsequent fallout from the 1998 collapse of the derivatives Long-Term Capital
Management hedge fund involving bad bets placed on the movement of the Russian
ruble, the Dow would go on to surpass the 9,000 level during the month of April in 1998,
making its sentimental push towards the symbolic 10,000 level. On March 29, 1999, the
average closed above the 10,000 mark (10,006.78) after flirting with it for two weeks.
This prompted a celebration on the trading floor, complete with party hats. The scene at
the exchange made front-page headlines on many U.S. newspapers such as The New
York Times. On May 3, 1999, the Dow achieved its first close above the 11,000 mark
(11,014.70). Total gains for the decade exceeded 315%; from the 2,753 level to 11,497.
The Dow averaged a 5.3% return compounded annually for the 20th century, a
record Warren Buffett called "a wonderful century"; when he calculated that to achieve
that return again, the index would need to close at about 2,000,000 by December
2099. [23] During the height of the dot-com era, authors James K. Glassman and Kevin A.
Hassett went so far as to publish a book entitled Dow 36,000: The New Strategy for
Profiting From the Coming Rise in the Stock Market. Their theory was to imply that
stocks were still cheap and it was not too late to benefit from rising prices during the
Internet boom.
Characterized by fear on the part of newer investors, the uncertainty of the 2000s
(decade) brought on a significant bear market. There was indecision on whether the
cyclical bull market represented a prolonged temporary bounce or a new long-term
trend. Ultimately, there was widespread resignation and disappointment as the lows
were revisited, and in some cases, surpassed near the end of the decade.
Post Internet-Bubble Era
The fourth largest one-day point drop in DJIA history, and largest at the time, occurred
on September 17, 2001, the first day of trading after the September 11, 2001 attacks,
when the Dow fell 684.81 points, or 7.1%. However, the Dow had been in a downward
trend for virtually all of 2001 prior to September 11, losing well over 1000 points
between January 2 and September 10, and had lost 187.51 points on September 6,
followed by losing 235.4 points on September 7. By the end of that week, the Dow had
fallen 1,369.70 points, or 14.3%. However, the Dow began an upward trend shortly after
the attacks, and quickly regained all lost ground to close above the 10,000 level for the
year.
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During 2002, the average remained subdued without making substantial gains due to
the stock market downturn of 2002 as well as the lingering effects of the dot-com
bubble. In 2003, the Dow held steady within the 7,000 to 9,000-point level range by
the early 2000s recession, the Afghan War and the Iraq War. But by December of that
year, the Dow remarkably returned to the 10,000 mark. In October 2006, four years
after its bear market low, the DJIA set fresh record theoretical, intra-day, daily close,
weekly, and monthly highs for the first time in almost seven years, closing above the
12,000 level for the first time on the 19th anniversary of Black Monday (1987). On
February 27, 2007, the Dow Jones Industrial Average fell 3.3% (415.30 points), its
biggest point drop since 2001. The initial drop was caused by a global sell-off
after Chinese stocks experienced a mini-crash, yet by April 25, the Dow passed the
13,000 level in trading and closed above that milestone for the first time. On July 19,
2007, the average passed the 14,000 level, completing the fastest 1,000-point advance
for the index since 1999. One week later, a 450-point intra-day loss, owing to turbulence
in the U.S. sub-prime mortgage market and the soaring value of the yuan, initiated
another correction falling below the 13,000 mark, about 10% from its highs.
On October 9, 2007, the Dow Jones Industrial Average closed at a record high of
14,164.53. Two days later on October 11, the Dow traded at an intra-day level high of
14,198.10, a mark which would not be matched until March 2013. In what would
normally take many years to accomplish; numerous reasons were cited for the Dow's
extremely rapid rise from the 11,000 level in early 2006, to the 14,000 level in late 2007.
They included future possible takeovers and mergers, healthy earnings reports
particularly in the tech sector, and moderate inflationary numbers; fueling speculation
the Federal Reserve would not raise interest rates.
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On September 15, 2008, a wider financial crisis became evident when Lehman
Brothers filed for Chapter 11 bankruptcy along with the economic effect of record high
oil prices which reached almost $150 per barrel two months earlier. When opening that
morning, it immediately lost 300 points and overall the DJIA lost more than 500 points
for only the sixth time in history, returning to its mid-July lows below the 11,000 level. A
series of "bailout" packages, including the Emergency Economic Stabilization Act of
2008, proposed and implemented by the Federal Reserve and U.S. Treasury, as well
as FDIC-sponsored bank mergers, did not prevent further losses. After nearly six
months of extreme volatility during which the Dow experienced its largest one-day point
loss, largest daily point gain, and largest intra-day range (more than 1,000 points), the
index closed at a new twelve-year low of 6,547.05 on March 9, 2009 (after an intra-day
low of 6,469.95 during the March 6 session), its lowest close since April 1997, and had
lost 20% of its value in only six weeks.
Bull Market of 2009–Present
Towards the latter half of 2009, the average rallied towards the 10,000 level amid
optimism that the Late-2000s (decade) Recession, the United States Housing
Bubble and the Global Financial Crisis of 2008–2009, were easing and possibly coming
to an end. For the decade, the Dow saw a rather substantial pullback for a negative
return from the 11,497 level to 10,428, a loss of a little over 9%.
During the early part of the 2010s, aided somewhat by the loose monetary
policy practiced by the Federal Reserve, the Dow made a notable rally attempt, though
with significant volatility due to growing global concerns such as the 2010 European
sovereign debt crisis, the Dubai debt crisis, and the United States debt ceiling crisis. On
May 6, 2010, the index lost around 400 points over the day, then just after 2:30 pm
EDT, it lost about 600 points in just a few minutes, and gained the last amount back
about as quickly. The intra-day change at the lowest point was 998.50 points,
representing an intra-day loss of 9.2%. The event, during which the Dow bottomed out
at 9,869 before recovering to end with a 3.2% daily loss at 10,520.32, became known
as the 2010 Flash Crash. The index closed the half-year at 9,774.02 for a loss of
7.7%. [31]
In the midst of the decade, the Dow rallied its way above the peak from October 2007.
On May 3, 2013, the Dow surpassed the 15,000 mark for the first time before towering
above the next few millenary milestones thanks to commendable economic reports. The
index closed 2014 at 17,823.07 for a gain of 71% for the five years before progress
became minimal the next year. However, the overwhelming economic factors exhibited
in 2015 caused the Dow to plunge into correction territory for the first time since
2011. By October, the Dow had exited correction rallying 14% from its August lows, but
failed to hit a record high set back in May. In November and December, the Dow
continued to retreat from the 14% rally in October, leading some to call it a bear market.
This led to the Dow closing at 17,425.03 for 2015, the first annual loss since 2008. After
nearly 14 months since the last record close, the Dow finally achieved a fresh new,
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central-bank debt fueled record close on July 20, 2016 at 18,595.03 along with an
intraday high of 18,622.01.
During the late part of the 2010s, despite anticipations of post-election selloffs, the Dow
rallied significantly after Donald Trump was elected President. On January 25, 2017, the
Dow hit a record high of 20,000, an increase of 1,667 points since his election in
November
2016. Throughout the course of the rest of 2017 and January
2018, the Dow skyrocketed past a few millenary milestones, including the
symbolic
25,000 on January 4, 2018. The current record high of
26,616.71 was achieved on Jan. 26, 2018.
However, on February 2, 2018, the Dow
suffered its biggest loss since Brexit on June
24, 2016. As volatility made its return for
next week, the largest intraday point drop of
1,597.08 points and largest closing point
drop of 1,175.21 points were both set on
February 5, 2018 although percentage
changes were not as extreme as some
past stock market crashes.
Investing
Investing in the DJIA is made widely accessible in
equities
through exchange-traded funds (ETFs) as well as
in derivatives through option contracts and futures contracts.
Exchange-Traded Fund
Several ETFs follow the Dow Jones Industrial Average, including with short or leverage
strategies. The biggest has assets under management in the tens of billions dollars as
of 2017.
Due to the advent of pre-market trading, the ETFs provide a very accurate opening
value for the average.
Futures Contracts
In the derivatives market, the CME Group through its subsidiaries the Chicago
Mercantile Exchange (CME) and the Chicago Board of Trade (CBOT), issues Futures
Contracts; the E-mini Dow ($5) Futures (YM), which track the average and trade on
their exchange floors respectively. Trading is typically carried out in an Open
Outcry auction, or over an electronic network such as CME's Globex platform. Dow
Futures is one of the most important premarket tool and reflect the mood in which DJIA
will open.
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Options Contracts
The Chicago Board Options Exchange (CBOE) issues Options Contracts on the Dow
through the root symbol DJX in combination with long-term expiration options
called DJX LEAPS. There are also options on the various ETFs; Performance
ETFs, Inverse Performance ETFs, 2x Performance ETFs, Inverse 2x Performance
ETFs, 3x Performance ETFs, and Inverse 3x Performance ETFs.
Calculation
To calculate the DJIA, the sum of the prices of all 30 stocks is divided by a divisor, the
Dow Divisor. The divisor is adjusted in case of stock splits, spinoffs or similar structural
changes, to ensure that such events do not in themselves alter the numerical value of
the DJIA. Early on, the initial divisor was composed of the original number of component
companies; which made the DJIA at first, a simple arithmetic average. The present
divisor, after many adjustments, is less than one (meaning the index is larger than the
sum of the prices of the components). That is:
DJIA = sum(p) / d
where p are the prices of the component stocks and d is the Dow Divisor.
Events such as stock splits or changes in the list of the companies composing the index
alter the sum of the component prices. In these cases, in order to avoid discontinuity in
the index, the Dow Divisor is updated so that the quotations right before and after the
event coincide:
DJIA = sum(p_old) / d_old = sum(p_new) / d_new
The Dow Divisor was 0.14523396877348 on September 1, 2017. [46] Presently, every $1
change in price in a particular stock within the average equates to a 6.885 (or
1 ÷ 0.14523396877348) point movement.
Market Performance
Assessment
With the current inclusion of only 30 stocks, critics such as Ric Edelman argue that the
DJIA is not a very accurate representation of overall market performance. Still, it is the
most cited and most widely recognized of the stock market indices. Additionally, the
DJIA is criticized for being a price-weighted average, which gives higher-priced stocks
more influence over the average than their lower-priced counterparts, but takes no
account of the relative industry size or market capitalization of the components. For
example, a $1 increase in a lower-priced stock can be negated by a $1 decrease in a
much higher-priced stock, even though the lower-priced stock experienced a
larger percentage change. In addition, a $1 move in the smallest component of the DJIA
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has the same effect as a $1 move in the largest component of the average. For
example, during September–October 2008, former component AIG's reverse splitadjusted
stock price collapsed from $22.76 on September 8 to $1.35 on October 27;
contributing to a roughly 3,000-point drop in the index.
As of January 2018, Boeing and Goldman Sachs are among the highest priced stocks
in the average and therefore have the greatest influence on it. Alternately, Pfizer and
General Electric are among the lowest priced stocks in the average and have the least
amount of sway in the price movement. Many critics of the DJIA recommend the floatadjusted
market-value weighted S&P 500 or the Wilshire 5000, the latter of which
includes all U.S. equity securities, as better indicators of the U.S. stock market.
Correlation Among Components
A study between the correlation of components of the Dow Jones Industrial Average
compared with the movement of the index finds that the correlation is higher in a time
period where the average recedes and goes down. The correlation is lowest in a time
when the average is flat or rises a modest amount.
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V. The S&P 500 Index
The Standard &
Poor's 500,
often
abbreviated as the S&P 500, or
just the S&P, is an American
stock market index based on the
market capitalizations of 500
large companies having
common stock listed on the
NYSE or NASDAQ. The S&P
500 index components and their
weightings are determined by
S&P Dow Jones Indices. It
differs from other U.S. stock
market indices, such as the Dow
Jones Industrial Average or the
Nasdaq Composite index,
because of its diverse
constituency and weighting methodology. It is one of the most commonly followed
equity indices, and many consider it one of the best representations of the U.S. stock
market, and a bellwether for the U.S. economy. The National Bureau of Economic
Research has classified common stocks as a leading indicator of business cycles.
The S&P 500 was developed and continues to be maintained by S&P Dow Jones
Indices, a joint venture majority-owned by S&P Global. S&P Dow Jones Indices
publishes many stock market indices such as the Dow Jones Industrial Average, S&P
MidCap 400, the S&P SmallCap 600, and the S&P Composite 1500. It is a free-float
capitalization-weighted index, and has many ticker symbols, such as: ^GSPC, INX, and
$SPX.
History
The "Composite Index", as the S&P 500 was first called when it introduced its first stock
index in 1923, began tracking a small number of stocks. Three years later in 1926, the
Composite Index expanded to 90 stocks and then in 1957 it expanded to its current 500.
Standard & Poor's, a company that doles out financial information and analysis, was
founded in 1860 by Henry Varnum Poor. In 1941, Poor's Publishing (Henry Varnum
Poor's original company) merged with Standard Statistics (founded in 1906 as the
Standard Statistics Bureau) and therein assumed the name Standard and Poor's
Corporation. Its primary daily stock market index was the "S&P 90", a value-weighted
index based on 90 stocks. Standard & Poor's also published a weekly index of 423.0
companies. The S&P 500 index in its present form began on March 4, 1957.
Technology has allowed the index to be calculated and disseminated in real time. The
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S&P 500 is widely used as a measure of the general level of stock prices, as it includes
both growth stocks and value stocks.
In September 1962, Ultronic Systems Corp. entered into an agreement with Standard
and Poor's. Under the terms of this agreement, Ultronics computed the S&P 500 Stock
Composite Index, the 425 Stock Industrial Index, the 50 Stock Utility Index, and the 25
Stock Rail Index. Throughout the market day these statistics were furnished to Standard
& Poor's. In addition, Ultronics also computed and reported the 94 S&P sub-indexes.
Price History
On August 12, 1982, the index closed at 102.42.
The index reached a relative intraday high—which was not exceeded for over seven
years—of 1,552.87, on March 24, 2000, during the dot-com bubble. The index then
declined by approximately 50%, to 768.63, on October 10, 2002, during the stock
market downturn of 2002. On May 30, 2007, the S&P 500 closed at 1,530.23, to set its
first all-time closing high in more than seven years. Although the index achieved a new
all-time intraday high on October 11, 2007, at 1,576.09, following a record close of
1,565.15 on October 9, the index finished 2007 at 1,468.36 points—just below its 1999
annual close. Less than a month later, it dropped to 1,400, and would not see similar
levels again for five years.
In mid-2007, the subprime mortgage crisis spread to the wider U.S. financial sector. The
resulting situation became acute in September 2008, ushering in a period of unusual
market volatility, encompassing record 100-point swings in both directions and reaching
the highest levels since 1929. On November 20, 2008, the index closed at 752.44, its
lowest since early 1997. A modest recovery the following day still left the index down
45.5% for the year. This year-to-date loss was the greatest since 1931, when the broad
market declined more than 50%. The index closed the year at 903.25, for a loss of
38.5%. The market continued to decline in early 2009, surrounding the financial crisis of
2008. The index reached a nearly 13-year low, closing at 676.53, on March 9, 2009.
On March 23, 2009, the S&P 500 marked a 20% gain when it hit 822.92. The Dow
Jones Industrial Average soon followed. The close for 2009 was 1,115.10, making it the
second-best year of the decade. On April 14, 2010 the index broke 1200 closing at
1210.65, but by July 2, 2010 it had closed at 1022.58. On April 29, 2011, the index
closed at 1363.61, but it had a sharp drop in August and briefly broke 1100 in October
(with the VIX hitting 40). Gains continued despite significant volatility amid electoral and
fiscal uncertainty, and the 2012 close of the S&P 500 following QE3 was its thirdhighest
ever, at 1,426.22 points. On March 28, 2013, it closed above the closing high
from 2007. On April 10, 2013, it also closed above the intraday high from 2007.
On May 3, 2013—more than 13 years since its first close above 1,500—the S&P 500
closed above 1,600 for the first time, at 1,614.42. This would be the first of three 100-
point milestones in 2013: 1,600 on May 3, 2013; 1,700 on August 1, 2013; and 1,800 on
November 22, 2013. The S&P 500 closed out 2013 at a record high, finishing the
Page 88 of 214

December 31, 2013, trading day at 1,848.36. On May 23, 2014, the index for the first
time closed above 1,900, at 1,900.53. On August 26, 2014, the index closed above
2,000 for the very first time, and on December 22 the S&P 500 climbed to 2078, an alltime
high. The index closed on December 29 at 2,090.57 with a closing of 2,058.90 at
the end of 2014. This was a gain of 85% (in price return, and 105% in total return) for
the five years 2010–2014. On February 17, 2015, the index first closed above 2,100,
closing at 2,100.34. On February 25, 2015 it reached 2,119.59 during mid-day, and on
the following day it closed at record high of 2,115.48. On May 21, 2015, the index
closed at 2,130.82, its high point for the year. At the end of 2015, the index closed at
2,043.94, down 0.73% for the year. A period of over a year with no new record highs
ended on July 11, 2016 (closing at 2,137.16). In June 2017, the index saw the largest
weekly rise since the past presidential election in November 2016.
Selection Criteria
The components of the S&P 500 are selected by a committee. This is similar to the Dow
Jones Industrial Average, but different from others such as the Russell 1000, which are
strictly rule-based. When considering the eligibility of a new addition, the committee
assesses the company's merit using eight primary criteria: market capitalization,
liquidity, domicile, public float, sector classification, financial viability, length of time
publicly traded and stock exchange. Each of these primary criteria have specific
requirements that must be met, for example, in order to be added to the index, a
company must satisfy the following liquidity-based size requirements:
1. Market capitalization must be greater than or equal to $6.1 billion USD
2. Annual dollar value traded to float-adjusted market capitalization is greater than 1.0
Page 89 of 214

3. Minimum monthly trading volume of 250,000 shares in each of the six months leading up
to the evaluation date
The committee selects the companies in the S&P 500 so they are representative of the
industries in the United States economy. The securities must be publicly listed on either
the NYSE (including NYSE Arca or NYSE MKT) or NASDAQ (NASDAQ Global Select
Market, NASDAQ Select Market or the NASDAQ Capital Market). Securities that are
ineligible for inclusion in the index are limited partnerships, master limited partnerships,
OTC bulletin board issues, closed-end funds, ETFs, ETNs, royalty trusts, tracking
stocks, preferred stock, unit trusts, equity warrants, convertible bonds, investment
trusts, ADRs, ADSs and MLP IT units.
The index includes non-U.S. companies, both formerly U.S.-incorporated companies
that have re-incorporated outside the United States, as well as firms that have never
been incorporated in the United States.
Versions
Components
The "S&P 500" generally quoted is a price return index; there are also "total return" and
"net total return" versions of the index. These versions differ in how dividends are
accounted for. The price return version does not account for dividends; it only captures
the changes in the prices of the index components. The total return version reflects the
effects of dividend reinvestment. Finally, the net total return version reflects the effects
of dividend reinvestment after the deduction of withholding tax.
Weighting
The index has traditionally been capitalization-weighted; that is, movements in the
prices of stocks with higher market capitalizations (the share price times the number of
shares outstanding) have a greater impact on the value of the index than do companies
with smaller market caps. That is, Standard & Poor's now calculates the market
capitalization of each company relevant to the index using only the number of shares
available for public trading (called the "float"). This transition was made in two steps, the
first on March 18, 2005 and the second on September 16, 2005.
Index Maintenance
In order to keep the S&P 500 Index consistent over time, it is adjusted to capture
corporate actions which affect market capitalization, such as additional share issuance,
dividends and restructuring events such as mergers or spin-offs. Additionally, to remain
indicative of the U.S. stock market, the constituent stocks are changed from time to
time. Between January 1, 2005 and January 1, 2015, 188 index components were
replaced by other components.
Page 90 of 214

To prevent the value of the Index from changing merely as a result of corporate financial
actions, all such actions affecting the market value of the Index require a divisor
adjustment. Also, when a company is dropped and replaced by another with a different
market capitalization, the divisor needs to be adjusted in such a way that the value of
the S&P 500 Index remains constant. All divisor adjustments are made after the close of
trading and after the calculation of the closing value of the S&P 500 Index. There is a
large range of different corporate actions that can require the divisor to be adjusted.
These are listed in the table below:
Calculation
Type of Action Divisor Adjustment
Stock split (e.g., 2×1) No
Share issuance Yes
Share repurchase Yes
Special cash dividend Yes
Company change Yes
Rights offering Yes
Spinoffs
Yes
Mergers
Yes
To calculate the value of the S&P 500 Index, the sum of the adjusted market
capitalization of all 500 stocks is divided by a factor, usually referred to as the Divisor.
For example, if the total adjusted market cap of the 500 component stocks is US$13
trillion and the Divisor is set at 8.933 billion, then the S&P 500 Index value would be
1,455.28. Although the adjusted market capitalization of the entire index can be
accessed from Standard & Poor's website, the Divisor is considered to be proprietary to
the firm. However, the Divisor's value is approximately 8.9 billion.
The formula to calculate the S&P 500 Index value is:
Index = SUM (market cap all S&P 500 stocks) / DIVISOR
where P is the price of each stock in the index and Q is the number of shares publicly
available for each stock.
The divisor is adjusted in the case of stock issuance, spin-offs or similar structural
changes, to ensure that such events do not in themselves alter the numerical value of
the Index.
Update Frequency
The index value is updated every 15 seconds during trading sessions and is
disseminated by Reuters America, Inc., a subsidiary of Thomson Reuters Corporation.
Page 91 of 214

Investing
Many index funds and exchange-traded funds attempt to replicate (before fees and
expenses) the performance of the S&P 500 by holding the same stocks as the index, in
the same proportions. Many other mutual funds are benchmarked to the S&P 500.
Consequently, a company whose stock is added to the list of S&P 500 stocks may see
its stock price rise, as index funds must purchase that company's stock in order to
continue tracking the S&P 500 index. Mutual fund managers provide index funds that
track the S&P 500, the first of which was The Vanguard Group's Vanguard 500 in 1976.
In addition to investing in a mutual fund indexed to the S&P 500, investors may also
purchase shares of an exchange-traded fund (ETF) which represents ownership in a
portfolio of the equity securities that comprise the Standard & Poor's 500 Index. These
exchange-traded funds track the S&P 500 index and may be used to trade the index.
Investors may also invest in all the stocks of the S&P 500 directly, which is usually
called index replication.
In the derivatives market, the Chicago Mercantile Exchange (CME) offers futures
contracts (ticker symbols /SP for the full-sized contract and /ES for the E-mini contract
that is one-fifth the size of /SP) that track the index and trade on the exchange floor in
an open outcry auction, or on CME's Globex platform, and are the exchange's most
popular product. Additionally, the Chicago Board Options Exchange (CBOE) offers
options on the S&P 500 as well as S&P 500 ETFs, inverse ETFs and leveraged ETFs.
Milestones
Market Statistics
On October 11, 2007, S&P index set a milestone with its all-time intraday high of
1,576.09. On March 28, 2013, the S&P finally surpassed its closing high level of
1,565.15, recovering all its losses from the financial crisis. On March 2, 2015, the S&P
finally closed at a new all-time inflation-adjusted closing high, though it has yet to
achieve a new all-time inflation-adjusted intraday high, both of which were set back in
2000.
Annual Returns
(total return) Calculation used for CAGR (Compound Annual Growth Rate, Annualized
Return):
CAGR = ((Ending Value)/(Starting Value))∧(1/ (# of years)) – 1
The current CAGR through 2017 is calculated at 10.53%.
Year
Change
in Index
Total
Annual
Value of
$1.00
5 Year
Annualized
10 Year
Annualized
15 Year
Annualized
20 Year
Annualized
25 Year
Annualized
Page 92 of 214

Return
Including
Dividends
Invested on
1970-01-01
Return Return Return Return Return
1970 0.10% 4.01% $1.04 - - - - -
1971 10.79% 14.31% $1.19 - - - - -
1972 15.63% 18.98% $1.41 - - - - -
1973 −17.37% −14.66% $1.21 - - - - -
1974 −29.72% −26.47% $0.89 −2.35% - - - -
1975 31.55% 37.20% $1.22 3.21% - - - -
1976 19.15% 23.84% $1.51 4.87% - - - -
1977 −11.50% −7.18% $1.40 −0.21% - - - -
1978 1.06% 6.56% $1.49 4.32% - - - -
1979 12.31% 18.44% $1.77 14.76% 5.86% - - -
1980 25.77% 32.50% $2.34 13.96% 8.45% - - -
1981 −9.73% −4.92% $2.23 8.10% 6.47% - - -
1982 14.76% 21.55% $2.71 14.09% 6.70% - - -
1983 17.27% 22.56% $3.32 17.32% 10.63% - - -
1984 1.40% 6.27% $3.52 14.81% 14.78% 8.76% - -
1985 26.33% 31.73% $4.64 14.67% 14.32% 10.49% - -
1986 14.62% 18.67% $5.51 19.87% 13.83% 10.76% - -
1987 2.03% 5.25% $5.80 16.47% 15.27% 9.86% - -
1988 12.40% 16.61% $6.76 15.31% 16.31% 12.17% - -
1989 27.25% 31.69% $8.90 20.37% 17.55% 16.61% 11.55% -
1990 −6.56% −3.10% $8.63 13.20% 13.93% 13.94% 11.16% -
1991 26.31% 30.47% $11.26 15.36% 17.59% 14.34% 11.90% -
1992 4.46% 7.62% $12.11 15.88% 16.17% 15.47% 11.34% -
1993 7.06% 10.08% $13.33 14.55% 14.93% 15.72% 12.76% -
1994 −1.54% 1.32% $13.51 8.70% 14.38% 14.52% 14.58% 10.98%
1995 34.11% 37.58% $18.59 16.59% 14.88% 14.81% 14.60% 12.22%
1996 20.26% 22.96% $22.86 15.22% 15.29% 16.80% 14.56% 12.55%
1997 31.01% 33.36% $30.48 20.27% 18.05% 17.52% 16.65% 13.07%
1998 26.67% 28.58% $39.19 24.06% 19.21% 17.90% 17.75% 14.94%
1999 19.53% 21.04% $47.44 28.56% 18.21% 18.93% 17.88% 17.25%
2000 −10.14% −9.10% $43.12 18.33% 17.46% 16.02% 15.68% 15.34%
2001 −13.04% −11.89% $37.99 10.70% 12.94% 13.74% 15.24% 13.78%
2002 −23.37% −22.10% $29.60 −0.59% 9.34% 11.48% 12.71% 12.98%
2003 26.38% 28.68% $38.09 −0.57% 11.07% 12.22% 12.98% 13.84%
2004 8.99% 10.88% $42.23 −2.30% 12.07% 10.94% 13.22% 13.54%
2005 3.00% 4.91% $44.30 0.54% 9.07% 11.52% 11.94% 12.48%
2006 13.62% 15.79% $51.30 6.19% 8.42% 10.64% 11.80% 13.37%
2007 3.53% 5.49% $54.12 12.83% 5.91% 10.49% 11.82% 12.73%
2008 −38.49% −37.00% $34.09 −2.19% −1.38% 6.46% 8.43% 9.77%
2009 23.45% 26.46% $43.11 0.42% −0.95% 8.04% 8.21% 10.54%
2010 12.78% 15.06% $49.61 2.29% 1.41% 6.76% 9.14% 9.94%
2011 -0.00% 2.11% $50.65 −0.25% 2.92% 5.45% 7.81% 9.28%
2012 13.41% 16.00% $58.76 1.66% 7.10% 4.47% 8.22% 9.71%
2013 29.60% 32.39% $77.79 17.94% 7.40% 4.68% 9.22% 10.26%
2014 11.39% 13.69% $88.44 15.45% 7.67% 4.24% 9.85% 9.62%
2015 −0.73% 1.38% $89.66 12.57% 7.30% 5.00% 8.19% 9.82%
2016 9.54% 11.96% $100.38 14.66% 6.94% 6.69% 7.68% 9.15%
2017 19.42% 21.83% $122.30 15.79% 8.49% 9.92% 7.19% 9.69%
High 34.11% 37.58% $122.30 28.56% 19.21% 18.93% 17.88% 17.25%
Low −38.49% −37.00% $0.89 −2.35% −1.38% 4.24% 7.19% 9.15%
Median 11.85% 14.69% $13.42 14.02% 11.07% 11.21% 11.82% 12.35%
Ticker
symbol
Security
List of S&P 500 Companies
SEC
filings
S&P 500 Component Stocks
GICS Sector
GICS Sub Industry
Address of
Headquarters
Date
first
added
MMM 3M Company reports Industrials Industrial St. Paul, 0000066740
CIK
Page 93 of 214

ABT Abbott Laboratories reports Health Care
Conglomerates
Health Care
Equipment
ABBV AbbVie Inc. reports Health Care Pharmaceuticals
ACN Accenture plc reports
ATVI Activision Blizzard reports
Information
Technology
Information
Technology
AYI Acuity Brands Inc reports Industrials
ADBE Adobe Systems Inc reports
AMD
Advanced Micro
Devices Inc
reports
AAP Advance Auto Parts reports
Information
Technology
Information
Technology
Consumer
Discretionary
AES AES Corp reports Utilities
IT Consulting &
Other Services
Home
Entertainment
Software
Electrical
Components &
Equipment
Application
Software
Semiconductors
Automotive Retail
Independent Power
Producers &
Energy Traders
Managed Health
Care
Asset Management
& Custody Banks
Life & Health
Insurance
Health Care
Equipment
Minnesota
North Chicago,
Illinois
North Chicago,
Illinois
Dublin, Ireland
Santa Monica,
California
Atlanta,
Georgia
San Jose,
California
Sunnyvale,
California
Roanoke,
Virginia
Arlington,
Virginia
1964-
03-31
2012-
12-31
2011-
07-06
2015-
08-31
2016-
05-03
1997-
05-05
2017-
03-20
2015-
07-09
0000001800
0001551152
0001467373
0000718877
0001144215
0000796343
0000002488
0001158449
0000874761
AET Aetna Inc reports Health Care
Hartford, 1976-
Connecticut 06-30
0001122304
AMG
Affiliated Managers
Beverly, 2014-
reports Financials
Group Inc
Massachusetts 07-01
0001004434
AFL AFLAC Inc reports Financials
Columbus,
Georgia
0000004977
A
Agilent
Santa Clara, 2000-
reports Health Care
Technologies Inc
California 06-05
0001090872
APD
Air Products &
Allentown, 1985-
reports Materials Industrial Gases
Chemicals Inc
Pennsylvania 04-30
0000002969
AKAM
Akamai
Information Internet Software & Cambridge, 2007-
reports
Technologies Inc
Technology
Services Massachusetts 07-12
0001086222
ALK
Alaska Air Group
Seattle, 2016-
reports Industrials Airlines
Inc
Washington 05-13
0000766421
ALB Albemarle Corp reports Materials
Specialty Baton Rouge, 2016-
Chemicals Louisiana 07-01
0000915913
ARE
Alexandria Real
Pasadena, 2017-
reports Real Estate Office REITs
Estate Equities Inc
California 03-20
0001035443
ALXN
Alexion
Cheshire, 2012-
reports Health Care Biotechnology
Pharmaceuticals
Connecticut 05-25
0000899866
ALGN Align Technology reports Health Care
Health Care San Jose, 2017-
Supplies
California 06-19
0001097149
ALLE Allegion reports Industrials Building Products Dublin, Ireland
2013-
12-02
0001579241
AGN Allergan, Plc reports Health Care Pharmaceuticals Dublin, Ireland 0001578845
ADS
Data Processing &
Alliance Data
Information
2013-
reports
Outsourced Plano, Texas
Systems
Technology
12-23
Services
0001101215
LNT Alliant Energy Corp reports Utilities Electric Utilities
ALL Allstate Corp reports Financials
Property & Casualty
Insurance
Madison,
Wisconsin
Northfield
Township,
Illinois
2016-
07-01
0000352541
0000899051
GOOGL
Alphabet Inc Class
Information Internet Software & Mountain View, 2014-
reports
A
Technology
Services
California 04-03
0001652044
GOOG
Alphabet Inc Class
Information Internet Software & Mountain View,
reports
C
Technology
Services
California
0001652044
MO Altria Group Inc reports Consumer Staples Tobacco
Richmond,
Virginia
0000764180
AMZN Amazon.com Inc. reports
Consumer Internet & Direct Seattle, 2005-
Discretionary Marketing Retail Washington 11-18
0001018724
AEE Ameren Corp reports Utilities Multi-Utilities
St. Louis, 1991-
Missouri 09-19
0001002910
AAL
American Airlines
Fort Worth, 2015-
reports Industrials Airlines
Group
Texas 03-23
0000006201
AEP American Electric reports Utilities Electric Utilities Columbus, 0000004904
Page 94 of 214

AXP
AIG
AMT
AWK
AMP
ABC
Power
American Express
Co
American
International Group,
Inc.
American Tower
Corp A
American Water
Works Company
Inc
Ameriprise
Financial
AmerisourceBergen
Corp
reports Financials Consumer Finance
reports
Financials
Property & Casualty
Insurance
reports Real Estate Specialized REITs
reports Utilities Water Utilities
reports
reports
Financials
Health Care
AME AMETEK Inc. reports Industrials
Asset Management
& Custody Banks
Health Care
Distributors
Electrical
Components &
Equipment
AMGN Amgen Inc. reports Health Care Biotechnology
APH Amphenol Corp reports
APC
ADI
Anadarko
Petroleum Corp
Analog Devices,
Inc.
reports
reports
Information
Technology
Energy
Information
Technology
ANDV Andeavor reports Energy
ANSS ANSYS reports
Information
Technology
ANTM Anthem Inc. reports Health Care
Electronic
Components
Oil & Gas
Exploration &
Production
Semiconductors
Oil & Gas Refining
& Marketing
Application
Software
Managed Health
Care
AON Aon plc reports Financials Insurance Brokers
AOS A.O. Smith Corp reports Industrials Building Products
APA Apache Corporation reports Energy
AIV
Apartment
Investment &
Management
AAPL Apple Inc. reports
AMAT
Applied Materials
Inc.
Oil & Gas
Exploration &
Production
reports Real Estate Residential REITs
reports
APTV Aptiv Plc reports
ADM
Archer-Daniels-
Midland Co
reports
Information
Technology
Information
Technology
Consumer
Discretionary
Consumer Staples
ARNC Arconic Inc. reports Industrials
AJG
Arthur J. Gallagher
& Co.
Technology
Hardware, Storage
& Peripherals
Semiconductor
Equipment
Auto Parts &
Equipment
Agricultural
Products
Aerospace &
Defense
Ohio
New York,
New York
New York,
New York
Boston,
Massachusetts
Voorhees, New
Jersey
Minneapolis,
Minnesota
Chesterbrook,
Pennsylvania
Berwyn,
Pennsylvania
Thousand
Oaks,
California
Wallingford,
Connecticut
The
Woodlands,
Texas
Norwood,
Massachusetts
San Antonio,
Texas
Canonsburg,
Pennsylvania
Indianapolis,
Indiana
London, United
Kingdom
Milwaukee,
Wisconsin
Houston,
Texas
Denver,
Colorado
Cupertino,
California
Santa Clara,
California
Gillingham,
Kent, United
Kingdom
Decatur, Illinois
New York,
New York
reports Financials Insurance Brokers Itasca, Illinois
AIZ Assurant Inc. reports Financials Multi-line Insurance
T AT&T Inc. reports
Telecommunication
Services
Integrated
Telecommunication
Services
Application
Software
Internet Software &
Services
New York,
New York
Dallas, Texas
1976-
06-30
1980-
03-31
2007-
11-19
2016-
03-04
2005-
10-03
2001-
08-30
2013-
09-23
1992-
01-02
2008-
09-30
2007-
09-27
2017-
06-19
2017-
07-26
1982-
11-30
2012-
12-24
1981-
07-29
1964-
03-31
2016-
05-31
2007-
04-10
1983-
11-30
0000004962
0000005272
0001053507
0001410636
0000820027
0001140859
0001037868
0000318154
0000820313
0000773910
0000006281
0000050104
0001013462
0001156039
0000315293
0000091142
0000006769
0000922864
0000320193
0000006951
0001521332
0000007084
0000004281
0000354190
0001267238
0000732717
Information
San Rafael, 1989-
ADSK Autodesk Inc. reports
0000769397
Technology
California 12-01
Automatic Data
Information
Roseland, New 1981-
ADP
reports
0000008670
Processing
Technology
Jersey 03-31
AZO AutoZone Inc reports Consumer Specialty Stores Memphis, 0000866787
Page 95 of 214

AVB
AVY
BHGE
AvalonBay
Communities, Inc.
Avery Dennison
Corp
Baker Hughes, a
GE Company
Discretionary
reports Real Estate Residential REITs
reports Materials Paper Packaging
reports
Energy
BLL Ball Corp reports Materials
BAC
BK
BAX
Bank of America
Corp
The Bank of New
York Mellon Corp.
Baxter International
Inc.
Oil & Gas
Equipment &
Services
Metal & Glass
Containers
reports Financials Diversified Banks
reports
reports
Financials
Health Care
Asset Management
& Custody Banks
Health Care
Equipment
BBT BB&T Corporation reports Financials Regional Banks
BDX Becton Dickinson reports Health Care
BRK.B Berkshire Hathaway reports Financials
BBY Best Buy Co. Inc. reports
Consumer
Discretionary
Health Care
Equipment
Multi-Sector
Holdings
Computer &
Electronics Retail
BIIB Biogen Inc. reports Health Care Biotechnology
BLK BlackRock reports Financials
Asset Management
& Custody Banks
HRB Block H&R reports Financials Consumer Finance
BA Boeing Company reports Industrials
BKNG
Booking Holdings
Inc
reports
BWA BorgWarner reports
Consumer
Discretionary
Consumer
Discretionary
Aerospace &
Defense
Internet & Direct
Marketing Retail
Auto Parts &
Equipment
BXP Boston Properties reports Real Estate Office REITs
BSX Boston Scientific reports Health Care
BHF
BMY
Brighthouse
Financial Inc
Bristol-Myers
Squibb
reports
reports
AVGO Broadcom reports
BF.B
CHRW
Brown-Forman
Corp.
C. H. Robinson
Worldwide
Financials
Health Care
Information
Technology
Health Care
Equipment
Life & Health
Insurance
Health Care
Distributors
Semiconductors
reports Consumer Staples Distillers & Vintners
reports
CA CA, Inc. reports
Industrials
Information
Technology
COG Cabot Oil & Gas reports Energy
CDNS
Cadence Design
Systems
reports
Information
Technology
CPB Campbell Soup reports Consumer Staples
COF
Capital One
Financial
CAH Cardinal Health Inc. reports Health Care
CBOE CBOE Holdings reports Financials
KMX Carmax Inc reports
Air Freight &
Logistics
Systems Software
Oil & Gas
Exploration &
Production
Application
Software
Packaged Foods &
Meats
reports Financials Consumer Finance
Consumer
Discretionary
Health Care
Distributors
Financial
Exchanges & Data
Specialty Stores
Tennessee
Arlington,
Virginia
Glendale,
California
Houston,
Texas
Broomfield,
Colorado
Charlotte,
North Carolina
New York,
New York
Deerfield,
Illinois
Winston-
Salem, North
Carolina
Franklin Lakes,
New Jersey
Omaha,
Nebraska
Richfield,
Minnesota
Weston,
Massachusetts
New York,
New York
Kansas City,
Missouri
Chicago,
Illinois
Norwalk,
Connecticut
Auburn Hills,
Michigan
Boston,
Massachusetts
Marlborough,
Massachusetts
Charlotte,
North Carolina
New York,
New York
San Jose,
California
Louisville,
Kentucky
Eden Prairie,
Minnesota
Islandia, New
York
Houston,
Texas
San Jose,
California
Camden, New
Jersey
Tysons Corner,
Virginia
2007-
01-10
1987-
12-31
1984-
10-31
1976-
06-30
1972-
09-30
1972-
09-30
2010-
02-16
1999-
06-29
2011-
04-04
1986-
11-30
2009-
11-06
2011-
12-19
2006-
04-03
1995-
02-24
2017-
08-08
2014-
05-08
1982-
10-31
2007-
03-02
1987-
07-31
2008-
06-23
2017-
09-18
0000915912
0000008818
0001701605
0000009389
0000070858
0001390777
0000010456
0000092230
0000010795
0001067983
0000764478
0000875045
0001364742
0000012659
0000012927
0001075531
0000908255
0001037540
0000885725
0001685040
0000014272
0001441634
0000014693
0001043277
0000356028
0000858470
0000813672
0000016732
0000927628
Dublin, Ohio 0000721371
Chicago,
Illinois
Richmond,
Virginia
2017-
03-01
2010-
06-28
0001374310
0001170010
Page 96 of 214

CCL Carnival Corp. reports
Consumer
Discretionary
CAT Caterpillar Inc. reports Industrials
CBG CBRE Group reports Real Estate
CBS CBS Corp. reports
Consumer
Discretionary
Hotels, Resorts &
Cruise Lines
Construction
Machinery & Heavy
Trucks
Real Estate
Services
Broadcasting
CELG Celgene Corp. reports Health Care Biotechnology
CNC
Centene
Corporation
reports
Health Care
Managed Health
Care
CNP CenterPoint Energy reports Utilities Multi-Utilities
CTL CenturyLink Inc reports
Telecommunication
Services
CERN Cerner reports Health Care
CF
SCHW
CHTR
CHK
CF Industries
Holdings Inc
Charles Schwab
Corporation
Charter
Communications
Chesapeake
Energy
reports
reports
reports
reports
Materials
Financials
Consumer
Discretionary
Energy
Integrated
Telecommunication
Services
Health Care
Technology
Fertilizers &
Agricultural
Chemicals
Investment Banking
& Brokerage
Cable & Satellite
Oil & Gas
Exploration &
Production
Integrated Oil &
Gas
Miami, Florida 0000815097
Peoria, Illinois 0000018230
Los Angeles,
California
New York,
New York
Summit, New
Jersey
St Louis,
Missouri
Houston,
Texas
Monroe,
Louisiana
North Kansas
City, Missouri
Deerfield,
Illinois
San Francisco,
California
Stamford,
Connecticut
Oklahoma City,
Oklahoma
2006-
11-10
1994-
09-01
2006-
11-06
2016-
03-30
1985-
07-31
2010-
04-30
2008-
08-27
2016-
09-08
0001138118
0000813828
0000816284
0001071739
0001130310
0000018926
0000804753
0001324404
0000316709
0001091667
0000895126
CVX Chevron Corp. reports Energy
San Ramon,
California
0000093410
CMG
Chipotle Mexican
Consumer
Denver, 2011-
reports
Restaurants
Grill
Discretionary
Colorado 04-28
0001058090
CB Chubb Limited reports Financials
Property & Casualty Zurich, 2010-
Insurance Switzerland 07-15
0000896159
CHD Church & Dwight reports Consumer Staples
Household Ewing, New 2015-
Products
Jersey 12-29
0000313927
CI CIGNA Corp. reports Health Care
Managed Health Philadelphia, 1976-
Care
Pennsylvania 06-30
0000701221
XEC Cimarex Energy reports Energy
Oil & Gas
Denver, 2014-
Exploration &
Colorado 06-21
Production
0001168054
CINF Cincinnati Financial reports Financials
Property & Casualty
Insurance
Fairfield, Ohio 0000020286
CTAS Cintas Corporation reports Industrials
Diversified Support
2001-
Mason, Ohio
Services
03-01
0000723254
CSCO Cisco Systems reports
Information Communications San Jose, 1993-
Technology
Equipment California 12-01
0000858877
C Citigroup Inc. reports Financials Diversified Banks
New York, 1988-
New York 05-31
0000831001
CFG
Citizens Financial
Providence, 2016-
reports Financials Regional Banks
Group
Rhode Island 01-29
0000759944
CTXS Citrix Systems reports
Fort
Information Internet Software &
Lauderdale,
Technology
Services
Florida
0000877890
CLX
The Clorox
Household Oakland, 1969-
reports Consumer Staples
Company
Products
California 03-31
0000021076
CME CME Group Inc. reports Financials
Financial
Chicago,
Exchanges & Data Illinois
0001156375
CMS CMS Energy reports Utilities Multi-Utilities
Jackson,
Michigan
0000811156
KO
Coca-Cola
Atlanta,
reports Consumer Staples Soft Drinks
Company (The)
Georgia
0000021344
CTSH
Cognizant
Information IT Consulting & Teaneck, New 2006-
Technology reports
Technology Other Services Jersey 11-17
Solutions
0001058290
CL Colgate-Palmolive reports Consumer Staples Household New York, 0000021665
Page 97 of 214

Products
New York
CMCSA Comcast Corp. reports
Consumer
Philadelphia, 2015-
Cable & Satellite
Discretionary
Pennsylvania 09-18
0001166691
CMA Comerica Inc. reports Financials Diversified Banks Dallas, Texas 0000028412
CAG Conagra Brands reports Consumer Staples
Packaged Foods & Chicago, 1983-
Meats
Illinois 08-31
0000023217
CXO Concho Resources reports Energy
Oil & Gas
2016-
Exploration & Midland, Texas
02-22
Production
0001358071
COP ConocoPhillips reports Energy
Oil & Gas
Exploration &
Production
Houston,
Texas
0001163165
ED
Consolidated
New York,
reports Utilities Electric Utilities
Edison
New York
0001047862
STZ
Constellation
Victor, New 2005-
reports Consumer Staples Distillers & Vintners
Brands
York 07-05
0000016918
COO
The Cooper
Health Care Pleasanton, 2016-
reports Health Care
Companies
Supplies
California 09-23
0000711404
GLW Corning Inc. reports
Information
Electronic Corning, New
Technology Components
York
0000024741
COST
Costco Wholesale
Hypermarkets & Issaquah, 1993-
reports Consumer Staples
Corp.
Super Centers Washington 10-01
0000909832
COTY Coty, Inc reports Consumer Staples Personal Products
New York, 2016-
New York 10-03
0001024305
CCI
Crown Castle
Houston, 2012-
reports Real Estate Specialized REITs
International Corp.
Texas 03-14
0001051470
CSRA CSRA Inc. reports
Information IT Consulting & Falls Church, 2015-
Technology Other Services Virginia 12-01
0001646383
CSX CSX Corp. reports Industrials Railroads
Jacksonville, 1967-
Florida 09-30
0000277948
CMI Cummins Inc. reports Industrials
Industrial Columbus, 1965-
Machinery
Indiana 03-31
0000026172
CVS CVS Health reports Consumer Staples Drug Retail
Woonsocket,
Rhode Island
0000064803
DHI D. R. Horton reports
Consumer
Fort Worth,
Homebuilding
Discretionary
Texas
0000882184
DHR Danaher Corp. reports Health Care
Health Care Washington,
Equipment
D.C.
0000313616
DRI Darden Restaurants reports
Consumer
Orlando,
Restaurants
Discretionary
Florida
0000940944
DVA DaVita Inc. reports Health Care
Health Care Denver, 2008-
Facilities
Colorado 07-31
0000927066
DE Deere & Co. reports Industrials
Agricultural & Farm
Machinery
Moline, Illinois 0000315189
DAL Delta Air Lines Inc. reports Industrials Airlines
Atlanta, 2013-
Georgia 09-11
0000027904
XRAY Dentsply Sirona reports Health Care
Health Care
York, 2008-
Supplies Pennsylvania 11-14
0000818479
DVN
Oil & Gas
Devon Energy
Oklahoma City, 2000-
reports Energy
Exploration &
Corp.
Oklahoma 08-30
Production
0001090012
DLR
Digital Realty Trust
San Francisco, 2016-
reports Real Estate Specialized REITs
Inc
California 05-18
0001297996
DFS
Discover Financial
Riverwoods, 2007-
reports Financials Consumer Finance
Services
Illinois 07-02
0001393612
DISCA
Discovery
Consumer
Silver Spring, 2010-
reports
Cable & Satellite
Communications-A
Discretionary
Maryland 03-01
0001437107
DISCK
Discovery
Consumer
Silver Spring, 2014-
reports
Cable & Satellite
Communications-C
Discretionary
Maryland 08-07
0001437107
DISH Dish Network reports
Consumer
Meridian, 2017-
Cable & Satellite
Discretionary
Colorado 03-13
0001001082
DG Dollar General reports
Consumer
General Goodlettsville, 2012-
Discretionary Merchandise Stores Tennessee 12-03
0000029534
DLTR Dollar Tree reports
Consumer
General Chesapeake, 2011-
Discretionary Merchandise Stores Virginia 12-19
0000935703
D Dominion Energy reports Utilities Electric Utilities
Richmond,
Virginia
0000715957
DOV Dover Corp. reports Industrials Industrial Downers 1985- 0000029905
Page 98 of 214

DWDP DowDuPont reports Materials
DPS
Dr Pepper Snapple
Group
Machinery Grove, Illinois 10-31
Diversified Midland,
Chemicals Michigan
reports Consumer Staples Soft Drinks Plano, Texas
2008-
10-07
Detroit,
Michigan
Indianapolis, 2017-
Indiana 07-26
Charlotte, 1976-
DTE DTE Energy Co. reports Utilities Multi-Utilities
DRE Duke Realty Corp reports Real Estate Industrial REITs
DUK Duke Energy reports Utilities Electric Utilities
DXC DXC Technology reports
Information
Technology
ETFC E*Trade reports Financials
EMN Eastman Chemical reports Materials
ETN Eaton Corporation reports Industrials
EBAY eBay Inc. reports
Information
Technology
ECL Ecolab Inc. reports Materials
IT Consulting &
Other Services
Investment Banking
& Brokerage
Diversified
Chemicals
Electrical
Components &
Equipment
Internet Software &
Services
Specialty
Chemicals
EIX Edison Int'l reports Utilities Electric Utilities
EW
Edwards
Lifesciences
reports
EA Electronic Arts reports
EMR
Emerson Electric
Company
reports
Health Care
Information
Technology
Industrials
Health Care
Equipment
Home
Entertainment
Software
Electrical
Components &
Equipment
ETR Entergy Corp. reports Utilities Electric Utilities
EVHC Envision Healthcare reports Health Care
EOG EOG Resources reports Energy
EQT EQT Corporation reports Energy
EFX Equifax Inc. reports Industrials
Health Care
Services
Oil & Gas
Exploration &
Production
Oil & Gas
Exploration &
Production
Research &
Consulting Services
EQIX Equinix reports Real Estate Specialized REITs
EQR Equity Residential reports Real Estate Residential REITs
ESS
Essex Property
Trust, Inc.
reports Real Estate Residential REITs
EL Estee Lauder Cos. reports Consumer Staples Personal Products
ES Eversource Energy reports Utilities Multi-Utilities
RE
Everest Re Group
Ltd.
reports Financials Reinsurance
EXC Exelon Corp. reports Utilities Multi-Utilities
EXPE Expedia Inc. reports
EXPD
Expeditors
International
reports
Consumer
Discretionary
Industrials
ESRX Express Scripts reports Health Care
EXR
Extra Space
Storage
Internet & Direct
Marketing Retail
Air Freight &
Logistics
Health Care
Distributors
reports Real Estate Specialized REITs
North Carolina
Tysons Corner,
Virginia
New York,
New York
Kingsport,
Tennessee
06-30
2017-
04-04
2004-
03-31
1994-
01-01
0001666700
0001418135
0000936340
0000783280
0001326160
0001688568
0001015780
0000915389
Dublin, Ireland 0001551182
San Jose,
California
St. Paul,
Minnesota
Rosemead,
California
Irvine,
California
Redwood City,
California
Ferguson,
Missouri
New Orleans,
Louisiana
Nashville,
Tennessee
Houston,
Texas
Pittsburgh,
Pennsylvania
Atlanta,
Georgia
Redwood City,
California
Chicago,
Illinois
Palo Alto,
California
New York,
New York
Springfield,
Massachusetts
Hamilton,
Bermuda
Chicago,
Illinois
Bellevue,
Washington
Seattle,
Washington
Cool Valley,
Missouri
Salt Lake City,
Utah
1989-
01-31
2011-
04-01
2002-
07-22
1965-
03-31
2016-
12-02
2000-
11-02
2008-
12-19
1997-
06-19
2015-
03-20
2001-
12-03
2014-
04-02
2006-
01-05
2017-
06-19
2007-
10-02
2007-
10-10
2003-
09-25
2016-
01-19
0001065088
0000031462
0000827052
0001099800
0000712515
0000032604
0000065984
0000895930
0000821189
0000033213
0000033185
0001101239
0000906107
0000920522
0001001250
0000072741
0001095073
0001109357
0001324424
0000746515
0001532063
0001289490
Page 99 of 214

XOM Exxon Mobil Corp. reports Energy
FFIV F5 Networks reports
FB Facebook, Inc. reports
Information
Technology
Information
Technology
Integrated Oil &
Gas
Communications
Equipment
Internet Software &
Services
FAST Fastenal Co reports Industrials Building Products
FRT
Federal Realty
Investment Trust
reports Real Estate Retail REITs
FDX FedEx Corporation reports Industrials
FIS
Fidelity National
Information
Services
reports
Information
Technology
Air Freight &
Logistics
Internet Software &
Services
Irving, Texas 0000034088
Seattle,
Washington
Menlo Park,
California
Winona,
Minnesota
Rockville,
Maryland
Memphis,
Tennessee
Jacksonville,
Florida
2010-
12-20
2013-
12-23
2009-
09-15
2016-
02-01
1980-
12-31
2006-
11-10
0001048695
0001326801
0000815556
0000034903
0001048911
0001136893
FITB Fifth Third Bancorp reports Financials Regional Banks
Cincinnati,
Ohio
0000035527
FE FirstEnergy Corp reports Utilities Electric Utilities Akron, Ohio 0001031296
FISV Fiserv Inc reports
Information Internet Software & Brookfield, 2001-
Technology
Services
Wisconsin 04-02
0000798354
FLIR FLIR Systems reports
Electronic
Information
Wilsonville, 2009-
Equipment &
Technology
Oregon 01-02
Instruments
0000354908
FLS
Flowserve
Corporation
reports
Industrials
FLR Fluor Corp. reports Industrials
FMC FMC Corporation reports Materials
FL Foot Locker Inc reports
F Ford Motor reports
Consumer
Discretionary
Consumer
Discretionary
FTV Fortive Corp reports Industrials
FBHS
Fortune Brands
Home & Security
BEN Franklin Resources reports Financials
FCX
Freeport-McMoRan
Inc.
GPS Gap Inc. reports
GRMN Garmin Ltd. reports
IT Gartner Inc reports
Industrial
Machinery
Construction &
Engineering
Fertilizers &
Agricultural
Chemicals
Apparel Retail
Automobile
Manufacturers
Industrial
Machinery
reports Industrials Building Products
Asset Management
& Custody Banks
reports Materials Copper
Consumer
Discretionary
Consumer
Discretionary
Information
Technology
GD General Dynamics reports Industrials
GE General Electric reports Industrials
GGP
General Growth
Properties Inc.
Apparel Retail
Consumer
Electronics
IT Consulting &
Other Services
Aerospace &
Defense
Industrial
Conglomerates
reports Real Estate Retail REITs
GIS General Mills reports Consumer Staples
GM General Motors reports
GPC Genuine Parts reports
Consumer
Discretionary
Consumer
Discretionary
Packaged Foods &
Meats
Automobile
Manufacturers
Specialty Stores
GILD Gilead Sciences reports Health Care Biotechnology
GPN
Global Payments
Inc.
reports
Information
Technology
Data Processing &
Outsourced
Services
Investment Banking
& Brokerage
Irving, Texas
Irving, Texas
Philadelphia,
Pennsylvania
New York,
New York
Dearborn,
Michigan
Everett,
Washington
Deerfield,
Illinois
San Mateo,
California
Phoenix,
Arizona
San Francisco,
California
Schaffhausen,
Switzerland
Stamford,
Connecticut
Falls Church,
Virginia
Boston,
Massachusetts
Chicago,
Illinois
Golden Valley,
Minnesota
Detroit,
Michigan
Atlanta,
Georgia
Foster City,
California
Atlanta,
Georgia
2008-
10-02
1980-
03-31
2009-
08-19
2016-
04-04
2016-
07-01
2016-
06-22
1986-
08-31
2012-
12-12
2017-
04-05
2013-
12-10
1969-
03-31
2013-
06-06
1973-
12-31
2004-
07-01
2016-
04-25
0000030625
0001124198
0000037785
0000850209
0000037996
0001659166
0001519751
0000038777
0000831259
0000039911
0001121788
0000749251
0000040533
0000040545
0001496048
0000040704
0001467858
0000040987
0000882095
0001123360
Goldman Sachs
New York, 2002-
GS
reports Financials
0000886982
Group
New York 07-22
GT Goodyear Tire & reports Consumer Tires & Rubber Akron, Ohio 0000042582
Page 100 of 214

Rubber
Discretionary
GWW
Grainger (W.W.)
Industrial Lake Forest, 1981-
reports Industrials
Inc.
Machinery
Illinois 06-30
0000277135
HAL Halliburton Co. reports Energy
Oil & Gas
Houston,
Equipment &
Texas
Services
0000045012
HBI Hanesbrands Inc reports
Apparel,
Winston-
Consumer
2015-
Accessories & Salem, North
Discretionary
03-20
Luxury Goods Carolina
0001359841
HOG Harley-Davidson reports
Consumer
Motorcycle Milwaukee,
Discretionary Manufacturers Wisconsin
0000793952
HRS Harris Corporation reports
Information Communications Melbourne, 2008-
Technology
Equipment
Florida 09-22
0000202058
HIG
Hartford Financial
Property & Casualty Hartford,
reports Financials
Svc.Gp.
Insurance Connecticut
0000874766
HAS Hasbro Inc. reports
Consumer
Pawtucket, 1984-
Leisure Products
Discretionary
Rhode Island 09-30
0000046080
HCA HCA Holdings reports Health Care
Health Care Nashville, 2015-
Facilities Tennessee 01-27
0000860730
HCP HCP Inc. reports Real Estate Health Care REITs
Long Beach, 2008-
California 03-31
0000765880
HP Helmerich & Payne reports Energy Oil & Gas Drilling
Tulsa, 2010-
Oklahoma 03-01
0000046765
HSIC Henry Schein reports Health Care
Health Care Melville, New 2015-
Distributors
York 03-17
0001000228
HSY
The Hershey
Packaged Foods & Hershey,
reports Consumer Staples
Company
Meats Pennsylvania
0000047111
HES Hess Corporation reports Energy
Integrated Oil & New York, 1984-
Gas
New York 05-31
0000004447
HPE
Technology
Hewlett Packard
Information
Palo Alto, 2015-
reports
Hardware, Storage
Enterprise
Technology
California 11-02
& Peripherals
0001645590
HLT
Hilton Worldwide
Consumer Hotels, Resorts & Tysons Corner, 2017-
reports
Holdings Inc
Discretionary Cruise Lines Virginia 06-19
0001585689
HOLX Hologic reports Health Care
Health Care Marlborough, 2016-
Equipment Massachusetts 03-30
0000859737
HD Home Depot reports
Consumer Home Improvement Atlanta, 1988-
Discretionary
Retail
Georgia 03-31
0000354950
HON Honeywell Int'l Inc. reports Industrials
Industrial Morristown, 1964-
Conglomerates New Jersey 03-31
0000773840
HRL
Hormel Foods
Packaged Foods & Austin, 2009-
reports Consumer Staples
Corp.
Meats
Minnesota 03-04
0000048465
HST
Host Hotels &
Hotel & Resort Bethesda, 2007-
reports Real Estate
Resorts
REITs
Maryland 03-20
0001070750
HPQ HP Inc. reports
Technology
Information
Palo Alto, 1974-
Hardware, Storage
Technology
California 12-31
& Peripherals
0000047217
HUM Humana Inc. reports Health Care
Managed Health Louisville,
Care
Kentucky
0000049071
HBAN
Huntington
Columbus,
reports Financials Regional Banks
Bancshares
Ohio
0000049196
HII
Huntington Ingalls
Aerospace & Newport News, 2018-
reports Industrials
Industries
Defense
Virginia 01-03
0001501585
IDXX IDEXX Laboratories reports Health Care
Health Care Westbrook, 2017-
Equipment
Maine 01-05
0000874716
INFO IHS Markit Ltd. reports Industrials
Research & London, United 2017-
Consulting Services Kingdom 06-02
0001598014
ITW Illinois Tool Works reports Industrials
Industrial Glenview, 1986-
Machinery
Illinois 02-28
0000049826
ILMN Illumina Inc reports Health Care
Life Sciences Tools San Diego, 2015-
& Services California 11-19
0001110803
IR Ingersoll-Rand PLC reports Industrials
Industrial
2010-
Dublin, Ireland
Machinery
11-17
0001466258
INTC Intel Corp. reports
Information
Santa Clara, 1976-
Semiconductors
Technology
California 12-31
0000050863
ICE
Intercontinental
Financial
Atlanta, 2007-
reports Financials
Exchange
Exchanges & Data Georgia 09-26
0001571949
IBM International reports Information IT Consulting & Armonk, New 0000051143
Page 101 of 214

Business Machines Technology Other Services York
INCY Incyte reports Health Care Biotechnology
Wilmington,
Delaware
IP International Paper reports Materials Paper Packaging
Memphis,
Tennessee
IPG Interpublic Group reports
Consumer
New York,
Advertising
Discretionary
New York
IFF
Intl Flavors &
Specialty New York,
reports Materials
Fragrances
Chemicals New York
INTU Intuit Inc. reports
Information Internet Software & Mountain View,
Technology
Services
California
ISRG
Intuitive Surgical
Health Care Sunnyvale,
reports Health Care
Inc.
Equipment California
IVZ Invesco Ltd. reports Financials
Asset Management Atlanta,
& Custody Banks Georgia
IPGP
Electronic
IPG Photonics
Information
Oxford,
reports
Manufacturing
Corp.
Technology
Massachusetts
Services
IQV IQVIA Holdings Inc. reports Health Care
Life Sciences Tools Durham, North
& Service
Carolina
IRM
Iron Mountain
reports Real Estate Specialized REITs
Boston,
JEC
JBHT
Incorporated
Jacobs Engineering
Group
J. B. Hunt Transport
Services
reports
Industrials
Construction &
Engineering
reports Industrials Trucking
SJM JM Smucker reports Consumer Staples
JNJ Johnson & Johnson reports Health Care
JCI
JPM
Johnson Controls
International
JPMorgan Chase &
Co.
JNPR Juniper Networks reports
KSU
Kansas City
Southern
Packaged Foods &
Meats
Health Care
Equipment
Massachusetts
Pasadena,
California
Lowell,
Arkansas
Orrville, Ohio
New
Brunswick,
New Jersey
reports Industrials Building Products Cork, Ireland
reports Financials Diversified Banks
Information
Technology
Communications
Equipment
reports Industrials Railroads
K Kellogg Co. reports Consumer Staples
Packaged Foods &
Meats
KEY KeyCorp reports Financials Regional Banks
KMB Kimberly-Clark reports Consumer Staples
Household
Products
KIM Kimco Realty reports Real Estate Retail REITs
KMI Kinder Morgan reports Energy
KLAC KLA-Tencor Corp. reports
KSS Kohl's Corp. reports
Information
Technology
Consumer
Discretionary
KHC Kraft Heinz Co reports Consumer Staples
Oil & Gas Storage
& Transportation
Semiconductor
Equipment
General
Merchandise Stores
Packaged Foods &
Meats
KR Kroger Co. reports Consumer Staples Food Retail
LB L Brands Inc. reports
LLL
LH
L-3
Communications
Holdings
Laboratory Corp. of
America Holding
reports
reports
LRCX Lam Research reports
Consumer
Discretionary
Industrials
Health Care
Information
Technology
Apparel Retail
Aerospace &
Defense
Health Care
Services
Semiconductor
Equipment
New York,
New York
Sunnyvale,
California
Kansas City,
Missouri
Battle Creek,
Michigan
Cleveland,
Ohio
2017-
02-28
1992-
10-01
1976-
03-31
2000-
12-05
2008-
06-02
2008-
08-21
2018-
03-08
2017-
08-29
2009-
01-06
2007-
10-26
2015-
07-01
2008-
11-06
1973-
06-30
2010-
08-27
1975-
06-30
2013-
05-24
1994-
03-01
0000879169
0000051434
0000051644
0000051253
0000896878
0001035267
0000914208
0001111928
0001478242
0001020569
0000052988
0000728535
0000091419
0000200406
0000833444
0000019617
0001043604
0000054480
0000055067
0000091576
Irving, Texas 0000055785
New Hyde
Park, New
York
Houston,
Texas
Milpitas,
California
Menomonee
Falls,
Wisconsin
Pittsburgh,
Pennsylvania
Cincinnati,
Ohio
Columbus,
Ohio
New York,
New York
Burlington,
North Carolina
Fremont,
California
2006-
04-04
2012-
05-25
2015-
07-06
1983-
09-30
2004-
11-01
2012-
06-29
0000879101
0001506307
0000319201
0000885639
0001637459
0000056873
0000701985
0001056239
0000920148
0000707549
Page 102 of 214

LEG Leggett & Platt reports
LEN Lennar Corp. reports
LUK
Leucadia National
Corp.
reports
Consumer
Discretionary
Consumer
Discretionary
Financials
Home Furnishings
Homebuilding
Multi-Sector
Holdings
LLY Lilly (Eli) & Co. reports Health Care Pharmaceuticals
LNC Lincoln National reports Financials Multi-line Insurance
LKQ LKQ Corporation reports
LMT
Lockheed Martin
Corp.
reports
Consumer
Discretionary
Industrials
Distributors
Aerospace &
Defense
L Loews Corp. reports Financials Multi-line Insurance
LOW Lowe's Cos. reports
Consumer
Discretionary
LYB LyondellBasell reports Materials
Home Improvement
Retail
Specialty
Chemicals
MTB M&T Bank Corp. reports Financials Regional Banks
MAC Macerich reports Real Estate Retail REITs
M Macy's Inc. reports
Consumer
Discretionary
MRO Marathon Oil Corp. reports Energy
MPC
Marathon
Petroleum
reports
MAR Marriott Int'l. reports
Energy
Consumer
Discretionary
Department Stores
Oil & Gas
Exploration &
Production
Oil & Gas Refining
& Marketing
Hotels, Resorts &
Cruise Lines
MMC Marsh & McLennan reports Financials Insurance Brokers
MLM
Martin Marietta
Materials
reports
Materials
Construction
Materials
MAS Masco Corp. reports Industrials Building Products
MA Mastercard Inc. reports
MAT Mattel Inc. reports
Information
Technology
Consumer
Discretionary
MKC McCormick & Co. reports Consumer Staples
MCD McDonald's Corp. reports
Consumer
Discretionary
MCK McKesson Corp. reports Health Care
MDT Medtronic plc reports Health Care
Internet Software &
Services
Leisure Products
Packaged Foods &
Meats
Restaurants
Health Care
Distributors
Health Care
Equipment
MRK Merck & Co. reports Health Care Pharmaceuticals
MET MetLife Inc. reports Financials
MTD Mettler Toledo reports Health Care
MGM
KORS
MGM Resorts
International
Michael Kors
Holdings
reports
reports
Consumer
Discretionary
Consumer
Discretionary
Life & Health
Insurance
Life Sciences Tools
& Services
Casinos & Gaming
Apparel,
Accessories &
Luxury Goods
Carthage,
Missouri
Miami, Florida
New York,
New York
Indianapolis,
Indiana
Radnor,
Pennsylvania
Chicago,
Illinois
Bethesda,
Maryland
New York,
New York
Mooresville,
North Carolina
Rotterdam,
Netherlands
Buffalo, New
York
Santa Monica,
California
Cincinnati,
Ohio
Houston,
Texas
Findlay, Ohio
Bethesda,
Maryland
New York,
New York
Raleigh, North
Carolina
Taylor,
Michigan
Harrison, New
York
El Segundo,
California
Sparks,
Maryland
Oak Brook,
Illinois
San Francisco,
California
Dublin, Ireland
Whitehouse
Station, New
Jersey
New York,
New York
Columbus,
Ohio
Paradise,
Nevada
New York,
New York
2005-
10-04
2007-
08-27
1970-
12-31
1976-
06-30
2016-
05-23
1984-
07-31
1984-
02-29
2012-
09-05
2013-
05-09
1991-
05-01
2011-
07-01
1987-
08-31
2014-
07-02
1981-
06-30
2008-
07-18
1982-
03-31
1970-
06-30
1986-
10-31
2016-
09-06
2017-
07-26
2013-
11-13
0000058492
0000920760
0000096223
0000059478
0000059558
0001065696
0000936468
0000060086
0000060667
0001489393
0000036270
0000912242
0000794367
0000101778
0001510295
0001048286
0000062709
0000916076
0000062996
0001141391
0000063276
0000063754
0000063908
0000927653
0000064670
0000310158
0001099219
0001037646
0000789570
0001530721
Microchip
Information
Chandler, 2007-
MCHP
reports
Semiconductors
0000827054
Technology
Technology
Arizona 09-07
Information
1994-
MU Micron Technology reports
Semiconductors Boise, Idaho
0000723125
Technology
09-27
MSFT Microsoft Corp. reports Information Systems Software Redmond, 1994- 0000789019
Page 103 of 214

Technology Washington 06-01
MAA
Mid-America
Memphis, 2016-
reports Real Estate Residential REITs
Apartments
Tennessee 12-02
MHK Mohawk Industries reports
Consumer
Amsterdam, 2013-
Home Furnishings
Discretionary
New York 12-23
TAP
Molson Coors
Denver, 1976-
reports Consumer Staples Brewers
Brewing Company
Colorado 06-30
MDLZ
Mondelez
Packaged Foods & Northfield, 2012-
reports Consumer Staples
International
Meats
Illinois 10-02
MON Monsanto Co. reports Materials
Fertilizers &
Creve Coeur, 2002-
Agricultural
Missouri 08-07
Chemicals
MNST Monster Beverage reports Consumer Staples Soft Drinks
Corona, 2012-
California 06-28
MCO Moody's Corp reports Financials
Financial New York,
MS Morgan Stanley reports Financials
MOS
MSI
The Mosaic
Company
Motorola Solutions
Inc.
reports
reports
Materials
Information
Technology
Exchanges & Data
Investment Banking
& Brokerage
Fertilizers &
Agricultural
Chemicals
Communications
Equipment
MYL Mylan N.V. reports Health Care Pharmaceuticals
NDAQ Nasdaq, Inc. reports Financials
NOV
National Oilwell
Varco Inc.
reports
Energy
Financial
Exchanges & Data
Oil & Gas
Equipment &
Services
NAVI Navient reports Financials Consumer Finance
NTAP NetApp reports
NFLX Netflix Inc. reports
NWL Newell Brands reports
NFX
NEM
Newfield
Exploration Co
Newmont Mining
Corporation
reports
NWSA News Corp. Class A reports
NWS News Corp. Class B reports
Information
Technology
Information
Technology
Consumer
Discretionary
Energy
Internet Software &
Services
Internet Software &
Services
Housewares &
Specialties
Oil & Gas
Exploration &
Production
reports Materials Gold
Consumer
Discretionary
Consumer
Discretionary
Publishing
Publishing
NEE NextEra Energy reports Utilities Multi-Utilities
NLSN Nielsen Holdings reports Industrials
NKE Nike reports
Consumer
Discretionary
Research &
Consulting Services
Apparel,
Accessories &
Luxury Goods
NI NiSource Inc. reports Utilities Multi-Utilities
NBL Noble Energy Inc reports Energy
JWN Nordstrom reports
NSC
NTRS
NOC
Norfolk Southern
Corp.
Northern Trust
Corp.
Northrop Grumman
Corp.
Consumer
Discretionary
Oil & Gas
Exploration &
Production
Department Stores
reports Industrials Railroads
reports
reports
Financials
Industrials
Asset Management
& Custody Banks
Aerospace &
Defense
New York
New York,
New York
Plymouth,
Minnesota
Schaumburg,
Illinois
Amsterdam,
Netherlands
New York,
New York
Houston,
Texas
Wilmington,
Delaware
Sunnyvale,
California
Los Gatos,
California
Sandy Springs,
Georgia
Houston,
Texas
Denver,
Colorado
New York,
New York
New York,
New York
Juno Beach,
Florida
New York,
New York
Washington
County,
Oregon
Merrillville,
Indiana
Houston,
Texas
Seattle,
Washington
Norfolk,
Virginia
Chicago,
Illinois
West Falls
Church,
Virginia
2011-
09-26
2004-
04-23
2008-
10-22
2005-
03-14
2014-
05-01
1999-
06-25
2010-
12-20
1989-
04-30
2010-
12-20
1969-
06-30
2013-
08-01
2015-
09-18
1976-
06-30
2013-
07-09
1988-
11-30
2007-
10-08
1986-
08-31
1985-
06-30
0000912595
0000851968
0000024545
0001103982
0001110783
0000865752
0001059556
0000895421
0001285785
0000068505
0000069499
0001120193
0001021860
0001593538
0001002047
0001065280
0000814453
0000912750
0001164727
0001564708
0001564708
0000753308
0001492633
0000320187
0001111711
0000072207
0000072333
0000702165
0000073124
0001133421
Page 104 of 214

NCLH
Norwegian Cruise
Line
reports
Consumer
Discretionary
NRG NRG Energy reports Utilities
Hotels, Resorts &
Cruise Lines
Independent Power
Producers &
Energy Traders
NUE Nucor Corp. reports Materials Steel
NVDA Nvidia Corporation reports
ORLY O'Reilly Automotive reports
OXY
Occidental
Petroleum
reports
OMC Omnicom Group reports
Information
Technology
Consumer
Discretionary
Energy
Consumer
Discretionary
OKE ONEOK reports Energy
ORCL Oracle Corp. reports
Information
Technology
PCAR PACCAR Inc. reports Industrials
PKG
Packaging
Corporation of
America
PH Parker-Hannifin reports Industrials
PDCO
Patterson
Companies
Semiconductors
Specialty Stores
Oil & Gas
Exploration &
Production
Advertising
Oil & Gas Storage
& Transportation
Application
Software
Construction
Machinery & Heavy
Trucks
reports Materials Paper Packaging
reports
PAYX Paychex Inc. reports
PYPL PayPal reports
Health Care
Information
Technology
Information
Technology
PNR Pentair Ltd. reports Industrials
PBCT
People's United
Financial
reports
Financials
Industrial
Machinery
Health Care
Supplies
Internet Software &
Services
Data Processing &
Outsourced
Services
Industrial
Machinery
Thrifts & Mortgage
Finance
PEP PepsiCo Inc. reports Consumer Staples Soft Drinks
PKI PerkinElmer reports Health Care
Health Care
Equipment
Miami, Florida
Princeton, New
Jersey
Charlotte,
North Carolina
Santa Clara,
California
Springfield,
Missouri
Los Angeles,
California
New York,
New York
Tulsa,
Oklahoma
Redwood
Shores,
California
Bellevue,
Washington
Lake Forest,
Illinois
Cleveland,
Ohio
St. Paul,
Minnesota
Penfield, New
York
San Jose,
California
Worsley, UK
Bridgeport,
Connecticut
Purchase, New
York
Waltham,
Massachusetts
PRGO Perrigo reports Health Care Pharmaceuticals Dublin, Ireland
PFE Pfizer Inc. reports Health Care Pharmaceuticals
PCG PG&E Corp. reports Utilities Multi-Utilities
PM
Philip Morris
International
PSX Phillips 66 reports Energy
PNW
PXD
PNC
RL
Pinnacle West
Capital
Pioneer Natural
Resources
PNC Financial
Services
Polo Ralph Lauren
Corp.
reports Consumer Staples Tobacco
Oil & Gas Refining
& Marketing
reports Utilities Multi-Utilities
reports
Energy
Oil & Gas
Exploration &
Production
reports Financials Regional Banks
reports
Consumer
Discretionary
PPG PPG Industries reports Materials
Apparel,
Accessories &
Luxury Goods
Specialty
Chemicals
PPL PPL Corp. reports Utilities Electric Utilities
New York,
New York
San Francisco,
California
New York,
New York
Houston,
Texas
Phoenix,
Arizona
Irving, Texas
Pittsburgh,
Pennsylvania
New York,
New York
Pittsburgh,
Pennsylvania
Allentown,
Pennsylvania
2017-
10-13
2010-
01-29
1985-
04-30
2001-
11-30
2009-
03-27
1982-
12-31
2010-
03-15
1989-
08-31
1980-
12-31
2017-
07-26
1985-
11-30
2005-
10-11
2015-
07-20
2012-
10-01
2008-
11-13
1985-
05-31
2011-
12-19
2008-
03-31
2012-
05-01
2008-
09-24
1988-
04-30
2007-
02-02
0001513761
0001013871
0000073309
0001045810
0000898173
0000797468
0000029989
0001039684
0001341439
0000075362
0000075677
0000076334
0000891024
0000723531
0001633917
0000077360
0001378946
0000077476
0000031791
0001585364
0000078003
0001004980
0001413329
0001534701
0000764622
0001038357
0000713676
0001037038
0000079879
0000922224
Page 105 of 214

PX Praxair Inc. reports Materials Industrial Gases
PFG
Principal Financial
Group
reports
Financials
Life & Health
Insurance
PG Procter & Gamble reports Consumer Staples Personal Products
PGR Progressive Corp. reports Financials
Property & Casualty
Insurance
PLD Prologis reports Real Estate Industrial REITs
PRU Prudential Financial reports Financials
PEG
Public Serv.
Enterprise Inc.
Life & Health
Insurance
reports Utilities Electric Utilities
PSA Public Storage reports Real Estate Specialized REITs
PHM Pulte Homes Inc. reports
PVH PVH Corp. reports
QRVO Qorvo reports
PWR
Quanta Services
Inc.
reports
QCOM QUALCOMM Inc. reports
Consumer
Discretionary
Consumer
Discretionary
Information
Technology
Industrials
Information
Technology
DGX Quest Diagnostics reports Health Care
RRC
RJF
Range Resources
Corp.
Raymond James
Financial Inc.
reports
reports
Energy
Financials
RTN Raytheon Co. reports Industrials
O
Realty Income
Corporation
RHT Red Hat Inc. reports
REG
Regency Centers
Corporation
Homebuilding
Apparel,
Accessories &
Luxury Goods
Semiconductors
Construction &
Engineering
Semiconductors
Health Care
Services
Oil & Gas
Exploration &
Production
Investment Banking
& Brokerage
Aerospace &
Defense
reports Real Estate Retail REITs
Information
Technology
Systems Software
reports Real Estate Retail REITs
REGN Regeneron reports Health Care Biotechnology
RF
RSG
Regions Financial
Corp.
Republic Services
Inc
reports Financials Regional Banks
reports
Industrials
RMD ResMed reports Health Care
RHI
ROK
Robert Half
International
Rockwell
Automation Inc.
reports
reports
Industrials
Industrials
COL Rockwell Collins reports Industrials
ROP Roper Technologies reports Industrials
ROST Ross Stores reports
RCL
Royal Caribbean
Cruises Ltd
reports
CRM Salesforce.com reports
SBAC
SBA
Communications
Consumer
Discretionary
Consumer
Discretionary
Information
Technology
Environmental &
Facilities Services
Health Care
Equipment
Human Resource &
Employment
Services
Electrical
Components &
Equipment
Aerospace &
Defense
Industrial
Conglomerates
Apparel Retail
Hotels, Resorts &
Cruise Lines
Internet Software &
Services
reports Real Estate Specialized REITs
Danbury,
Connecticut
Des Moines,
Iowa
Cincinnati,
Ohio
Mayfield
Village, Ohio
San Francisco,
California
Newark, New
Jersey
Newark, New
Jersey
Glendale,
California
Atlanta,
Georgia
New York,
New York
Greensboro,
North Carolina
Houston,
Texas
San Diego,
California
Madison, New
Jersey
Fort Worth,
Texas
St. Petersburg,
Florida
Waltham,
Massachusetts
San Diego,
California
Raleigh, North
Carolina
Jacksonville,
Florida
Tarrytown,
New York
Birmingham,
Alabama
Phoenix,
Arizona
San Diego,
California
Menlo Park,
California
Milwaukee,
Wisconsin
Cedar Rapids,
Iowa
Sarasota,
Florida
Pleasanton,
California
Miami, Florida
San Francisco,
California
Boca Raton,
Florida
1992-
07-01
2002-
07-22
1997-
08-04
2003-
07-17
2002-
07-22
2005-
08-19
1984-
04-30
2013-
02-15
2015-
06-11
2009-
07-01
2002-
12-12
2007-
12-21
2017-
03-20
2015-
04-07
2009-
07-27
2017-
03-02
2013-
05-01
1998-
08-28
2008-
12-05
2017-
07-26
2000-
12-05
2001-
07-02
2009-
12-23
2009-
12-21
2014-
12-05
2008-
09-15
2017-
09-01
0000884905
0001126328
0000080424
0000080661
0001045609
0001137774
0000788784
0001393311
0000822416
0000078239
0001604778
0001050915
0000804328
0001022079
0000315852
0000720005
0001047122
0000726728
0001087423
0000910606
0000872589
0001281761
0001060391
0000943819
0000315213
0001024478
0001137411
0000882835
0000745732
0000884887
0001108524
0001034054
Page 106 of 214

SCG SCANA Corp reports Utilities Multi-Utilities
SLB Schlumberger Ltd. reports Energy
STX
Seagate
Technology
reports
Information
Technology
Oil & Gas
Equipment &
Services
Technology
Hardware, Storage
& Peripherals
SEE Sealed Air reports Materials Paper Packaging
SRE Sempra Energy reports Utilities Multi-Utilities
SHW Sherwin-Williams reports Materials
SIG Signet Jewelers reports
SPG
Simon Property
Group Inc
SWKS Skyworks Solutions reports
Consumer
Discretionary
Specialty
Chemicals
Specialty Stores
reports Real Estate Retail REITs
Information
Technology
Semiconductors
SLG SL Green Realty reports Real Estate Office REITs
SNA Snap-On Inc. reports
Consumer
Discretionary
Household
Appliances
SO Southern Co. reports Utilities Electric Utilities
Cayce, South
Carolina
Curaçao,
Kingdom of the
Netherlands
Dublin, Ireland
Elmwood Park,
New Jersey
San Diego,
California
Cleveland,
Ohio
Hamilton,
Bermuda
Indianapolis,
Indiana
Woburn,
Massachusetts
New York,
New York
Kenosha,
Wisconsin
Atlanta,
Georgia
LUV Southwest Airlines reports Industrials Airlines Dallas, Texas
SPGI S&P Global, Inc. reports Financials
SWK
Stanley Black &
Decker
reports
SBUX Starbucks Corp. reports
Consumer
Discretionary
Consumer
Discretionary
STT State Street Corp. reports Financials
SRCL Stericycle Inc reports Industrials
SYK Stryker Corp. reports Health Care
Financial
Exchanges & Data
Household
Appliances
Restaurants
Asset Management
& Custody Banks
Environmental &
Facilities Services
Health Care
Equipment
STI SunTrust Banks reports Financials Regional Banks
SYMC Symantec Corp. reports
SYF
Synchrony
Financial
SNPS Synopsys Inc. reports
Information
Technology
Application
Software
reports Financials Consumer Finance
Information
Technology
Application
Software
SYY Sysco Corp. reports Consumer Staples Food Distributors
TROW
T. Rowe Price
Group
reports
TPR Tapestry, Inc. reports
TGT Target Corp. reports
TEL TE Connectivity Ltd. reports
Financials
Consumer
Discretionary
Consumer
Discretionary
Information
Technology
FTI TechnipFMC reports Energy
TXN Texas Instruments reports
Information
Technology
Asset Management
& Custody Banks
Apparel,
Accessories &
Luxury Goods
General
Merchandise Stores
Electronic
Manufacturing
Services
Oil & Gas
Equipment &
Services
New York,
New York
New Britain,
Connecticut
Seattle,
Washington
Boston,
Massachusetts
Lake Forest,
Illinois
Kalamazoo,
Michigan
Atlanta,
Georgia
Mountain View,
California
Stamford,
Connecticut
Mountain View,
California
Houston,
Texas
Baltimore,
Maryland
New York,
New York
Minneapolis,
Minnesota
Schaffhausen,
Switzerland
London, United
Kingdom
2009-
01-02
1965-
03-31
2012-
07-02
1964-
06-30
2015-
07-29
2002-
06-26
2015-
03-12
2015-
03-20
1982-
09-30
1994-
07-01
1982-
09-30
2008-
11-19
2000-
12-12
1988-
05-31
2003-
03-25
2015-
11-18
2017-
03-16
1986-
12-31
1976-
12-31
2011-
10-17
2009-
06-05
0000754737
0000087347
0001137789
0001012100
0001032208
0000089800
0000832988
0001063761
0000004127
0001040971
0000091440
0000092122
0000092380
0000064040
0000093556
0000829224
0000093751
0000861878
0000310764
0000750556
0000849399
0001601712
0000883241
0000096021
0001113169
0001116132
0000027419
0001385157
0001681459
Semiconductors Dallas, Texas 0000097476
Aerospace & Providence, 1978-
TXT Textron Inc. reports Industrials
0000217346
Defense Rhode Island 12-31
TMO Thermo Fisher reports Health Care Health Care Waltham, 0000097745
Page 107 of 214

Scientific Equipment Massachusetts
Apparel,
Consumer
New York,
TIF Tiffany & Co. reports
Accessories &
Discretionary
New York
Luxury Goods
Consumer
New York,
TWX Time Warner Inc. reports
Cable & Satellite
TJX
TJX Companies
Inc.
reports
Discretionary
Consumer
Discretionary
TMK Torchmark Corp. reports Financials
TSS
TSCO
Total System
Services
Tractor Supply
Company
reports
reports
Information
Technology
Consumer
Discretionary
TDG TransDigm Group reports Industrials
TRV
The Travelers
Companies Inc.
reports
TRIP TripAdvisor reports
FOXA
FOX
Twenty-First
Century Fox Class
A
Twenty-First
Century Fox Class
B
reports
reports
Financials
Consumer
Discretionary
Consumer
Discretionary
Consumer
Discretionary
TSN Tyson Foods reports Consumer Staples
Apparel Retail
Life & Health
Insurance
Internet Software &
Services
Specialty Stores
Aerospace &
Defense
Property & Casualty
Insurance
Internet & Direct
Marketing Retail
Publishing
Publishing
Packaged Foods &
Meats
UDR UDR Inc reports Real Estate Residential REITs
ULTA Ulta Beauty reports
Consumer
Discretionary
Specialty Stores
USB U.S. Bancorp reports Financials Diversified Banks
UAA
UA
Under Armour
Class A
Under Armour
Class C
reports
reports
Consumer
Discretionary
Consumer
Discretionary
Apparel,
Accessories &
Luxury Goods
Apparel,
Accessories &
Luxury Goods
New York
Framingham,
Massachusetts
McKinney,
Texas
Columbus,
Georgia
Brentwood,
Tennessee
Cleveland,
Ohio
New York,
New York
Newton,
Massachusetts
New York,
New York
New York,
New York
Springdale,
Arkansas
Highlands
Ranch,
Colorado
Bolingbrook,
Illinois
Minneapolis,
Minnesota
Baltimore,
Maryland
Baltimore,
Maryland
2000-
06-21
1985-
09-30
1989-
04-30
2008-
01-02
2014-
01-24
2016-
06-03
2002-
08-21
2011-
12-21
2013-
07-01
2015-
09-18
2016-
03-07
2016-
04-18
2016-
03-25
2014-
05-01
0000098246
0001105705
0000109198
0000320335
0000721683
0000916365
0001260221
0000086312
0001526520
0001308161
0001308161
0000100493
0000074208
0001403568
0000036104
0001336917
0001336917
UNP Union Pacific reports Industrials Railroads
Omaha,
Nebraska
0000100885
UAL
United Continental
Chicago, 2015-
reports Industrials Airlines
Holdings
Illinois 09-03
0000100517
UNH
United Health
Managed Health Minnetonka, 1994-
reports Health Care
Group Inc.
Care
Minnesota 07-01
0000731766
UPS
United Parcel
Air Freight & Atlanta, 2002-
reports Industrials
Service
Logistics
Georgia 07-22
0001090727
URI United Rentals, Inc. reports Industrials
Trading Companies Stamford, 2014-
& Distributors Connecticut 09-20
0001067701
UTX
United
Aerospace & Hartford,
reports Industrials
Technologies
Defense Connecticut
0000101829
UHS
King of
Universal Health
Health Care
2014-
reports Health Care
Prussia,
Services, Inc.
Facilities
09-20
Pennsylvania
0000352915
UNM Unum Group reports Financials
Life & Health Chattanooga, 1994-
Insurance Tennessee 03-01
0000005513
VFC V.F. Corp. reports
Apparel,
Consumer
Greensboro, 1979-
Accessories &
Discretionary
North Carolina 06-30
Luxury Goods
0000103379
VLO Valero Energy reports Energy
Oil & Gas Refining San Antonio,
& Marketing
Texas
0001035002
VAR
Varian Medical
Health Care Palo Alto, 2007-
reports Health Care
Systems
Equipment California 02-12
0000203527
VTR Ventas Inc reports Real Estate Health Care REITs
Chicago, 2009-
Illinois 03-04
0000740260
VRSN Verisign Inc. reports Information Internet Software & Dulles, Virginia 2006- 0001014473
Page 108 of 214

Technology Services 02-01
Research & Jersey City, 2015-
VRSK Verisk Analytics reports Industrials
Consulting Services New Jersey 10-08
Integrated
Verizon
Telecommunication
New York, 1983-
VZ
reports
Telecommunication
Communications
Services
New York 11-30
Services
VRTX
Vertex
Pharmaceuticals
Inc
VIAB Viacom Inc. reports
V Visa Inc. reports
VNO
Vornado Realty
Trust
reports Health Care Biotechnology
Consumer
Discretionary
Information
Technology
VMC Vulcan Materials reports Materials
Cable & Satellite
Internet Software &
Services
reports Real Estate Office REITs
WMT Wal-Mart Stores reports Consumer Staples
WBA
DIS
WM
Walgreens Boots
Alliance
The Walt Disney
Company
Waste Management
Inc.
Construction
Materials
Hypermarkets &
Super Centers
reports Consumer Staples Drug Retail
reports
reports
Consumer
Discretionary
Industrials
WAT Waters Corporation reports Health Care
WEC
Wec Energy Group
Inc
Cable & Satellite
Environmental &
Facilities Services
Health Care
Distributors
reports Utilities Electric Utilities
WFC Wells Fargo reports Financials Diversified Banks
Cambridge,
Massachusetts
New York,
New York
San Francisco,
California
New York,
New York
Birmingham,
Alabama
Bentonville,
Arkansas
Deerfield,
Illinois
Burbank,
California
Houston,
Texas
Milford,
Massachusetts
Milwaukee,
Wisconsin
San Francisco,
California
WELL Welltower Inc. reports Real Estate Health Care REITs Toledo, Ohio
WDC Western Digital reports
WU Western Union Co reports
WRK
WY
WestRock
Company
Weyerhaeuser
Corp.
WHR Whirlpool Corp. reports
Information
Technology
Information
Technology
Technology
Hardware, Storage
& Peripherals
Internet Software &
Services
reports Materials Paper Packaging
reports Real Estate Specialized REITs
Consumer
Discretionary
WMB Williams Cos. reports Energy
WLTW
WYN
Willis Towers
Watson
Wyndham
Worldwide
Household
Appliances
Oil & Gas Storage
& Transportation
reports Financials Insurance Brokers
reports
WYNN Wynn Resorts Ltd reports
Consumer
Discretionary
Consumer
Discretionary
Hotels, Resorts &
Cruise Lines
Casinos & Gaming
XEL Xcel Energy Inc reports Utilities Multi-Utilities
XRX Xerox Corp. reports
Information
Technology
Technology
Hardware, Storage
& Peripherals
Irvine,
California
Englewood,
Colorado
Richmond,
Virginia
Federal Way,
Washington
Benton Harbor,
Michigan
Tulsa,
Oklahoma
London, United
Kingdom
Parsippany,
New Jersey
Paradise,
Nevada
Minneapolis,
Minnesota
Norwalk,
Connecticut
2013-
09-23
2009-
12-21
1999-
06-30
1982-
08-31
1979-
12-31
1976-
06-30
2008-
10-31
1976-
06-30
2009-
01-30
2009-
07-01
1975-
03-31
2016-
01-05
2008-
11-14
0001442145
0000732712
0000875320
0001339947
0001403161
0000899689
0001396009
0000104169
0001618921
0001001039
0000823768
0001000697
0000783325
0000072971
0000766704
0000106040
0001365135
0001636023
0000106535
0000106640
0000107263
0001140536
0001361658
0001174922
0000072903
0000108772
XLNX Xilinx Inc reports
Information
San Jose, 1999-
Semiconductors
Technology
California 11-08
0000743988
XL XL Capital reports Financials
Property & Casualty Hamilton,
Insurance Bermuda
0000875159
XYL Xylem Inc. reports Industrials
Industrial White Plains, 2011-
Machinery New York 11-01
0001524472
YUM Yum! Brands Inc reports
Consumer
Louisville, 1997-
Restaurants
Discretionary
Kentucky 10-06
0001041061
ZBH
Zimmer Biomet
Health Care Warsaw, 2001-
reports Health Care
Holdings
Equipment
Indiana 08-07
0001136869
ZION Zions Bancorp reports Financials Regional Banks Salt Lake City, 0000109380
Page 109 of 214

ZTS Zoetis reports Health Care Pharmaceuticals
Utah
Florham Park,
New Jersey
2013-
06-21
0001555280
Recent Changes to The List of S&P 500 Components
S&P Dow Jones Indices updates the components of the S&P 500 periodically, typically
in response to acquisitions, or to keep the index up to date as various companies grow
or shrink in value. Between January 1, 1963 and December 31, 2014, 1,186 index
components were replaced by other components.
Added
Removed
Date Ticker Security Ticker Security Reason
March 8,
Scripps Networks Discovery Communications acquired
IPGP IPG Photonics Corp. SNI
2018
Interactive
SNI.
January 3,
Huntington Ingalls
HII
2018
Industries
BCR CR Bard Becton Dickinson acquired BCR.
October 13,
Norwegian Cruise
Level 3
NCLH
LVLT
2017
Line
Communications
CenturyLink Inc acquired LVLT.
September
Cadence Design
CDNS
18, 2017
Systems
SPLS Staples Inc. Sycamore Partners acquired Staples.
September
The Dow Chemical Company acquired
SBAC SBA Communications DD DuPont
1, 2017
DuPont.
August 29,
Amazon.com Inc. acquired Whole
Q QuintilesIMS WFM Whole Foods Market
2017
Foods Market.
August 8,
2017
AN AutoNation Inc BHF replaced AN
August 7,
Brighthouse Financial
BHF
2017
Inc
MET spun off BHF
DRE Duke Realty Corp RIG Transocean
AOS A.O. Smith BBBY Bed Bath & Beyond
Packaging
Market capitalization changes.
PKG Corporation of MUR Murphy Oil
July 26, 2017
America
RMD ResMed MNK Mallinckrodt
MGM
MGM Resorts
British American Tobacco plc (NYSE
RAI Reynolds American
International
MKT:BTI) acquired Reynolds American.
VZ acquired YHOO operations;
Hilton Worldwide
HLT
YHOO Yahoo! Inc.
remainder of YHOO converted to
Holdings Inc.
closed-end company known as Altaba.
June 19,
ALGN Align Technology Inc. TDC Teradata Corp.
2017
Market capitalization changes.
ANSS ANSYS Inc. R Ryder Systems Inc.
RE Everest Re Group MJN Mead Johnson
Reckitt Benckiser Group plc acquired
Mead Johnson Nutrition.
June 2, 2017 INFO IHS Markit Ltd. TGNA Tegna, Inc. TGNA spins off Cars.com
April 5, 2017 IT Gartner Inc DNB Dun & Bradstreet IT acquiring CEB
April 4, 2017 DXC DXC Technology SWN Southwestern Energy
HPE spins off Everett Inc., merged with
CSC to form DXC
AMD
Advanced Micro
Devices
URBN Urban Outfitters
March 20,
Raymond James
Frontier
RJF
FTR
2017
Financial
Communications
Market capitalization changes.
ARE
Alexandria Real
Estate Equities
FSLR First Solar
March 16,
Samsung Electronics Co. Ltd. acquired
SNPS Synopsys HAR Harman Int'l Industries
2017
Harman International Industries.
S&P 500 constituent Analog Devices
March 13,
DISH Dish Network LLTC Linear Technology Inc. (NASD:ADI) acquired Linear
2017
Technology.
March 2,
Regency Centers
REG
2017
Corporation
ENDP Endo International plc REG acquires EQY
March 1, CBOE CBOE Holdings PBI Pitney Bowes Inc CBOE acquires BATS
Page 110 of 214

2017
February 28,
2017
January 5,
2017
December 2,
2016
September
30, 2016
September
22, 2016
September
8, 2016
September
6, 2016
INCY Incyte SE Spectra Energy Corp SE acquired by ENB
IDXX IDEXX Laboratories STJ St. Jude Medical
S&P 100 & 500 constituent Abbott
Laboratories (NYSE:ABT) acquired St.
Jude Medical.
MAA
Mid-America
OI Owens-Illinois
Apartments
Market capitalization changes
EVHC Envision Healthcare LM Legg Mason
COTY Coty, Inc. DO
Diamond Offshore
Drilling
COTY replaces DO
COO
The Cooper
Starwood Hotels &
HOT
Companies
Resorts Worldwide Inc
MAR acquires HOT
CHTR
Charter
Communications
EMC EMC Corporation Dell acquires EMC
MTD Mettler Toledo JCI Johnson Controls Inc
TYC acquires JCI (and becomes new
JCI).
Columbia Pipeline
Group
CPGX acquired by TRP
July 5, 2016 FTV Fortive Corp CPGX
July 1, 2016 LNT Alliant Energy Corp GAS AGL Resources GAS acquired by SO
July 1, 2016 ALB Albemarle Corp TE TECO Energy TE acquired by EMA
June 22,
Fortune Brands Home
FBHS
2016
& Security
CVC Cablevision Systems CVC acquired by Altice NV
June 20,
Under Armour Class
Under Armour distribution of second
UA-C
2016
C
class of stock
June 3, 2016 TDG TransDigm Group BXLT Baxalta Inc SHPG acquiring BXLT
May 31, 2016 AJG
Arthur J. Gallagher &
Co.
CCE Coca-Cola Enterprises CCE merging with European bottlers
May 23, 2016 LKQ LKQ Corporation ARG Airgas Inc ARG acquired by Air Liquide
May 18, 2016 DLR Digital Realty Trust TWC Time Warner Cable TWC acquired by CHTR
May 13, 2016 ALK Alaska Air Group Inc SNDK SanDisk Corporation SNDK acquired by WDC
May 3, 2016 AYI Acuity Brands Inc ADT ADT Corp ADT acquired by APO
April 25,
Global Payments is acquiring Heartland
GPN Global Payments Inc. GME GameStop
2016
Payment Systems
April 18,
Ulta Salon, Cosmetics
ULTA
2016
& Fragrance Inc
THC Tenet Healthcare Ulta replaces Tenet
April 4, 2016 FL Foot Locker Inc CAM Cameron International Schlumberger acquired Cameron
March 30,
2016
HOLX Hologic Inc POM Pepco Holdings Inc Exelon Corp acquired Pepco
March 30,
2016
CNC Centene Corporation ESV Ensco plc Centene acquired Health Net
March 7,
JAB Holding Company acquired Keurig
UDR UDR Inc GMCR Keurig Green Mountain
2016
Green Mountain
March 4,
American Water
AWK
2016
Works Company Inc
CNX Consol Energy AWK replaces CNX
February 22,
2016
CXO Concho Resources PCL Plum Creek Timber PCL taken over by WY
February 1,
Citizens Financial
Precision Castparts
CFG
PCP
2016
Group
Corp.
CFG replaces PCP
February 1,
Federal Realty
FRT
2016
Investment Trust
BRCM Broadcom Corporation FRT replaces BRCM
January 19,
2016
EXR Extra Space Storage CB Chubb Corp EXR replaces CB
January 5,
WSH merges with TW (and renames to
WLTW Willis Towers Watson FOSL Fossil Group
2016
WLTW)
December
29, 2015
CHD Church & Dwight ALTR Altera Corp ALTR taken over by INTC
December
15, 2015
CMCSK Comcast K Corp CMCSK shares no longer listed
December 1,
Computer Sciences
CSRA CSRA Inc CSC
2015
Corp
CSC spins off CSRA
November
Sigma-Aldrich acquired by Merck KGaA
ILMN Illumina Inc SIAL Sigma-Aldrich Corp
19, 2015
(MKGAY)
November
18, 2015
SYF Synchrony Financial GNW Genworth Financial GE spinning off Synchrony Financial
November 2,
Hewlett Packard
Hudson City Bancorp
HPE
HCBK
2015
Enterprise
Inc
HPQ spins off HPE
October 7, VRSK Verisk Analytics JOY Joy Global Market capitalization change.
Page 111 of 214

2015
CMCSK
Comcast Class K
Special
September
Twenty-First Century
FOX
18, 2015
Fox Class B
Share class methodology change
NWS
News Corporation
Class B
September
United Continental
UAL
2, 2015
Holdings
HSP Hospira Inc Hospira taken over
August 28,
2015
ATVI Activision Blizzard PLL Pall Corp Pall taken over
July 29, 2015 SIG Signet Jewelers DTV DirecTV DirectTV acquired by AT&T
July 20, 2015 PYPL PayPal NE Noble Corp PayPal Spun off by eBay
July 8, 2015 AAP Advance Auto Parts FDO
Family Dollar Stores
Inc.
Family Dollar Acquired.
July 6, 2015 KHC Kraft Heinz KRFT Kraft Foods Group Kraft merger with Heinz.
July 2, 2015 CPGX
Columbia Pipeline
Allegheny
ATI
Group
Technologies
Spin off of Columbia Pipeline.
July 1, 2015 JBHT J. B. Hunt TEG
Integrys Energy Group
Inc.
Integris taken over.
July 1, 2015 BXLT Baxalta QEP QEP Resources Baxalta spun off by Baxter.
June 11,
2015
QRVO Qorvo LO Lorillard Inc. Lorillard Inc. gets acquired.
April 7, 2015 O
Realty Income
Windstream Holdings
WIN
Corporation
Inc
Market capitalization change.
March 23,
American Airlines
Allergan acquired by Actavis plc (and
AAL
AGN Allergan, Inc
2015
Group
changed name to Allergan, pl.
EQIX Equinix DNR Denbury Resources
March 23,
SLG SL Green Realty NBR Nabors Industries
2015
HBI Hanesbrands AVP Avon Products
Market Capitalization Changes.
March 18,
Carefusion acquired by Becton
HSIC Henry Schein CFN Carefusion
2015
Dickinson
March 12,
2015
January 27,
2015
January 27,
2015
December 5,
2014
November 5,
2014
September
20, 2014
August 18,
2014
August 6,
2014
July 2, 2014
July 1, 2014
SWKS
Skyworks Solutions
Inc.
PETM
PetSmart Inc.
HCA HCA Holdings SWY Safeway Inc
PetSmart acquired by private equity
consortium
Safeway acquired by private equity
consortium
ENDP Endo International COV Covidien Covidien acquired by Medtronic
RCL
Royal Caribbean
Cruises
BMS Bemis Company Market cap changes
LVLT
Level 3
Communications
JBL Jabil Circuit Market cap changes
URI United Rentals BTU Peabody Energy
UHS
Universal Health
Market cap changes
GHC Graham Holdings
Services
MNK Mallinckrodt Plc RDC Rowan Companies plc Market cap changes
DISCK
MLM
AMG
Discovery
Communications
Martin Marietta
Materials
Affiliated Managers
Group
X
United States Steel
Corporation
Class C share distribution
Market capitalization changes
FRX Forest Laboratories Actavis acquires Forest Laboratories
June 20,
International Game
XEC Cimarex Energy IGT
2014
Technology
Market capitalization changes
May 8, 2014 AVGO Avago Technologies LSI LSI Corporation Avago acquires LSI
May 1, 2014 UA Under Armour BEAM Beam Inc. Beam acquired by Suntory
May 1, 2014 NAVI Navient SLM SLM Corporation Navient Spun off from SLM
April 3, 2014 GOOGL Google Inc. Google Class C share distribution
April 2, 2014
March 21,
2014
January 24,
2014
December
23, 2013
ESS
Essex Property Trust
Cliffs Natural
CLF
Inc
Resources
Market capitalization changes
GMCR
Keurig Green
Mountain
WPX WPX Energy, Inc. Market capitalization changes
TSCO
Tractor Supply
Life Technologies acquired by Thermo
LIFE Life Technologies
Company
Fisher Scientific Inc
ADS Alliance Data Systems ANF Abercrombie & Fitch
MHK Mohawk Industries JDSU JDS Uniphase
Market capitalization changes
FB Facebook TER Teradyne
Page 112 of 214

December
10, 2013
December 2,
2013
November
13, 2013
October 29,
2013
September
20, 2013
September
10, 2013
GGP
General Growth
Properties
MOLX Molex Inc. MOLX acquired by Koch Industries
ALLE Allegion JCP J.C. Penney Allegion spun off by Ingersoll Rand
KORS Michael Kors NYX NYSE Euronext
RIG Transocean DELL Dell, Inc.
Vertex
Advanced Micro
VRTX
AMD
Pharmaceuticals
Devices
AME Ametek SAIC SAIC
ICE Exchange acquired NYSE
Euronext
Founder Michael Dell and Silver Lake
Partners acquired Dell.
Market capitalization changes
DAL Delta Air Lines BMC BMC Software BMC taken private by consortium
July 8, 2013 NLSN Nielsen Holdings S Sprint Nextel Corp.
Softbank consortium purchase results
in public float below 50%
June 28,
Apollo Group's market cap more
FOXA 21st Century Fox APOL Apollo Group Inc.
2013
representative of a mid-cap
June 21,
2013
ZTS Zoetis FHN First Horizon Zoetis spun off by Pfizer
June 6, 2013 GM General Motors HNZ H. J. Heinz Company HNZ acquired by consortium
May 23, 2013 KSU Kansas City Southern DF Dean Foods
DF too small after spinoff of White
Wave Foods
May 8, 2013 MAC Macerich CVH Coventry Health Care Acquired by Aetna (AET)
April 30,
A majority of MetroPCS was acquired
REGN Regeneron PCS MetroPCS
2013
by T-Mobile
February 15,
2013
PVH PVH Corp. BIG Big Lots Inc. Market capitalization changes
December
31, 2012
ABBV AbbVie FII Federated Investors ABBV spun off from Abbott Labs (ABT)
December
TIE acquired by Precision Cast Parts
DLPH Delphi Automotive TIE Titanium Metals
21, 2012
(PCP)
December
11, 2012
GRMN Garmin Ltd. RRD R.R. Donnelley Market capitalization changes
December 3,
2012
DG Dollar General CBE Cooper Industries Acquired by Eaton Corp. (ETN)
October 10,
Acquired by Energy Transfer Partners
PETM PetSmart, Inc. SUN Sunoco Inc.
2012
(ETP)
October 2,
Alpha Natural
KRFT Kraft Foods Group ANR
2012
Resources
Kraft split into two companies
October 1,
2012
ADT ADT Corp LXK Lexmark Int'l Inc Tyco spun off ADT
October 1,
2012
PNR Pentair Ltd. DV DeVry, Inc. Tyco spin-off merged w/Pentair
September
Sears Holding
LYB LyondellBasell SHLD
5, 2012
Corporation
SHLD below public float threshold
July 31, 2012 ESV Ensco plc GR Goodrich Corporation Acquired by United Technologies (UTX)
July 2, 2012 STX Seagate Technology PGN Progress Energy Inc Acquired by Duke Energy (DUK)
June 29,
2012
MNST Monster Beverage SLE Sara Lee Corp. Split up of Sara Lee
June 5, 2012 LRCX Lam Research NVLS Novellus Systems Acquired by Lam Research (LRCX)
May 21, 2012 ALXN
Alexion
Pharmaceuticals
MMI Motorola Mobility Acquired by Google (GOOG)
May 17, 2012 KMI Kinder Morgan EP El Paso Corp. Acquired by Kinder Morgan (KMI)
April 23,
2012
PSX Phillips 66 SVU Supervalu Inc. ConocoPhillips spun off Phillips 66
April 3, 2012 FOSL Fossil, Inc. MHS
Medco Health
Solutions Inc.
Acquired by Express Scripts (ESRX)
March 13,
Crown Castle
Constellation Energy
CCI
CEG
2012
International Corp.
Group
Acquired by Exelon Corp. (EXC)
December
31, 2011
WPX WPX Energy, Inc. CPWR Compuware Market capitalization changes
December
20, 2011
TRIP TripAdvisor Inc. TLAB Tellabs Inc. Expedia Inc. spun off TripAdvisor Inc.
BWA BorgWarner Inc. AKS AK Steel Holding Corp.
Monster Worldwide
December PRGO Perrigo Co. MWW
Inc.
Market capitalization changes
16, 2011
MEMC Electronic
DLTR Dollar Tree Inc. WFR
Materials Inc.
Page 113 of 214

December
12, 2011
November
18, 2011
October 31,
2011
October 14,
2011
September
23, 2011
GAS AGL Resources Inc. GAS Nicor Inc.
CBE Cooper Industries JNS Janus Capital Group
Nicor acquired by AGL, which retained
the GAS ticker.
Janus Capital Group’s market
capitalization is less than $1.2 billion
and is no longer representative of the
large cap market space.
XYL Xylem Inc. ITT ITT Corp. Spun off from ITT Corp.
TEL TE Connectivity Ltd. CEPH Cephalon Inc.
MOS The Mosaic Company NSM
National
Semiconductor Corp.
July 5, 2011 ACN Accenture plc MI Marshall & Iisley Corp.
June 30,
2011
June 1, 2011
MPC
ANR
Marathon Petroleum
Corp
Alpha Natural
Resources, Inc.
Acquired by Teva Pharmaceutical
Industries (TEVA).
Acquired by Texas Instruments (TXN).
Marshall & Iisley is being bought by
Bank of Montreal
RSH RadioShack Corp. Market capitalization adjustments.
MEE
Massey Energy
Company
Alpha Natural Resources is acquiring
Massey Energy in a deal expected to
be
completed on or about that date
pending final approvals.
April 27,
2011
CMG Chipotle Mexican Grill NOVL Novell, Inc. Acquired by private equity firms.
April 1, 2011 BLK BlackRock GENZ Genzyme Corp. Acquired by Sanofi-aventis (SNY)
March 31,
Qwest
EW Edwards Lifesciences Q
2011
Communications
Acquired by CenturyLink
February 28,
2011
COV Covidien Plc MFE McAfee Inc. Acquired by Intel Corp. (INTC)
February 25,
2011
JOY Joy Global Inc. AYE Allegheny Energy Inc. Acquired by First Energy (FE).
December
Cablevision Systems
King Pharmaceuticals
CVC
KG
17, 2010
Corp.
Inc.
Acquired by Pfizer Inc. (PFE).
FFIV F5 Networks Inc. EK Eastman Kodak Co.
December NFLX Netflix Inc. ODP Office Depot Inc.
Market Cap changes.
17, 2010
Newfield Exploration
The New York Times
NFX
NYT
Co.
Co.
August 26,
2010
TYC Tyco International Ltd. SII Smith International Inc. Acquired by Schlumberger Ltd. (SLB)
July 14, 2010 CB Chubb Limited MIL Millipore Inc. Acquired by Merck KGaA (MKGAY)
June 30,
Company split. QEP retained, but ticker
QEP QEP Resources STR Questar Corp.
2010
changed.
June 28,
2010
KMX CarMax, Inc. XTO XTO Energy Inc. Acquired by ExxonMobil Inc. (XOM)
April 29,
2010
CERN Cerner Corp. BJS BJ Services Company Acquired by Baker Hughes Inc. (BHI)
February 26,
2010
HP Helmerich & Payne RX IMS Health Taken private
November 3,
2009
PCLN Priceline.com SGP Schering-Plough Corp. Acquired by Merck & Co. (MRK)
September
28, 2009
ARG Airgas Inc CBE Cooper Industries Ltd. Redomesticated to Ireland
June 10,
2008
LO Lorillard Inc. ABK Ambac Financial Market Value Decline
December
20, 2007
RRC Range Resources TRB Tribune Co. Taken private
December
13, 2007
GME GameStop DJ Dow Jones Acquired by News Corp.
October 25,
Jacobs Engineering
JEC
2007
Group
AV Avaya Inc. Taken private
August 24,
2007
LUK Leucadia National KSP KeySpan Acquired by National Grid plc
March 30,
2007
KFT Kraft Foods SBR Sabre Holdings Taken Private
January 10,
AvalonBay
AVB
2007
Communities, Inc.
SBL Symbol Technologies Acquired by Motorola
July 1, 2005 STZ Constellation Brands GLK Great Lakes Chemical Acquired by Crompton Corp.
September
25, 2003
ESRX Express Scripts QTRN Quintiles Transnational Taken private
Page 114 of 214

December 5,
2000
INTU Intuit BS Bethlehem Steel
SBL Symbol Technologies OI Owens-Illinois
AYE Allegheny Energy GRA W.R. Grace
ABK Ambac Financial CCK Crown Holdings
Market Cap changes.
Page 115 of 214

Page 116 of 214

VI. The NASDAQ
The NASDAQ Stock Market (/ˈnæzˌdæk/ ( listen)) is an American stock exchange. It
is the second-largest exchange in the world by market capitalization, behind only
the New York Stock Exchange located in the same city. The exchange platform is
owned by Nasdaq, Inc., which also owns the Nasdaq Nordic (formerly
known as OMX) and Nasdaq Baltic stock market network and several
other US stock and options
exchanges.
1971–1999
History
When it was founded, NASDAQ stood for the acronym of "National Association
of Securities Dealers Automated Quotations". NASDAQ was founded in
1971 by the National Association of Securities Dealers (NASD), which divested itself of
Nasdaq in a series of sales in 2000 and 2001. The Nasdaq Stock Market is owned and
operated by Nasdaq, Inc., the stock of which was listed on its own securities exchange
on July 2, 2002, under the ticker symbol NDAQ.
When the Nasdaq Stock Market began trading on February 8, 1971, it was the world's
first electronic stock market. At first, it was merely a quotation system and did not
provide a way to perform electronic trades. The Nasdaq Stock Market helped lower the
spread (the difference between the bid price and the ask price of the stock) but was
unpopular among brokerages which made much of their money on the spread.
The Nasdaq Stock Market eventually assumed the majority of major trades that had
been executed by the over-the-counter (OTC) system of trading, although there are still
many securities traded in this fashion. As late as 1987, the Nasdaq exchange was still
commonly referred to as "OTC" in media and also in the monthly Stock Guides (stock
guides and procedures) issued by Standard & Poor's Corporation.
Over the years, the NASDAQ Stock Market became more of a stock market by adding
trade and volume reporting and automated trading systems. It was also the first stock
market in the United States to start trading online, highlighting NASDAQ -traded
companies and closing with the declaration that the NASDAQ Stock Market is "the stock
market for the next hundred years". The NASDAQ Stock Market attracted new growth
companies such as Microsoft, Apple, Cisco, Oracle and Dell and helped modernize
the IPO.
Page 117 of 214

Its main index is the NASDAQ Composite, which has been published since its inception.
However, its exchange-traded fund tracks the large-cap NASDAQ-100 index, which was
introduced in 1985 alongside the NASDAQ 100 Financial Index which tracks the largest
100 companies in terms of market capitalization.
In 1992, the Nasdaq Stock Market joined with the London Stock Exchange to form the
first intercontinental linkage of securities markets. The National Association of Securities
Dealers spun off the Nasdaq Stock Market in 2000 to form a publicly traded company.
2000–present
On March 10, 2000, the NASDAQ Composite peaked at 5,132.52, but fell to 3227 by
April 17, and in the following 30 months fell 78% from its peak.
In 2006, the status of the Nasdaq Stock Market was changed from a stock market to a
licensed national securities exchange.
In 2007, Nasdaq merged with OMX, a leading exchange operator in the Nordic
countries, expanded its global footprint, and changed its name to the NASDAQ OMX
Group.
To qualify for listing on the exchange, a company must be registered with the United
States Securities and Exchange Commission (SEC), must have at least three market
makers (financial firms that act as brokers or dealers for specific securities) and must
meet minimum requirements for assets, capital, public shares, and shareholders.
In February 2011, in the wake of an announced merger of NYSE
Euronext with Deutsche Börse, speculation developed that NASDAQ OMX
and Intercontinental Exchange (ICE) could mount a counter-bid of their own for NYSE.
NASDAQ OMX could be looking to acquire the American exchange's cash equities
business, ICE the derivatives business. At the time, "NYSE Euronext’s market value
was $9.75 billion. Nasdaq was valued at $5.78 billion, while ICE was valued at
$9.45 billion." Late in the month, Nasdaq was reported to be considering asking either
ICE or the Chicago Mercantile Exchange to join in what would probably have to be, if it
proceeded, an $11–12 billion counterbid.
The European Association of Securities Dealers Automatic Quotation System
(EASDAQ) was founded as a European equivalent to the Nasdaq Stock Market. It was
purchased by NASDAQ in 2001 and became NASDAQ Europe. Operations were shut
down, however, as a result of the burst of the dot-com bubble. In 2007, NASDAQ
Europe was revived as Equiduct, and is currently operating under Börse Berlin.
On June 18, 2012, Nasdaq OMX became a founding member of the United
Nations Sustainable Stock Exchanges initiative on the eve of the United Nations
Conference on Sustainable Development (Rio+20).
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In November 2016, Nasdaq Chief Operating Officer Adena Friedman was promoted to
the role of CEO, becoming the first woman to run a major exchange in the U.S. In 2016,
Nasdaq earned $272 million in listings-related revenues.
Quote Availability
Nasdaq quotes are available at three levels:
Level 1 shows the highest bid and lowest ask—inside quote.
Level 2 shows all public quotes of market makers together with information of
market dealers wishing to buy or sell stock and recently executed orders.
Level 3 is used by the market makers and allows them to enter their quotes and
execute orders.
Trading Schedule
The Nasdaq Stock Market sessions eastern time are:
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4:00 am to 9:30 am premarket session
9:30 am to 4:00 pm normal trading session
4:00 pm to 8:00 pm postmarket session
Market Tiers
The Nasdaq Stock Market has three different market tiers:
Capital Market (small cap) is an equity market for companies that have relatively
small levels of market capitalization. Listing requirements for such "small cap"
companies are less stringent than for other Nasdaq markets that list larger
companies with significantly higher market capitalization.
Global Market (mid cap) is made up of stocks that represent the Nasdaq Global
Market. The Global Market consists of 1,450 stocks that meet Nasdaq's strict
financial and liquidity requirements, and corporate governance standards. The
Global Market is less exclusive than the Global Select Market.
Global Select Market (NASDAQ-GS large cap) is a market capitalizationweighted
index made up of US-based and international stocks that represent the
Global Select Market Composite. The Global Select Market consists of 1,200
stocks that meet Nasdaq's strict financial and liquidity requirements and
corporate governance standards. The Global Select Market is more exclusive
than the Global Market. Every October, the Nasdaq Listing Qualifications
Department reviews the Global Market Composite to determine if any of its
stocks have become eligible for listing on the Global Select Market.
Average Annualized Growth Rate
As of June 2015, the Nasdaq Stock Market had an average annualized growth rate of
9.24% since its opening in February 1971. Since the end of the recession in June 2009
however, it has increased by 18.29% per year.
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VII. The American Stock Exchange
NYSE American, formerly known as the American Stock Exchange (AMEX), and
more recently as NYSE MKT, is an American stock exchange situated in New York
City, New York. AMEX was previously a mutual organization, owned by its members.
Until 1953, it was known as the New York Curb Exchange.
NYSE Euronext acquired AMEX on October 1, 2008, with AMEX integrated with
the Alternext European small-cap exchange and renamed the NYSE Alternext U.S. In
March 2009, NYSE Alternext U.S. was changed to NYSE Amex Equities.
On May 10, 2012, NYSE Amex Equities changed its name to NYSE MKT LLC.
Following the SEC approval of competing stock exchange IEX in 2016, NYSE
MKT rebranded as NYSE American and introduced a 350-microsecond delay in
trading, referred to as a "speed bump", which is also present on the IEX.
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History
The Curb Market
The exchange grew out of the loosely organized curb market of curbstone
brokers on Broad Street in Manhattan. Efforts to organize and standardize the market
started early in the 20th century under Emanuel S. Mendels and Carl H.
Pforzheimer. The curb brokers had been kicked out of the Mills Building front by 1907,
and had moved to the pavement outside the Blair Building where cabbies lined up.
There they were given a "little domain of asphalt" fenced off by the police on Broad
Street between Exchange Place and Beaver Street. As of 1907, the curb market
operated starting at 10 AM, each day except Sundays, until a gong at 3 PM. Orders for
the purchase and sale of securities were shouted down from the windows of nearby
brokerages, with the execution of the sale then shouted back up to the brokerage.
Organizing and 'Curb List'
As of 1907, E. S. Mendels gave the brokers rules "by right of seniority", but the curb
brokers intentionally avoided organizing. According to the Times, this came from a
general belief that if a curb exchange was organized, the exchange authorities would
force members to sell their other exchange memberships. However, in 1908 the New
York Curb Market Agency was established, which developed appropriate trading rules
for curbstone brokers, organized by Mendels. The informal Curb Association formed in
1910 to weed out undesirables. The curb exchange was for years at odds with the New
York Stock Exchange (NYSE), or "Big Board", operating several buildings away.
Explained the New York Times in 1910, the Big Board looked at the curb as "a trading
place for 'cats and dogs.'" On April 1, 1910, however, when the NYSE abolished its
unlisted department, the NYSE stocks "made homeless by the abolition" were "refused
domicile" by the curb brokers on Broad Street until they had complied with the "Curb
list" of requirements. In 1911, Mendels and his advisers drew up a constitution and
formed the New York Curb Market Association, which can be considered the first
formal constitution of American Stock Exchange.
1920s-1940s: Move Indoors
In 1920, journalist Edwin C. Hill wrote that the curb exchange on lower Broad Street
was a "roaring, swirling whirlpool” that "tears control of a gold-mine from an unlucky
operator, then pauses to auction a puppy-dog. It is like nothing else under the
astonishing sky that is its only roof.” After a group of Curb brokers formed a real estate
company to design a building, Starrett & Van Vleck designed the new exchange
building on Greenwich Street in Lower Manhattan between Thames and Rector, at 86
Trinity Place. It opened in 1921, [8] and the curbstone brokers moved indoors on June
27, 1921. In 1929, the New York Curb Market changed its name to the New York Curb
Exchange. Within no time, the Curb Exchange became the leading international stock
market, listing more foreign issues than all other U.S. securities markets combined.
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George Rea was approached about the position of president of the New York Curb
Exchange in 1939. He was unanimously elected as the first paid president in the history
of the Curb Exchange. He was paid $25,000 per year and held the position for 3 years
before offering his resignation in 1942. He left the position having "done such a good job
that there is virtually no need for a full-time successor."
Modernization as the American Stock Exchange
In 1953 the Curb Exchange was renamed the American Stock Exchange. The
exchange was shaken by a scandal in 1961, and in 1962 began a reorganization. Its
reputation recently damaged by charges of mismanagement, in 1962 the American
Stock Exchange named Edwin Etherington its president. Writes CNN, he and executive
vice president Paul Kolton were "tapped in 1962 to clean up and reinvigorate the
scandal-plagued American Stock Exchange." At AMEX for five years, he was credited
with improving opportunities for minorities and women. In 1971, Johnson Products
Company became the first African American-owned company to be listed on
the American Stock Exchange.
As of 1971, it was the second largest stock exchange in the United States. Paul Kolton
succeeded Ralph S. Saul as AMEX president on June 17, 1971, making him the first
person to be selected from within the exchange to serve as its leader, succeeding Ralph
S. Saul, who announced his resignation in March 1971. In November 1972, Kolton was
named as the exchange's first chief executive officer and its first salaried top
executive. As chairman, Kolton oversaw the introduction of options trading. Kolton
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opposed the idea of a merger with the New York Stock Exchange while he headed the
exchange saying that "two independent, viable exchanges are much more likely to be
responsive to new pressures and public needs than a single institution". Kolton
announced in July 1977 that he would be leaving his position at the American Exchange
in November of that year.
In 1977, Thomas Peterffy purchased a seat on the American Stock Exchange and
played a role in developing the electronic trading of securities. Peterffy created a major
stir among traders by introducing handheld computers onto the trading floor in the early
1980s.
NYSE Merger
As of 2003, AMEX was the only U.S. stock market to permit the transmission of buy and
sell orders through hand signals.
In October 2008 NYSE Euronext completed acquisition of the AMEX for $260 million in
stock. Before the closing of the acquisition, NYSE Euronext announced that the AMEX
would be integrated with the Alternext European small-cap exchange and renamed the
NYSE Alternext U.S. The American Stock Exchange merged with the New York Stock
Exchange (NYSE Euronext) on October 1, 2008. Post merger, the Amex equities
business was branded "NYSE Alternext US". As part of the re-branding exercise, NYSE
Alternext US was re-branded as NYSE Amex Equities. On December 1, 2008, the Curb
Exchange building at 86 Trinity Place was closed, and the Amex Equities trading floor
was moved to the NYSE Trading floor at 11 Wall Street. 90 years after its 1921 opening,
the old New York Curb Market building was empty but remained standing. In March
2009, NYSE Alternext U.S. was changed to NYSE Amex Equities. On May 10, 2012,
NYSE Amex Equities changed its name to NYSE MKT LLC.
In June 2016, a competing stock exchange IEX (which operated with a 350-
microsecond delay in trading), gained approval from the SEC, despite lobbying protests
by the NYSE and other exchanges and trading firms. On 24 July 2017, the NYSE
renamed NYSE MKT to NYSE American, and announced plans to introduce its own
350-microsecond "speed bump" in trading on the small and mid-cap company
exchange.
______
Q: What are the differences
between AMEX and Nasdaq?
by Bob Schneider
A: While similar in purpose, the American Stock Exchange (AMEX) and
the National Association of Securities Dealers Automated Quotations (Nasdaq)
are also unique from one another. The AMEX is the third-largest stock exchange
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y trading volume in the United States. In 2008, AMEX was acquired by NYSE
Euronext. The Nasdaq is another American stock exchange, also located in New
York City. Nasdaq holds a higher trading volume per day than any other stock
exchange in the world. Both the Nasdaq and the AMEX provide a platform for
exchange where buyers and sellers meet. However, there are several differences
between these two exchanges.
The Nasdaq is significantly larger than the AMEX, as noted previously. Another
key difference is the method of exchange: The AMEX is auction-based, which
means that the specialists are physically present at the exchange and the buying
and selling of stocks is done verbally. The Nasdaq, on the other hand, is
a market-maker based exchange and is completely electronic meaning
specialists are not required to match trades. The two exchanges also differ in
their focus. The AMEX includes innovative trades, boasting the second-largest
options trading market and it helped pioneer the inclusion of exchange-traded
funds. The Nasdaq focuses primarily on technology deals and corporate
exchanges.
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Q: What is a 'Market Maker'
A: A market maker is a "market participant" or member firm of an exchange that also
buys and sells securities at prices it displays in an exchange’s trading system for its own
account which are called principal trades and for customer accounts which are called
agency trades. Using these systems, a market maker can enter and adjust quotes to
buy or sell, enter, and execute orders, and clear those orders. Market makers exist
under rules created by stock exchanges approved by a securities regulator. In the U.S.,
the Securities and Exchange Commission is the main regulator of the exchanges.
Market maker rights and responsibilities vary by exchange, and the market within an
exchange such as equities or options.
Breaking Down 'Market Maker'
The most common type of market maker is a brokerage house that provides purchase
and sale solutions for investors in order to keep the financial markets liquid. A market
maker can also be an individual intermediary, but due to the size of securities needed to
facilitate the volume of purchases and sales, almost all market makers are or work for
large institutions.
"Making a market" means a willingness to buy and sell the securities of a defined set of
companies to broker-dealer firms that are member firms of that exchange. Each market
maker displays buy and sell quotations for a guaranteed number of shares. Once an
order is received from a buyer, the market maker immediately sells from its own
holdings or inventory of those shares to complete the order.
Thus, market making enables the smooth flow of financial markets. Without this,
investors and traders would not be able to buy and sell as easily. Less transactions in a
market naturally translates to less investing, overall. Investing less would reduce funds
available to companies and tend to decrease prices of shares of smaller companies
without as wide a base of investors.
Exchange rules often have more than one category of market maker. Within the rules, a
market maker firm can decide to commit to more responsibility for the smooth market
performance of the specific securities in which it agrees to make a market. The market
maker’s commitments include continuously quoting prices at which it will buy or bid, and
sell or ask for securities. Market makers also have to quote the volume in which it is
willing to trade and the frequency of time it will quote at the Best Bid and Best Offer
(BBO) prices, and how it will do all of the above during all kinds of market hours and
conditions. When markets become erratic or volatile, market makers need to keep a
cool head to facilitate smooth transactions.
How Market Makers Earn Profits
All market makers are compensated for the risk of holding assets. The risk they face is
a decline in the value of a security after it has been purchased from a seller and before
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it's sold to a buyer. Therefore, market makers charge a spread on each security that
they cover. This is known as the bid-ask spread and is extremely common in financial
transactions. For example, when an investor searches for a stock using an online
brokerage firm, it might have a bid price of $100 and an ask price of $100.05. This
means that the broker is purchasing the stock for $100 and then selling the stock for
$100.05 to prospective buyers. Through high-volume trading, the small spread ads up
to large daily profits.
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VIII. The NYSE vs. The NASDAQ
The New York Stock Exchange (NYSE) and the National Association of Securities
Dealers Automated Quotations (NASDAQ) are both well known in the trading sector for
providing high-end stock trading platforms. Both these stock-exchange giants are wellknown
and famous as majority of the North American equities trade either on NYSE or
Nasdaq. Companies going public have to decide where they want to list their shares.
The Nasdaq started off as the world's first electronic trading market and because of this
has attracted most of the tech companies. Both the stock exchanges try hard to get a
company listed on their exchange. The success of tech IPOs in the past decade has
made NYSE try harder to get tech companies listed. It has been helped to some extent
with the Facebook IPO disaster, and has been able to get companies like Pandora
(NYSE:P), and LinkedIn (NYSE:LNKD) to list on NYSE. Even Alibaba, which had a high
profile tech IPO last year, decided to list the BABA stocks on NYSE.
How It All Started
Compared to the NASDAQ, the NYSE is far older. Founded in the year 1792 when 24
brokers signed the Buttonwood Agreement to start trading securities, the NYSE has
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now grown to become the world’s largest stock exchange in terms of the accrued
market capitalization of its listed companies.
The NASDAQ was founded in the year 1971 by the NASDAQ OMX Group, which began
trading electronically for the first time in the world. Although the NYSE leads the stock
market in market capitalization, the NASDAQ is the leader when it comes to market
share and the sheer volume traded.
How Do They Trade?
The essential difference between the NYSE and NASDAQ is their trading principles—
the former is an auction market, while the latter is a dealer’s market.
In the NYSE, the buyers and sellers trade physically by comparing bid prices and ask
prices. If a buyer wishes to invest in a stock, he/she must place an order either to the
floor broker or by entering the order into the Universal Trading Platform. A specialist,
who is not an NYSE employee, supervises all the trades done by a given company. This
specialist will act as a middleman between the buyer and the seller to smoothly
complete the trade.
Trading acquires a different climate in the NASDAQ when compared to the NYSE.
Here, the buyers and sellers transact through a dealer. There are only two ways to
make a trade in the NASDAQ: Stock brokers must either call the dealer or use the
online execution system to enter an order. Likewise, dealers must also enter their prices
in the system for both selling and buying. The trade is finally executed by the electronic
system by matching the prices of both the buyers and the sellers. So, the NASDAQ is
quintessentially different from the NYSE because of its exclusively electronic
transactions.
Getting On The Market
The NYSE and NASDAQ both demand different initial requirements and fee structures
from companies that want to be listed on their respective stock exchanges. The
following table delineates these differences:
NYSE
The company must have issued a minimum of 1,100,000
shares to 400 shareholders at least.
The market value of the company’s public shares must be a
minimum of $40 million, with $4 being the minimum share
price.
For the past three years, the company’s pre-tax aggregate
should be $10 million, with the last year having $2 million.
The entry fee for a company to be listed on the NYSE goes up
to $250,000.
NASDAQ
The company must have publicly traded at least 1,250,000
shares, with a minimum bid price of $4.
The company must have a minimum of three dealers for its
stocks.
For the past three years, the company’s pre-tax aggregate
should be $11 million, with the last year having $2.2
million.
The entry fee for a company to be listed on the NASDAQ is
from $50,000 to $75,000.
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The NYSE collects a maximum yearly fee of $500,000. The NASDAQ collects a yearly fee of around $27,000.
Both these stock exchanges profit greatly from listing fees. To give you a general ideal
of how profitable listing fees are, consider that in 2011, 22% of the NASDAQ’s total
revenue came from listing fees and other such corporate services. For the NYSE, listing
fees made up 17% of their revenues in the same year.
What Sort of Companies Are Listed?
The nature of the companies that enter into these two stock exchanges is considerably
different. Well-established companies with rich legacies and long-standing stability are
usually listed in the NYSE. Examples include:
Stocks on NYSE Info as of Feb, 2015
Walmart (NYSE:WMT)
Walmart stock analysis
Coca Cola (NYSE:KO)
Amazon's brick and mortar competitor with a market cap of $269 billion.
Buffett's favourite stock and has been a part of his stock picks for 26 years.
Citigroup (NYSE:C) Citi revenue stood at $90.57 billion, and net income was $7.31 billion for 2014.
IBM (NYSE:IBM)
IBM stock analysis
One of the oldest trading stocks on NYSE, is trying to stay relevant with new businesses
and strategic partnerships like the one with Apple.
In contrast, the quickly growing, Internet or technology-based companies are usually
listed under the NASDAQ. It is viewed as a high-tech exchange with more stock
volatility. Some of the more famous companies under the NASDAQ include:
Stocks on Nasdaq Info as of Feb, 2015
Facebook (NASDAQ:FB)
Facebook stock analysis
Apple
(NASDAQ:AAPL)
Apple stock analysis
Google (NASDAQ:GOOGL)
Google stock analysis
Amazon (NASDAQ:AMZN)
Amazon stock analysis
Facebook global ad revenue has increased and is second only to Google's. This social
media giant has built a solid and growing flow of revenue.
One of the most innovative tech companies of the decade, Apple cash on handstood at
$178 billion as of last year.
The world's number 1 search engine, Google is a stable investment among internet
stocks.
A high PE ratio, revenue focused strategy characterize this online retailer.
More Facts!
As of 2014, the number of companies listed in the NYSE and NASDAQ are 1,860 and
2,900 respectively. The market capitalization in the same year for the NYSE was $16.6
trillion and for the NASDAQ was $8.5 trillion. As mentioned above, the NYSE leads the
stock exchange market in terms of market capitalization.
Both of these organizations have a wide range of indices for the benefit of the investors
and issuers. The following lists a few of the indices of both the companies:
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NYSE Indices: The Dow Jones Industrial Average, the NYSE Composite, and NYSE
Equity Indices.
NASDAQ Indices: The NASDAQ Composite, NASDAQ Biotechnology, and NASDAQ-
100.
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IX. Online Investing
and Stock Selection Criteria
Online Investing
Investing Online, also known as online trading or trading online, is a process by
which individual investors and traders buy and sell securities over an electronic network,
typically with a brokerage firm. This type of trading and investing has become the norm
for individual investors and traders since late 1990s with many brokers offering services
via a wide variety of online trading platforms.
History
Prior to the Internet, investors had to
place an order through a stockbroker,
in person or via telephone. The
brokerage firm then entered the
order in their system, which was
linked to trading floors and
exchanges.
In 1985, Trade*Plus offered a
retail trading platform on America
Online and Compuserve, and in
1991 one of its founders, William
Porter, created a new subsidiary
company called E*Trade Securities,
Inc.
In
August 1994, K. Aufhauser & Company, Inc.
(later
acquired by TD Ameritrade) became the first
brokerage firm to offer online trading via its "WealthWEB". Online investing has
experienced significant growth since that time. Investors could now enter orders directly
online, or even trade with other investors via electronic communication networks (ECN).
Some orders entered online are still routed through the broker, allowing agents to
approve or monitor the trades. This step helps protect both the client and brokerage firm
from unlawful or incorrect trades that could affect the client’s portfolio or the
stockbroker’s license.
Online brokers in the US are often referred to as discount brokers but in Europe and
Asia many so-called online brokers work with high-net-worth individuals. Their
popularity is attributable to the speed and ease of their online order entry, and to fees
and commissions significantly lower than those of full service brokerage firms within the
US. Two types of online brokerages have emerged in the US in the mid-2000s: those
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offering direct-access trading on exchanges, and those that route orders to market
maker firms to have their orders filled.
Tools and Trading Platform
Investors who trade through an online brokerage firm are provided with a online trading
platform. The online trading platform acts as the hub, allowing investors to purchase
and sell such securities as fixed income, equities/stock, options, and mutual funds.
Included with the platform are tools to track and monitor securities, portfolios and
indices, as well as research tools, real-time streaming quotes and up-to-date news
releases—all of which are necessary to trade profitably. Often, more robust research
tools are available such as full, in-depth analyst reports and analysis, and customized
backtesting and screeners to see how particular investment strategies would have been
realized during different historical periods.
Risks
In all investments, there is a risk of investment fraud. This risk can increase for online
brokers where the investor does not have a personal relationship and the broker may be
located in a different jurisdiction. For this reason some financial regulators warn
potential investors to research the online brokers they plan to employ, assuring that
those firms are licensed within their state, provincial or national jurisdiction. Informed
investors are less likely to fall victim to unlawful securities schemes, such as the socalled
"boiler room" scam. The US Federal Government provides practical tips to avoid
investment scams via their OnGuard Online website. This website cautions investors to
be wary of internet newsletters, investing blogs, or bulletin boards. Stock manipulators
often float false information and "hot tips" on these sites, as part of an effort to affect the
price of shares in a particular security. Investors are also advised to turn to unbiased
sources when researching investments. In the US, the U.S. Securities and Exchange
Commission (via their EDGAR database) is one example.
Online investors typically invest without help from a trained stockbroker or investment
adviser, and may not fully understand the potential risks of investing in a particular
security. Inexperienced investors are easy prey for stock manipulators and pump and
dump schemes often associated with penny stocks. For this reason, many online
brokers offer a number of investment tools to educate and inform new investors.
Investment Selection
Many online brokers provide tools to help investors research and select potential
investments. There are also numerous third party providers of information, such as
Yahoo! Finance and ADVFN. Other reputable sites provide information on business
sectors, news and financial statements of individual companies, and basic tutorials on
subjects such as diversification, basic portfolio theory, and the mitigation of risk
associated with volatility in the stock market.
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Stock Selection Criteria
Stock Selection Criteria are methods for selecting a stock for investment. The stock
investment or position can be "long" (to benefit from a stock price increase) or "short" (to
benefit from a decrease in a stock's price), depending on the investor's expectation of
how the stock price is going to move. The stock selection criteria may include
systematic stock picking methods that utilize computer software and/or data.
Objectives
The objective of stock selection criteria is to:
(1) maximize the total return on investment (appreciation plus any dividends
received) for the targeted holding period
(2) limit risk (according to an individual's risks tolerance levels)
(3) maintain an appropriate degree of portfolio diversification.
Selection Components
The analytical components utilized by investors as stock selection criteria may include
one or more of the following:
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Sector Analysis
Sector analysis involves identification and analysis of various industries or economic
sectors that are likely to exhibit superior performance. Academic studies indicate that
the health of a stock's sector is as important as the performance of the individual stock
itself. In other words, even the best stock located in a weak sector will often perform
poorly because that sector is out of favor. Each industry has differences in terms of its
customer base, market share among firms, industry growth, competition, regulation and
business cycles. Learning how the industry operates provides a deeper understanding
of a company's financial health. One method of analyzing a company's growth potential
is examining whether the amount of customers in the overall market is expected to
grow. In some markets, there is zero or negative growth, a factor demanding careful
consideration. Additionally, market analysts recommend that investors should monitor
sectors that are nearing the bottom of performance rankings for possible signs of an
impending turnaround.
Quantitative Cumulative Value Analysis
Quantitative cumulative value analysis: This method is also commonly referred to as
fundamental analysis. Fundamental analysts consider past records of assets, earnings,
sales, products, management, and markets in predicting future trends in these
indicators and how they may affect a company’s future success or failure. By appraising
a firm’s prospects, these analysts determine a stock’s intrinsic value and assess
whether a particular stock or group of stocks is undervalued or overvalued at the current
market price. If the intrinsic value is more than the current share price, then this stock
would appear to be undervalued and a possible candidate for investment. While there
are several different methods for determining intrinsic value, the underlying premise is
that a company is worth the sum of its discounted cash flows (DCF). The DCF is the
value of future expected cash receipts and expenditures at a common date, which is
calculated using net present value or internal rate of return. This means a company is
worth the combined sum of its future profits, while at the same time being discounted in
consideration of the time value of money. This value, as determined by the discounted
cash flow analysis or its equivalents, consists of two components:
1. Current value ratios, such as the price-earnings (P/E) ratio and price-book (P/B)
ratio. The PE ratio, also called the multiple, gives investors an idea of how much
they are paying for a company’s earning power. The higher the PE, the more
investors are paying, and therefore the more earnings growth they are expecting.
High PE stocks – those with multiples over 20 – are typically young, fast-growing
companies. P/B is the ratio of a stock’s price to its book value per share. A stock
selling at a high PB ratio, such as 3 or higher, may represent a popular growth
stock with minimal book value. A stock selling below its book value may attract
value-oriented investors who think that the company’s management may
undertake steps, such as selling assets or restructuring the company, to unlock
hidden value on the company’s balance sheet.
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2. Earnings growth which may be reflected in measures like the Prospective
Earnings Growth (PEG) ratio. The PEG ratio is a projected one-year annual
growth rate, determined by taking the consensus forecast of next year’s
earnings, less the current year’s earnings, and dividing the result by the current
year’s earnings.
Management Issues
Management issues involves examining perceptions about management and
perceptions by management. It includes various qualitative judgments regarding the
competence of current and prospective company management, as well as issues
related to insider buying, future strategies to increase operations and market share.
Most large companies compensate executives through a combination of cash, restricted
stock and options. It is a positive sign when members of management are also
shareholders. When management makes large purchases of their own stock with
private funds, it may indicate that management insiders feel the company is
undervalued, or that a favorable company event will occur soon. Another way to get a
feel for management capability is to examine how executives performed at other
companies in the past. Warren Buffett has several recommendations for investors who
want to evaluate a company’s management as a precursor to possible investment in
that company’s stock. For example, he advises that one way to determine if
management is doing a good job is to evaluate the company's return on equity, instead
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of their earnings per share (the portion of a company’s profit allocated to each
outstanding share of common stock). "The primary test of managerial economic
performance is achievement of a high earnings rate on equity capital employed (without
undue leverage, accounting gimmickry, etc.) and not the achievement of consistent
gains in earnings per share." Buffett notes that because companies usually retain a
portion of their earnings, the assets a profitable company owns should increase
annually. This additional cash allows the company to report increased earnings per
share even if their performance is deteriorating. He also emphasizes investing in
companies with a management team that is committed to controlling costs. Cost-control
is reflected by a profit margin exceeding those of competitors. Superior managers
"attack costs as vigorously when profits are at record levels as when they are under
pressure". Therefore, be wary of companies that have opulent corporate offices,
unusually large corporate staffs and other signs of bloat. Additionally, Buffett suggests
investing in companies with honest and candid management, and avoiding companies
that have a history of using accounting gimmicks to inflate profits or have misled
investors in the past.
Technical Analysis
Technical analysis: Involves examining how the company is currently perceived by
investors as a whole. Technical analysis is a method of evaluating securities by
researching the demand and supply for a stock or asset based on recent trading
volume, price studies, as well as the buying and selling behavior of investors. Technical
analysts do not attempt to measure a security's intrinsic value, but instead use charts or
computer programs to identify and project price trends in a market, security, fund, or
futures contract. Most analysis is done for the short or intermediate-term, but some
technicians also predict long-term cycles based on charts, technical indicators,
oscillators and other data.
Examples of common technical indicators include relative strength index, Money Flow
Index, Stochastics, MACD and Bollinger bands. Technical indicators do not analyze any
part of the fundamentals of a business, like earnings, revenue and profit margins.
Technical indicators are used extensively by active traders, as they are designed
primarily for analyzing short-term price movements. The most effective uses of technical
indicators for a long-term investor are to help them to identify good entry and exit points
for a stock investment by analyzing the short and long-term trends.
Automatic Stock Screening
Stock screening is the process of searching for stocks that meet certain predetermined
investment and financial criteria. A stock screener has three components: a database of
companies, a set of variables and a screening engine that finds the companies
satisfying those variables to generate a list of matches. Automatic screens query a
stock database to select and rank stocks according to user-specified (or pre-specified)
criteria. Technical screens search for stocks based on patterns in price or volume.
Fundamental screens focus on sales, profits, and other business factors of the
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underlying companies. By focusing on the measurable factors affecting a stock's price,
stock screeners help users perform quantitative analysis. Screening focuses on tangible
variables such as market capitalization, revenue, volatility and profit margins, as well as
performance ratios such as the PE ratio or debt-to-equity ratio. For example, an investor
may want to do a search using a screen for all those companies that have a
price/earnings ratio of less than 10, an earnings growth rate of more than 15%, and a
dividend yield of more than 4%.
Stock Screeners
Many Investors take advantage of software programs or online subscription services
that allow them to select stocks based on a customized set of conditions and variables.
Some examples of various types of stock screening services are:
MSN Money StockScouter: Detailed screening using multiple factors and
predefined screens. The service rates over 5,000 publicly traded companies on a
10-point scale, using an advanced mathematical system to determine a stock's
expected risk and return. It compares the fundamental and technical qualities of
stocks to measures that have proven statistically predictive of stock performance
in the past. It then assigns an expected six-month return to each stock based on
this statistical profile and balances that return against expected volatility. The
ratio of expected return (weighted-average most likely outcome) to expected
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volatility, or risk, yields the stock's final overall rating. Ratings are displayed on a
bell curve, meaning there will be fewer 1-10 ratings and far more of 4-7 ratings.
Yahoo Stock Screener: Screening using multiple factors and predefined
screens. Utilizing nearly twenty predetermined screens covering an array of
investment strategies, including strong forecasted growth, large-cap value, smallcap
growth, and Dogs of the Dow. It also provides a large number of Stock Price
Variables which are particularly suitable for day traders.
Morningstar Stock Screener: A screening service that covers a range of trading
strategies and also includes a search based on Morningstar stock ratings. By
searching stocks according to these ratings, investors are accessing analyst
research on the company’s quality. One variable is minimum capitalization: one
of six different values is selected by the user as the smallest market cap desired
in the search results.
Composite Scores
In financial analysis, a composite is a balance sheet and/or profit and loss statement
representing averages for the accounts of a number of companies in the same industry
or sector. The accounts of a particular company can thus be compared with a
composite to identify abnormalities. Many stock selection methods have emerged which
involve evaluating a composite score by combining several factors. Some of these
methods include:
Scoring Companies
Some companies use the composite duration time-period covers the upcoming
six months. Scores are rated on a scale from one to ten (highest). The primary
components used in this analysis include the following:
1. Fundamental: Ability to meet earnings expectations, rate of earnings growth,
upgrades/downgrades
2. Ownership: Insider and institutional buying/selling
3. Valuation Analysis: P/E, price/sales (P/S) ratio, and PEG ratio
4. Technical: change/consistency, 50-day moving-average crossover. A crossover
is a point on a stock chart when a security and an indicator intersect. Crossovers
are used by technical analysts to aid in forecasting future movements in a stock’s
price. In most technical analysis models, a crossover is a signal to either buy or
sell
Another example is a quantitative model designed to help investor-clients
manage market risk. The Score reduces the market risk level to a single number
for interpretation purposes. Scores range from 0 to minus 4 for Longs, attempting
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to reveal levels of technical deterioration and guiding investors to an exit point.
Scores range form 0 to plus 4 for Avoids, attempting to show levels of
improvement and guiding investors to an entry point. This model is based largely
on a variety of technical indicators.
This system rates stock investments on a scale ranging from one to four (best)
stars. The score is based largely on valuation methods (placing a value or worth
on an asset) using cash flow analysis.
Stocks are rated from one to ten (highest). Short-term ratings cover the
upcoming week. Between 1995 and 2006, the highest rated stocks outperformed
the S&P 500 by a better than 12-1 margin over the next five days. Long-term
ratings cover the upcoming 12-month period. From 1995–2007, 81 percent of
stocks with long-term ratings of 10 increased in price one year later. 79.1 percent
of stocks with ratings of 9 increased in price one year later.
Rules of Thumb
Fund manager Peter Lynch in his two best-selling investment books entitled One up on
Wall Street (1989) and Beating the Street (1993) has outlined several strategic rules of
thumb or criteria that should be evaluated when considering a particular security
investment:
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Market Cap
Market Capitalization less than $5 billion - Lynch generally avoids large, well-known
companies in favor of small-cap stocks that still contain significant upside potential.
Most fund managers define small-caps as companies with market capitalizations under
$1 million. Institutional investors often use market one investment criterion, requiring, for
example, that a company have a market capitalization of $100 million or more to qualify
as an investment. Analysts look at market capitalization in relation to book value for an
indication of how investors value a company’s future prospects.
PEG ratio < 1.2
PEG ratio below 1.2 – The PEG ratio is a valuation metric that compares a company’s
price-earnings ratio with its projected growth rate. Small, high-growth stocks generally
trade at higher PEGs compared to the big-caps. If the PEG ratio is around 1, the
company is considered fairly valued. A PEG ratio that is much higher than 1 indicates
an overvalued company, and a PEG below 1 indicates an undervalued company. While
the PEG ratio can effectively provide insight in certain evaluations, it is limited by its
overriding focus on earnings growth. Revenue growth, cash flow, dividends, debt, and
numerous other factors are also critical in determining value. Additionally, while PEG is
useful for smaller companies it may be misleading for big-caps, since sustained growth
is less important to their total returns. PEG is most useful when supplementing a
thorough discounted cash flow analysis or relative valuation.
Earnings Growth 15–30%
Five-year earnings growth between 15% and 30% per year - In investments, earnings
growth refers to the annual rate of growth of earnings, or the amount of profit a
company produces during a specific period, usually defined as a quarter (three calendar
months) or year. Earnings typically refer to after-tax net income.. When the dividend
payout ratio is same, the dividend growth rate is equal to the earnings growth rate.
Earnings growth rate is a key value that is needed when the DCF model, or the
Gordon's model as used for stock valuation. Companies that exceed a 30 percent
earnings growth rate are confronted with two fundamental problems: (1) sustaining a
high growth-rate over the long term is extremely difficult; and (2) stocks growing that
rapidly are usually already being actively covered by Wall Street analysts, and Lynch
prefers less well-known names and avoiding competition.
Debt Ratio < 35%
Debt-to-Equity (D/E) ratio below 35 percent - If a companies debt levels are excessive,
it often proves extremely difficult for managers to raise sufficient cash to finance
continued expansion. Without expansion into new markets, corporate growth eventually
slows down. Companies with lower debt often have better prospects for future
expansion. Additionally, in the event of an economic slowdown, these firms should be in
better shape to weather any storms. Regarding debt-equity ratios, Lynch cites 0.33
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(25% debt compared to 75% equity) as normal for a corporation. Additionally, he
believes a debt-equity ratio of 4 reflects a weak balance sheet. Buffett echoed Lynch’s
avoidance of companies that have significant debt. He argued that debt is “the weak link
that snaps you." A good business "will produce quite satisfactory economic results with
no aid from leverage" while a company with significant debt will be vulnerable during
economic slowdowns.
Institutional Ownership 5–65%
Institutional ownership ranging between 5% and 65% - Institutional investors are
organizations that trade large volumes of securities. Percentage institutional ownership
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is the fraction of shares outstanding owned by mutual funds, pension plans and other
institutional investors. Most well-known stocks have at least 40% institutional ownership.
Usually more than 70% of daily trading on the New York Stock Exchange is from
institutional investors. Peter Lynch, among many other investors, uses institutional
ownership to gauge market interest. He believes stocks with low institutional ownership
have the best return potential. When mainstream Wall Street analysts identify a stock,
price growth can be dramatic with the support of institutional money. Lower levels can
be associated with greater price volatility.
Dividend Yields
When yields on long-term government bonds exceed the dividend yield (annual
percentage of return earned by an investor on a common or preferred stock) on the
S&P 500 Index by 6 percent or more, Lynch recommends selling stocks and purchasing
bonds. He recommends this as a type of value-contrarian-safety strategy, claiming that
when this situation occurs investors should enjoy the "risk-free" investment of bonds,
they are either yielding exceptionally well or the stock market is over-valued. Either way
bonds make more sense than stocks at that time. This is the only exception to Lynch's
assertion that stocks are always better investments compared to bonds. (See Fed
model)
Cyclical Stocks
For cyclical stocks it is recommended to purchase when the P/E ratio is High, and sell
them when the P/E ratio is Low. The opposite of normal practice. Cyclical stocks tend to
rise quickly when the economy turns up and fall quickly when the economy turns down.
Examples are housing, automobiles and paper.
Cyclicals can be a rewarding investments if purchased at their bottom price, so it helps
to seek opportunity in depressed stocks, rather than analyzing potential reasons why a
cyclical will take losses. When cyclical stocks are crushed by a weak economy and it
appears things could not possibly worsen, cyclicals usually hit their bottom.
Lynch goes on to explain the PE ratios for cyclicals, advising the time to buy is when
their PE hits a historic high, because 'Wall Street' has caught on to cyclicals and often
begins discounting them before the overall market tops-out (i.e., ends a period of rising
prices and is expected to stay on a plateau or decline). When a cyclical stock is at a low
PE ratio, alongside record-high profits that have grown for several years, the market is
anticipating a downturn. When a cyclical reaches a high PE on very low earnings, the
price may be ready for an upturn because earnings will be at or near their nadir.
Stock Selection Effectiveness
In A Random Walk Down Wall Street, Burton Malkiel (b. 1932), an economist from
Princeton University, argues that asset prices typically exhibit signs of random walk and
that one cannot consistently outperform market averages. Random walk is a theory
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about the movement of stock and commodity futures prices hypothesizing that past
prices are of no use in forecasting future price movements. According to the theory,
stock prices reflect reactions to information coming to the market in random fashion, so
they are no more predictable than the walking pattern of a drunken person. This book is
frequently cited by those in favor of the efficient-market hypothesis, a theory that market
prices reflect the knowledge and expectations of all investors.
However, there have been numerous studies indicating that some investment strategies
have outperformed the market for long periods of time. For example, in 1986, Roger
Ibbotson, a finance professor at the Yale School of Management, studied the
relationship between stock price as a percentage of book value and investment returns
in Decile Portfolios of the New York Stock Exchange, 1967–1984. His study reveals that
stocks with a low price to book value had significantly better investment returns over the
18-year period than stocks priced high as a percentage of book value. During that
period, the compound annual return for the market capitalization weighted NYSE
Composite Index was 8.6%.
In 1987, Werner F.M. DeBondt and Richard H. Thaler, Finance Professors at the
University of Wisconsin–Madison and Cornell University, respectively, examined stock
prices in relation to book value in "Further Evidence on Investor Overreaction and Stock
Market Seasonality", The Journal of Finance, July 1987. All companies listed on the
New York and American Stock Exchanges, except companies that were part of the S&P
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40 Financial Index, were ranked according to stock price in relation to book value and
sorted into quintiles, five groups of equal number on December 31 in each of 1969,
1971, 1973, 1975, 1977 and 1979. The total number of companies in the entire sample
ranged between 1,015 and 1,339 on each of the six portfolio formation dates.
The investment return in excess of or (less than) the equal weighted NYSE Index was
computed over the subsequent four years for all of the stocks in each selection period.
The four-year returns in excess of (or less than) the market index were averaged. The
compound annual return (investment return, discounted retroactively from a cumulative
figure, at which money, compounded annually, would reach the cumulative total) in
excess of the market index from the lowest 20% of the stocks, in terms of price/book
value, was 8.91%. For each $1,000,000 invested, the low price/book value stocks
returned $407,000 more on average than the market index in each four-year period.
The book What Works on Wall Street by James O'Shaughnessy tests most of these
criteria. Although some are found to be questionable, he finds that all the ratios based
on price (price-to-earnings, price-to-sales, price-to-cash flow, and dividend yield) give
better returns.
Analysis of Fundamental Information
Fundamental analysis, in accounting and finance, is the analysis of a business's
financial statements (usually to analyze the business's assets, liabilities, and earnings);
health; [1] and its competitors and markets. When applied to futures and forex, it focuses
on the overall state of the economy, and considers factors including interest rates,
production, earnings, employment, GDP, housing, manufacturing and management.
When analyzing a stock, futures contract, or currency using fundamental analysis, there
are two basic approaches that can be used: bottom up analysis and top down analysis.
These terms are used to distinguish such analysis from other types of investment
analysis, such as quantitative and technical.
Fundamental analysis is performed on historical and present data, but with the goal of
making financial forecasts. There are several possible objectives:
to conduct a company stock valuation and predict its probable price evolution;
to make a projection on its business performance;
to evaluate its management and make internal business decisions and/or to
calculate its credit risk.
to find out the intrinsic value of the share.
The Two Analytical Models
There are two basic methodologies investors rely upon when the objective of the
analysis is to determine what stock to buy and at what price:
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1. Fundamental Analysis maintains that markets may incorrectly price a
security in the short run but that the "correct" price will eventually be reached.
Profits can be made by purchasing the wrongly priced security and then waiting
for the market to recognize its "mistake" and reprice the security.
2. Technical Analysis maintains that all information is reflected already in
the price of a security. Technical analysts look at trends and believe that
sentiment changes predate and predict trend changes. Investors' emotional
responses to price movements lead to recognizable price chart patterns.
Technical analysts also evaluate historical trends to predict future price
movement.
Investors can use one or both of these complementary methods for stock picking. For
example, many fundamental investors use technicals for deciding entry and exit points.
Similarly, a large proportion of technical investors use fundamentals to limit their
universe of possible stock to "good" companies.
The choice of stock analysis is determined by the investor's belief in the different
paradigms for "how the stock market works" for explanations of these paradigms, see
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the discussions at efficient-market hypothesis, random walk hypothesis, capital asset
pricing model, Fed model Theory of Equity Valuation, market-based valuation, and
behavioral finance.
Fundamental analysis includes:
1. Economic analysis
2. Industry analysis
3. Company analysis
The intrinsic value of the shares is determined based upon these three analyses. It is
this value that is considered the true value of the share. If the intrinsic value is higher
than the market price, buying the share is recommended. If it is equal to market price, it
is recommended to hold the share; and if it is less than the market price, then one
should sell the shares.
Use by Different Portfolio Styles
Investors may also use fundamental analysis within different portfolio management
styles.
Buy and hold investors believe that latching on to good businesses allows the
investor's asset to grow with the business. Fundamental analysis lets them find
"good" companies, so they lower their risk and the probability of wipe-out.
Value investors restrict their attention to under-valued companies, believing that
"it's hard to fall out of a ditch". The values they follow come from fundamental
analysis.
Managers may use fundamental analysis to correctly value "good" and "bad"
companies. "Bad" companies' stock prices will eventually fluctuate, which can
create opportunities for profit.
Managers may also consider the economic cycle in determining whether
conditions are "right" to buy fundamentally suitable companies.
Contrarian investors hold that "in the short run, the market is a voting machine,
not a weighing machine". Fundamental analysis allows a broker to make his or
her own decision on value, while ignoring the opinions of the market.
Managers may use fundamental analysis to determine future growth rates for
buying high priced growth stocks.
Managers may include fundamental factors along with technical factors in
computer models (quantitative analysis).
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Top-Down and Bottom-Up Approaches
Investors using fundamental analysis can use either a top-down or bottom-up approach.
The top-down investor starts their analysis with global economics, including both
international and national economic indicators. These may include GDP growth
rates, inflation, interest rates, exchange rates, productivity, and energy prices.
They subsequently narrow their search to regional/ industry analysis of total
sales, price levels, the effects of competing products, foreign competition, and
entry or exit from the industry. Only then do they refine their search to the best
business in the area being studied.
The bottom-up investor starts with specific businesses, regardless of their
industry/region, and proceeds in reverse of the top-down approach.
Procedures
The analysis of a business's health starts with a financial statement analysis that
includes financial ratios. It looks at dividends paid, operating cash flow, new equity
issues and capital financing. The earnings estimates and growth rate projections
published widely by Thomson Reuters and others can be considered either
"fundamental" (they are facts) or "technical" (they are investor sentiment) based on
perception of their validity.
Determined growth rates (of income and cash) and risk levels (to determine the
discount rate) are used in various valuation models. The foremost is the discounted
cash flow model, which calculates the present value of the future:
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dividends received by the investor, along with the eventual sale price; (Gordon
model)
earnings of the company;
or cash flows of the company.
The amount of debt a company possesses is also a major consideration in determining
its health. It can be quickly assessed using the debt-to-equity ratio and the current ratio
(current assets/current liabilities).
The simple model commonly used is the P/E ratio (price-to-earnings ratio). Implicit in
this model of a perpetual annuity (time value of money) is that the "flip" of the P/E is the
discount rate appropriate to the risk of the business. The multiple accepted is adjusted
for expected growth (which is not built into the model).
Growth estimates are incorporated into the PEG ratio. Its validity depends on the length
of time analysts believe the growth will continue. IGAR models can be used to impute
expected changes in growth from current P/E and historical growth rates for the stocks
relative to a comparison index.
Computer modelling of stock prices has now replaced much of the subjective
interpretation of fundamental data (along with technical data) in the industry. Since
about the year 2000, a new job role has been invented with computers now able to
crunch vast amounts of data. At some funds (Quant Funds) managers' decisions have
been replaced by proprietary mathematical models.
Automation
The process of fundamental analysis has significantly dropped in difficulty over the past
10 years. Ever since computers became a household product, people have built
software designed to make the investor's life easier. Fundamental analysis is one of the
most time consuming forms of analysis. Furthermore, with the fast paced trading style of
the 21st century, where markets are dominated by HFT firms and day traders, it is
difficult to keep up with the market in a timely fashion. One way to go about cutting
down analysis time, is to subscribe to either free or paid screening services. Screening
services will allow you to search the entire market for stocks that match the quantitative
fields you are looking for. These types of software then automatically give you results,
hence cutting down on time spent sifting through SEC filings.
Reference - Fundamental Analysis Software for more information on fundamental
analysis software.
Criticisms
Economists such as Burton Malkiel suggest that neither fundamental analysis nor
technical analysis is useful in outperforming the markets. This is especially true of low
liquidity markets or securities.
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Analysis of Technical Data
In finance, technical analysis is an analysis methodology for forecasting the direction
of prices through the study of past market data, primarily price and volume. Behavioral
economics and quantitative analysis use many of the same tools of technical analysis,
which, being an aspect of active management, stands in contradiction to much of
modern portfolio theory. The efficacy of both technical and fundamental analysis is
disputed by the efficient-market hypothesis which states that stock market prices are
essentially unpredictable.
History
The principles of technical analysis are derived from hundreds of years of financial
market data. Some aspects of technical analysis began to appear in Amsterdam-based
businessman Joseph de la Vega's accounts of the Dutch financial markets in the 17th
century. In Asia, technical analysis is said to be a method developed by Homma
Munehisa during the early 18th century which evolved into the use of candlestick
techniques, and is today a technical analysis charting tool. In the 1920s and 1930s
Richard W. Schabacker published several books which continued the work of Charles
Dow and William Peter Hamilton in their books Stock Market Theory and Practice and
Technical Market Analysis. In 1948 Robert D. Edwards and John Magee published
Technical Analysis of Stock Trends which is widely considered to be one of the seminal
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works of the discipline. It is exclusively concerned with trend analysis and chart patterns
and remains in use to the present. Early technical analysis was almost exclusively the
analysis of charts, because the processing power of computers was not available for the
modern degree of statistical analysis. Charles Dow reportedly originated a form of point
and figure chart analysis.
Dow theory is based on the collected writings of Dow Jones co-founder and editor
Charles Dow, and inspired the use and development of modern technical analysis at the
end of the 19th century. Other pioneers of analysis techniques include Ralph Nelson
Elliott, William Delbert Gann and Richard Wyckoff who developed their respective
techniques in the early 20th century. More technical tools and theories have been
developed and enhanced in recent decades, with an increasing emphasis on computerassisted
techniques using specially designed computer software.
General Description
Fundamental analysts examine earnings, dividends, assets, quality, ratio, new products,
research and the like. Technicians employ many methods, tools and techniques as well,
one of which is the use of charts. Using charts, technical analysts seek to identify price
patterns and market trends in financial markets and attempt to exploit those patterns.
Technicians using charts search for archetypal price chart patterns, such as the wellknown
head and shoulders or double top/bottom reversal patterns, study technical
indicators, moving averages, and look for forms such as lines of support, resistance,
channels, and more obscure formations such as flags, pennants, balance days and cup
and handle patterns.
Technical analysts also widely use market indicators of many sorts, some of which are
mathematical transformations of price, often including up and down volume,
advance/decline data and other inputs. These indicators are used to help assess
whether an asset is trending, and if it is, the probability of its direction and of
continuation. Technicians also look for relationships between price/volume indices and
market indicators. Examples include the moving average, relative strength index, and
MACD. Other avenues of study include correlations between changes in Options
(implied volatility) and put/call ratios with price. Also important are sentiment indicators
such as Put/Call ratios, bull/bear ratios, short interest, Implied Volatility, etc.
There are many techniques in technical analysis. Adherents of different techniques (for
example, Candlestick analysis -the oldest form of technical analysis developed by a
Japanese grain trader-, Harmonics, Dow theory, and Elliott wave theory) may ignore the
other approaches, yet many traders combine elements from more than one technique.
Some technical analysts use subjective judgment to decide which pattern(s) a particular
instrument reflects at a given time and what the interpretation of that pattern should be.
Others employ a strictly mechanical or systematic approach to pattern identification and
interpretation.
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Contrasting with technical analysis is fundamental analysis, the study of economic
factors that influence the way investors price financial markets. Technical analysis holds
that prices already reflect all the underlying fundamental factors. Uncovering the trends
is what technical indicators are designed to do, although neither technical nor
fundamental indicators are perfect. Some traders use technical or fundamental analysis
exclusively, while others use both types to make trading decisions.
Characteristics
Technical analysis employs models and trading rules based on price and volume
transformations, such as the relative strength index, moving averages, regressions,
inter-market and intra-market price correlations, business cycles, stock market cycles
or, classically, through recognition of chart patterns.
Technical analysis stands in contrast to the fundamental analysis approach to security
and stock analysis. In the fundamental equation M = P/E technical analysis is the
examination of M (multiple). Multiple encompasses the psychology generally abounding,
i.e. the extent of willingness to buy/sell. Also in M is the ability to pay as, for instance, a
spent-out bull can't make the market go higher and a well-heeled bear won't. Technical
analysis analyzes price, volume, psychology, money flow and other market information,
whereas fundamental analysis looks at the facts of the company, market, currency or
commodity. Most large brokerage, trading group, or financial institutions will typically
have both a technical analysis and fundamental analysis team.
In the 1960s and 1970s it was widely dismissed by academics. In a recent review, Irwin
and Park reported that 56 of 95 modern studies found that it produces positive results
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ut noted that many of the positive results were rendered dubious by issues such as
data snooping, so that the evidence in support of technical analysis was inconclusive; it
is still considered by many academics to be pseudoscience. Academics such as
Eugene Fama say the evidence for technical analysis is sparse and is inconsistent with
the weak form of the efficient-market hypothesis. Users hold that even if technical
analysis cannot predict the future, it helps to identify trends, tendencies, and trading
opportunities.
While some isolated studies have indicated that technical trading rules might lead to
consistent returns in the period prior to 1987, most academic work has focused on the
nature of the anomalous position of the foreign exchange market. It is speculated that
this anomaly is due to central bank intervention, which obviously technical analysis is
not designed to predict. Recent research suggests that combining various trading
signals into a Combined Signal Approach may be able to increase profitability and
reduce dependence on any single rule.
Principles
A core principle of technical analysis is that a market's price reflects all relevant
information impacting that market. A technical analyst therefore looks at the history of a
security or commodity's trading pattern rather than external drivers such as economic,
fundamental and news events. It is believed that price action tends to repeat itself due
to the collective, patterned behavior of investors. Hence technical analysis focuses on
identifiable price trends and conditions.
Market Action Discounts Everything
Based on the premise that all relevant information is already reflected by prices,
technical analysts believe it is important to understand what investors think of that
information, known and perceived.
Prices Move In Trends
Technical analysts believe that prices trend directionally, i.e., up, down, or sideways
(flat) or some combination. The basic definition of a price trend was originally put
forward by Dow theory.
An example of a security that had an apparent trend is AOL from November 2001
through August 2002. A technical analyst or trend follower recognizing this trend would
look for opportunities to sell this security. AOL consistently moves downward in price.
Each time the stock rose, sellers would enter the market and sell the stock; hence the
"zig-zag" movement in the price. The series of "lower highs" and "lower lows" is a tell
tale sign of a stock in a down trend. In other words, each time the stock moved lower, it
fell below its previous relative low price. Each time the stock moved higher, it could not
reach the level of its previous relative high price.
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Note that the sequence of lower lows and lower highs did not begin until August. Then
AOL makes a low price that does not pierce the relative low set earlier in the month.
Later in the same month, the stock makes a relative high equal to the most recent
relative high. In this a technician sees strong indications that the down trend is at least
pausing and possibly ending, and would likely stop actively selling the stock at that
point.
History Tends to Repeat Itself
Technical analysts believe that investors collectively repeat the behavior of the investors
that preceded them. To a technician, the emotions in the market may be irrational, but
they exist. Because investor behavior repeats itself so often, technicians believe that
recognizable (and predictable) price patterns will develop on a chart. Recognition of
these patterns can allow the technician to select trades that have a higher probability of
success.
Technical analysis is not limited to charting, but it always considers price trends. For
example, many technicians monitor surveys of investor sentiment. These surveys
gauge the attitude of market participants, specifically whether they are bearish or
bullish. Technicians use these surveys to help determine whether a trend will continue
or if a reversal could develop; they are most likely to anticipate a change when the
surveys report extreme investor sentiment. Surveys that show overwhelming
bullishness, for example, are evidence that an uptrend may reverse; the premise being
that if most investors are bullish they have already bought the market (anticipating
higher prices). And because most investors are bullish and invested, one assumes that
few buyers remain. This leaves more potential sellers than buyers, despite the bullish
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sentiment. This suggests that prices will trend down, and is an example of contrarian
trading.
Recently, Kim Man Lui, Lun Hu, and Keith C.C. Chan have suggested that there is
statistical evidence of association relationships between some of the index composite
stocks whereas there is no evidence for such a relationship between some index
composite others. They show that the price behavior of these Hang Seng index
composite stocks is easier to understand than that of the index.
Industry
The industry is globally represented by the International Federation of Technical
Analysts(IFTA), which is a federation of regional and national organizations . In the
United States, the industry is represented by both the CMT Association and the
American Association of Professional Technical Analysts (AAPTA). The United States is
also represented by the Technical Security Analysts Association of San Francisco
(TSAASF). In the United Kingdom, the industry is represented by the Society of
Technical Analysts (STA). In Canada the industry is represented by the Canadian
Society of Technical Analysts. In Australia, the industry is represented by the Australian
Technical Analysts Association (ATAA), (which is affiliated to IFTA) and the Australian
Professional Technical Analysts (APTA) Inc.
Professional technical analysis societies have worked on creating a body of knowledge
that describes the field of Technical Analysis. A body of knowledge is central to the field
as a way of defining how and why technical analysis may work. It can then be used by
academia, as well as regulatory bodies, in developing proper research and standards
for the field. The CMT Association has published a body of knowledge, which is the
structure for the Chartered Market Technician (CMT) exam.
Software
Technical Analysis Software automates the charting, analysis and reporting functions
that support technical analysts in their review and prediction of financial markets (e.g.
the stock market).
Neural Networks
Systematic Trading
Since the early 1990s when the first practically usable types emerged, artificial neural
networks (ANNs) have rapidly grown in popularity. They are artificial intelligence
adaptive software systems that have been inspired by how biological neural networks
work. They are used because they can learn to detect complex patterns in data. In
mathematical terms, they are universal function approximators, meaning that given the
right data and configured correctly, they can capture and model any input-output
relationships. This not only removes the need for human interpretation of charts or the
Page 156 of 214

series of rules for generating entry/exit signals, but also provides a bridge to
fundamental analysis, as the variables used in fundamental analysis can be used as
input.
As ANNs are essentially non-linear statistical models, their accuracy and prediction
capabilities can be both mathematically and empirically tested. In various studies,
authors have claimed that neural networks used for generating trading signals given
various technical and fundamental inputs have significantly outperformed buy-hold
strategies as well as traditional linear technical analysis methods when combined with
rule-based expert systems.
While the advanced mathematical nature of such adaptive systems has kept neural
networks for financial analysis mostly within academic research circles, in recent years
more user friendly neural network software has made the technology more accessible to
traders. However, large-scale application is problematic because of the problem of
matching the correct neural topology to the market being studied.
Backtesting
Systematic trading is most often employed after testing an investment strategy on
historic data. This is known as backtesting. Backtesting is most often performed for
technical indicators, but can be applied to most investment strategies (e.g. fundamental
analysis). While traditional backtesting was done by hand, this was usually only
performed on human-selected stocks, and was thus prone to prior knowledge in stock
selection. With the advent of computers, backtesting can be performed on entire
exchanges over decades of historic data in very short amounts of time.
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The use of computers does have its drawbacks, being limited to algorithms that a
computer can perform. Several trading strategies rely on human interpretation, and are
unsuitable for computer processing. Only technical indicators which are entirely
algorithmic can be programmed for computerised automated backtesting.
Combination with other market forecast methods
John Murphy states that the principal sources of information available to technicians are
price, volume and open interest. Other data, such as indicators and sentiment analysis,
are considered secondary.
However, many technical analysts reach outside pure technical analysis, combining
other market forecast methods with their technical work. One advocate for this approach
is John Bollinger, who coined the term rational analysis in the middle 1980s for the
intersection of technical analysis and fundamental analysis. Another such approach,
fusion analysis, overlays fundamental analysis with technical, in an attempt to improve
portfolio manager performance.
Technical analysis is also often combined with quantitative analysis and economics. For
example, neural networks may be used to help identify intermarket relationships. [44]
Investor and newsletter polls, and magazine cover sentiment indicators, are also used
by technical analysts.
Empirical Evidence
Whether technical analysis actually works is a matter of controversy. Methods vary
greatly, and different technical analysts can sometimes make contradictory predictions
from the same data. Many investors claim that they experience positive returns, but
academic appraisals often find that it has little predictive power. Of 95 modern studies,
56 concluded that technical analysis had positive results, although data-snooping bias
and other problems make the analysis difficult. Nonlinear prediction using neural
networks occasionally produces statistically significant prediction results. A Federal
Reserve working paper regarding support and resistance levels in short-term foreign
exchange rates "offers strong evidence that the levels help to predict intraday trend
interruptions," although the "predictive power" of those levels was "found to vary across
the exchange rates and firms examined".
Technical trading strategies were found to be effective in the Chinese marketplace by a
recent study that states, "Finally, we find significant positive returns on buy trades
generated by the contrarian version of the moving-average crossover rule, the channel
breakout rule, and the Bollinger band trading rule, after accounting for transaction costs
of 0.50 percent."
An influential 1992 study by Brock et al. which appeared to find support for technical
trading rules was tested for data snooping and other problems in 1999; the sample
covered by Brock et al. was robust to data snooping.
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Subsequently, a comprehensive study of the question by Amsterdam economist Gerwin
Griffioen concludes that: "for the U.S., Japanese and most Western European stock
market indices the recursive out-of-sample forecasting procedure does not show to be
profitable, after implementing little transaction costs. Moreover, for sufficiently high
transaction costs it is found, by estimating CAPMs, that technical trading shows no
statistically significant risk-corrected out-of-sample forecasting power for almost all of
the stock market indices." Transaction costs are particularly applicable to "momentum
strategies"; a comprehensive 1996 review of the data and studies concluded that even
small transaction costs would lead to an inability to capture any excess from such
strategies.
In a paper published in the Journal of Finance, Dr. Andrew W. Lo, director MIT
Laboratory for Financial Engineering, working with Harry Mamaysky and Jiang Wang
found that:
Technical analysis, also known as "charting", has been a part of financial practice for
many decades, but this discipline has not received the same level of academic scrutiny
and acceptance as more traditional approaches such as fundamental analysis. One of
the main obstacles is the highly subjective nature of technical analysis – the presence of
geometric shapes in historical price charts is often in the eyes of the beholder. In this
paper, we propose a systematic and automatic approach to technical pattern
recognition using nonparametric kernel regression, and apply this method to a large
number of U.S. stocks from 1962 to 1996 to evaluate the effectiveness of technical
analysis. By comparing the unconditional empirical distribution of daily stock returns to
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the conditional distribution – conditioned on specific technical indicators such as headand-shoulders
or double-bottoms – we find that over the 31-year sample period, several
technical indicators do provide incremental information and may have some practical
value.
In that same paper Dr. Lo wrote that "several academic studies suggest that ... technical
analysis may well be an effective means for extracting useful information from market
prices." Some techniques such as Drummond Geometry attempt to overcome the past
data bias by projecting support and resistance levels from differing time frames into the
near-term future and combining that with reversion to the mean techniques.
Thomas DeMark's indicators enjoy a remarkable endorsement in the financial industry.
A recent work has investigated the predictive power of three DeMark indicators
(Sequential, Combo and Setup Trend), over 21 commodity futures markets and 10
years of data. Market entry signals have been tested by comparing conditional returns
(i.e. conditioned on the entry signals) to unconditional returns. For the period from Jan.
2004 to Jan. 2014, the tests suggest statistically significant predictive power on a wide
range of commodity futures.
Efficient-Market Hypothesis
The efficient-market hypothesis (EMH) contradicts the basic tenets of technical analysis
by stating that past prices cannot be used to profitably predict future prices. Thus it
holds that technical analysis cannot be effective. Economist Eugene Fama published
the seminal paper on the EMH in the Journal of Finance in 1970, and said "In short, the
evidence in support of the efficient markets model is extensive, and (somewhat uniquely
in economics) contradictory evidence is sparse."
Technicians say that EMH ignores the way markets work, in that many investors base
their expectations on past earnings or track record, for example. Because future stock
prices can be strongly influenced by investor expectations, technicians claim it only
follows that past prices influence future prices. They also point to research in the field of
behavioral finance, specifically that people are not the rational participants EMH makes
them out to be. Technicians have long said that irrational human behavior influences
stock prices, and that this behavior leads to predictable outcomes. Author David
Aronson says that the theory of behavioral finance blends with the practice of technical
analysis:
By considering the impact of emotions, cognitive errors, irrational preferences, and the
dynamics of group behavior, behavioral finance offers succinct explanations of excess
market volatility as well as the excess returns earned by stale information strategies....
cognitive errors may also explain the existence of market inefficiencies that spawn the
systematic price movements that allow objective TA [technical analysis] methods to
work.
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EMH advocates reply that while individual market participants do not always act
rationally (or have complete information), their aggregate decisions balance each other,
resulting in a rational outcome (optimists who buy stock and bid the price higher are
countered by pessimists who sell their stock, which keeps the price in equilibrium).
Likewise, complete information is reflected in the price because all market participants
bring their own individual, but incomplete, knowledge together in the market.
Random Walk Hypothesis
The random walk hypothesis may be derived from the weak-form efficient markets
hypothesis, which is based on the assumption that market participants take full account
of any information contained in past price movements (but not necessarily other public
information). In his book A Random Walk Down Wall Street, Princeton economist
Burton Malkiel said that technical forecasting tools such as pattern analysis must
ultimately be self-defeating: "The problem is that once such a regularity is known to
market participants, people will act in such a way that prevents it from happening in the
future." Malkiel has stated that while momentum may explain some stock price
movements, there is not enough momentum to make excess profits. Malkiel has
compared technical analysis to "astrology".
In the late 1980s, professors Andrew Lo and Craig McKinlay published a paper which
cast doubt on the random walk hypothesis. In a 1999 response to Malkiel, Lo and
McKinlay collected empirical papers that questioned the hypothesis' applicability that
suggested a non-random and possibly predictive component to stock price movement,
though they were careful to point out that rejecting random walk does not necessarily
invalidate EMH, which is an entirely separate concept from RWH. In a 2000 paper,
Andrew Lo back-analyzed data from U.S. from 1962 to 1996 and found that "several
technical indicators do provide incremental information and may have some practical
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value". Burton Malkiel dismissed the irregularities mentioned by Lo and McKinlay as
being too small to profit from.
Technicians say that the EMH and random walk theories both ignore the realities of
markets, in that participants are not completely rational and that current price moves are
not independent of previous moves. Some signal processing researchers negate the
random walk hypothesis that stock market prices resemble Wiener processes, because
the statistical moments of such processes and real stock data vary significantly with
respect to window size and similarity measure. They argue that feature transformations
used for the description of audio and biosignals can also be used to predict stock
market prices successfully which would contradict the random walk hypothesis.
The random walk index (RWI) is a technical indicator that attempts to determine if a
stock’s price movement is random in nature or a result of a statistically significant trend.
The random walk index attempts to determine when the market is in a strong uptrend or
downtrend by measuring price ranges over N and how it differs from what would be
expected by a random walk (randomly going up or down). The greater the range
suggests a stronger trend.
Scientific Technical Analysis
Caginalp and Balenovich in 1994 used their asset-flow differential equations model to
show that the major patterns of technical analysis could be generated with some basic
assumptions. Some of the patterns such as a triangle continuation or reversal pattern
can be generated with the assumption of two distinct groups of investors with different
assessments of valuation.The major assumptions of the models are that the finiteness
of assets and the use of trend as well as valuation in decision making. Many of the
patterns follow as mathematically logical consequences of these assumptions.
One of the problems with conventional technical analysis has been the difficulty of
specifying the patterns in a manner that permits objective testing.
Japanese candlestick patterns involve patterns of a few days that are within an uptrend
or downtrend. Caginalp and Laurent were the first to perform a successful large scale
test of patterns. A mathematically precise set of criteria were tested by first using a
definition of a short term trend by smoothing the data and allowing for one deviation in
the smoothed trend. They then considered eight major three-day candlestick reversal
patterns in a non-parametric manner and defined the patterns as a set of inequalities.
The results were positive with an overwhelming statistical confidence for each of the
patterns using the data set of all S&P 500 stocks daily for the five-year period 1992-
1996.
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Among the most basic ideas of conventional technical analysis is that a trend, once
established, tends to continue. However, testing for this trend has often led researchers
to conclude that stocks are a random walk. One study, performed by Poterba and
Summers, found a small trend effect that was too small to be of trading value. As Fisher
Black noted, "noise" in trading price data makes it difficult to test hypotheses.
One method for avoiding this noise was discovered in 1995 by Caginalp and
Constantine who used a ratio of two essentially identical closed-end funds to eliminate
any changes in valuation. A closed-end fund (unlike an open-end fund) trades
independently of its net asset value and its shares cannot be redeemed, but only traded
among investors as any other stock on the exchanges. In this study, the authors found
that the best estimate of tomorrow's price is not yesterday's price (as the efficientmarket
hypothesis would indicate), nor is it the pure momentum price (namely, the
same relative price change from yesterday to today continues from today to tomorrow).
But rather it is almost exactly halfway between the two.
Starting from the characterization of the past time evolution of market prices in terms of
price velocity and price acceleration, an attempt towards a general framework for
technical analysis has been developed, with the goal of establishing a principled
classification of the possible patterns characterizing the deviation or defects from the
random walk market state and its time translational invariant properties. The
classification relies on two dimensionless parameters, the Froude number
characterizing the relative strength of the acceleration with respect to the velocity and
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the time horizon forecast dimensionalized to the training period. Trend-following and
contrarian patterns are found to coexist and depend on the dimensionless time horizon.
Using a renormalisation group approach, the probabilistic based scenario approach
exhibits statistically signifificant predictive power in essentially all tested market phases.
A survey of modern studies by Park and Irwin showed that most found a positive result
from technical analysis.
In 2011, Caginalp and DeSantis have used large data sets of closed-end funds, where
comparison with valuation is possible, in order to determine quantitatively whether key
aspects of technical analysis such as trend and resistance have scientific validity. Using
data sets of over 100,000 points they demonstrate that trend has an effect that is at
least half as important as valuation. The effects of volume and volatility, which are
smaller, are also evident and statistically significant. An important aspect of their work
involves the nonlinear effect of trend. Positive trends that occur within approximately 3.7
standard deviations have a positive effect. For stronger uptrends, there is a negative
effect on returns, suggesting that profit taking occurs as the magnitude of the uptrend
increases. For downtrends the situation is similar except that the "buying on dips" does
not take place until the downtrend is a 4.6 standard deviation event. These methods can
be used to examine investor behavior and compare the underlying strategies among
different asset classes.
In 2013, Kim Man Lui and T Chong pointed out that the past findings on technical
analysis mostly reported the profitability of specific trading rules for a given set of
historical data. These past studies had not taken the human trader into consideration as
no real-world trader would mechanically adopt signals from any technical analysis
method. Therefore, to unveil the truth of technical analysis, we should get back to
understand the performance between experienced and novice traders. If the market
really walks randomly, there will be no difference between these two kinds of traders.
However, it is found by experiment that traders who are more knowledgeable on
technical analysis significantly outperform those who are less knowledgeable.
Ticker-Tape Reading
Until the mid-1960s, tape reading was a popular form of technical analysis. It consisted
of reading market information such as price, volume, order size, and so on from a paper
strip which ran through a machine called a stock ticker. Market data was sent to
brokerage houses and to the homes and offices of the most active speculators. This
system fell into disuse with the advent of electronic information panels in the late 60's,
and later computers, which allow for the easy preparation of charts.
Quotation board
Another form of technical analysis used so far was via interpretation of stock market
data contained in quotation boards, that in the times before electronic screens, were
huge chalkboards located in the stock exchanges, with data of the main financial assets
listed on exchanges for analysis of their movements. It was manually updated with
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chalk, with the updates regarding some of these data being transmitted to environments
outside of exchanges (such as brokerage houses, bucket shops, etc.) via the
aforementioned tape, telegraph, telephone and later telex.
This analysis tool was used both, on the spot, mainly by market professionals for day
trading and scalping, as well as by general public through the printed versions in
newspapers showing the data of the negotiations of the previous day, for swing and
position trades.
Despite to continue appearing in print in newspapers, as well as computerized versions
in some websites, analysis via quotation board is another form of technical analysis that
has fallen into disuse by the majority.
Concepts
Charting Terms and Indicators
Average True Range – averaged daily trading range, adjusted for price gaps.
Breakout – the concept whereby prices forcefully penetrate an area of prior
support or resistance, usually, but not always, accompanied by an increase in
volume.
Chart Pattern – distinctive pattern created by the movement of security or
commodity prices on a chart
Cycles – time targets for potential change in price action (price only moves up,
down, or sideways)
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Dead Cat Bounce – the phenomenon whereby a spectacular decline in the price
of a stock is immediately followed by a moderate and temporary rise before
resuming its downward movement
Elliott Wave Principle and the golden ratio to calculate successive price
movements and retracements
Fibonacci Ratios – used as a guide to determine support and resistance
Momentum – the rate of price change
Point And Figure Analysis – A priced-based analytical approach employing
numerical filters which may incorporate time references, though ignores time
entirely in its construction
Resistance – a price level that may prompt a net increase of selling activity
Support – a price level that may prompt a net increase of buying activity
Trending – the phenomenon by which price movement tends to persist in one
direction for an extended period of time
Types of Charts
Candlestick Chart – Of Japanese origin and similar to OHLC, candlesticks
widen and fill the interval between the open and close prices to emphasize the
open/close relationship. In the West, often black or red candle bodies represent a
close lower than the open, while white, green or blue candles represent a close
higher than the open price.
Line Chart – Connects the closing price values with line segments. You can also
choose to draw the line chart using open, high or low price.
Open-High-Low-Close Chart – OHLC charts, also known as bar charts, plot the
span between the high and low prices of a trading period as a vertical line
segment at the trading time, and the open and close prices with horizontal tick
marks on the range line, usually a tick to the left for the open price and a tick to
the right for the closing price.
Point and Figure Chart – a chart type employing numerical filters with only
passing references to time, and which ignores time entirely in its construction.
Overlays
Overlays are generally superimposed over the main price chart.
Bollinger Bands – a range of price volatility
Channel – a pair of parallel trend lines
Ichimoku Kinko Hyo – a moving average-based system that factors in time and
the average point between a candle's high and low
Moving Average – an average over a window of time before and after a given
time point that is repeated at each time point in the given chart. A moving
average can be thought of as a kind of dynamic trend-line.
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Parabolic SAR – Wilder's trailing stop based on prices tending to stay within a
parabolic curve during a strong trend
Pivot Point – derived by calculating the numerical average of a particular
currency's or stock's high, low and closing prices
Resistance – a price level that may act as a ceiling above price
Support – a price level that may act as a floor below price
Trend Line – a sloping line described by at least two peaks or two troughs
Zig Zag – This chart overlay that shows filtered price movements that are greater
than a given percentage.
Breadth Indicators
These indicators are based on statistics derived from the broad market.
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Advance–Decline Line – a popular indicator of market breadth.
Mcclellan Oscillator - a popular closed-form indicator of breadth.
Mcclellan Summation Index - a popular open-form indicator of breadth.
Price-Based Indicators
These indicators are generally shown below or above the main price chart.
Average Directional Index – a widely used indicator of trend strength.
Commodity Channel Index – identifies cyclical trends.
Macd – moving average convergence/divergence.
Momentum – the rate of price change.
Relative Strength Index (RSI) – oscillator showing price strength.
Relative Vigor Index (RVI) – oscillator measures the conviction of a recent price
action and the likelihood that it will continue.
Stochastic Oscillator – close position within recent trading range.
Trix – an oscillator showing the slope of a triple-smoothed exponential moving
average.
Volume-based indicators
Accumulation/Distribution Index – based on the close within the day's range.
Money Flow – the amount of stock traded on days the price went up.
On-Balance Volume – the momentum of buying and selling stocks.
Trading with Mixing Indicators
MACD & Average directional index
MACD & Super Trend
MACD & Moving average
MACD & RSI
MACD & Moving Averages
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X. List of Stock Exchanges
This is a list of major stock exchanges. Those futures exchanges that also offer
trading in securities besides trading in futures contracts are listed both here and at the
list of futures exchanges.
There are sixteen stock exchanges (bourse) in the world that have a market
capitalization of over US$1 trillion each. They are sometimes referred to as the "$1
Trillion Club". These exchanges accounted for 87% of global market capitalization in
2015. Some exchanges do include companies from outside the country where the
exchange is located.
Major Stock Exchanges
Major stock exchange groups (top 20 by market capitalization) of issued shares of
domestic companies, as of 31 October 2017
Ran
k
1
Exchange
New York
Stock
Exchange
Economy
United
States
2 NASDAQ United
States
3
4
Japan
Exchange
Group
Shanghai
Stock
Exchange
Japan
China
5 Euronext Europea
n Union
6
7
8
9
10
11
12
13
14
London
Stock
Exchange
Hong
Kong
Stock
Exchange
Shenzhen
Stock
Exchange
United
Kingdom
Kong
Hong
China
Headquarters
Market
cap
(USD bn
)
Monthly
trade
volume
(USD bn
)
Time zone Δ DST
New York 21,377 1,781 EST/EDT −5
New York 9,585 948 EST/EDT −5
Mar
–
Nov
Mar
–
Nov
Open
(local)
Close
(local)
Tokyo 5,974 536 JST +9 09:00 15:00
Shanghai 5,043 517 CST +8 09:30 15:00
Amsterdam
Brussels
Lisbon
London
Paris
4,388 167 CET/CEST +1
London 4,297 199 GMT/BST +0
Mar
–Oct
Mar
–Oct
Hong Kong 4,135 178 HKT +8 09:15 16:00
Shenzhen 3,688 680 CST +8 09:30 15:00
TMX
Group Canada Toronto 2,360 92 EST/EDT −5
National
Stock
Exchange
of India
Deutsche
Börse
Bombay
Stock
Exchange
Korea
Exchange
SIX Swiss
Exchange
India
Germany
India
South
Korea
Switzerlan
Mar
–
Nov
Lunc
h
(local)
Open
(UTC
)
Clos
e
(UTC
)
09:30 16:00 No 14:30 21:00
09:30 16:00 No 14:30 21:00
11:30
–
12:30
11:30
–
13:00
00:00 06:00
01:30 07:00
09:00 17:30 No 08:00 16:30
08:00 16:30 No 08:00 16:30
12:00
–
13:00
11:30
–
13:00
01:15 08:00
01:30 07:00
09:30 16:00 No 14:30 21:00
Mumbai 2,194 93 IST +5.5 09:15 15:30 No 03:45 10:00
Frankfurt 2,181 122 CET/CEST +1
Mar
–Oct
08:00
(Eurex
)
08:00
(floor)
09:00
(Xetra)
22:00
(Eurex
)
20:00
(floor)
17:30
(Xetra)
No 07:00 21:00
Mumbai 2,175 11 IST +5.5 09:15 15:30 No 03:45 10:00
Seoul 1,683 142 KST +9 09:00 15:00 No 00:00 06:00
Zurich 1,649 75 CET/CEST +1
Mar
–Oct
09:00 17:30 No 08:00 16:30
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15
16
17
18
19
20
Nasdaq
Nordic
Australian
Securities
Exchange
JSE
Limited
Taiwan
Stock
Exchange
BM&F
Bovespa
BME
Spanish
Exchange
s
d
Northern
Europe,
Armenia
South
Africa
Stockholm 1,561 77
Australia Sydney 1,428 64
Taiwan
Brazil
Spain
Johannesbur
g
AEST/AED
T
variou
s
+10
Oct–
Apr
09:50 16:12 No 23:50 06:12
1,129 30 SAST +2 09:00 17:00 No 07:00 15:00
Taipei 1,068 71 CST +8 09:00 13:30 No 01:00 05:30
São Paulo 935 65 BRT/BRST −3
Madrid 896 72 CET/CEST +1
Oct–
Feb
Mar
–Oct
10:00 17:30 No 13:00 20:00
09:00 17:30 No 08:00 16:30
Note: "Δ" to UTC, as well as "Open (UTC)" and "Close (UTC)" columns contain
valid data only for standard time in a given time zone. During daylight saving time
period, the UTC times will be one hour less and Δs one hour more.
Commodity Exchanges
Chicago Board of Trade
Chicago Mercantile Exchange
United States Mercantile Exchange
United States International Monetary Financial Futures and Options Exchange
United States Metal Exchange
New York Mercantile Exchange
United States Commodity Exchange
PEG Commodity Exchange
HAUFEX Derivatives Financial Exchange
STER CAUFEX Derivatives Financial Exchange
Central Asia
Mongol Securities Exchange
Kazakhstan
Kazakhstan Stock Exchange (KASE)
Kyrgyzstan
Kyrgyz Stock Exchange
Uzbekistan
Tashkent Stock Exchange
Uzbekistan Stock Exchange
Page 170 of 214

XI. Glossary of Investment Terms
JP Morgan
- A -
Alpha - The amount of return expected from an investment from its inherent value.
Alternative Minimum Tax (AMT) - Federal tax, revamped by the Tax Reform Act of
1986, aimed at ensuring that wealthy individuals, trusts, estates and corporations pay at
least some tax.
Annual report - The yearly audited record of a corporation or a mutual fund's condition
and performance that is distributed to shareholders.
Annualized - A procedure where figures covering a period of less than one year are
extended to cover a 12-month period.
Annualized rate of return - The average annual return over a period of years, taking into
account the effect of compounding. Annualized rate of return also can be called
compound growth rate.
Appreciation - The increase in value of a financial asset.
Asset allocation - The process of dividing investments among cash, income and growth
buckets to optimize the balance between risk and reward based on investment needs.
Asset class - Securities with similar features. The most common asset classes are
stocks, bonds and cash equivalents.
Average maturity - For a bond fund, the average of the stated maturity dates of the debt
securities in the portfolio. Also called average weighted maturity. In general, the longer
the average maturity, the greater the fund's sensitivity to interest-rate changes, which
means greater price fluctuation. A shorter average maturity usually means a less
sensitive - and consequently, less volatile - portfolio.
- B -
Balanced fund - Mutual funds that seek both growth and income in a portfolio with a mix
of common stock, preferred stock or bonds. The companies selected typically are in
different industries and different geographic regions.
Bear market - A bear market is a prolonged period of falling stock prices, usually
marked by a decline of 20% or more. A market in which prices decline sharply against a
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ackground of widespread pessimism, growing unemployment or business recession.
The opposite of a bull market.
Benchmark - A standard, usually an unmanaged index, used for comparative purposes
in assessing performance of a portfolio or mutual fund.
Beta - A measurement of volatility where 1 is neutral; above 1 is more volatile; and less
than 1 is less volatile.
Blue chip - A high-quality, relatively low-risk investment; the term usually refers to
stocks of large, well-established companies that have performed well over a long
period. The term Blue Chip is borrowed from poker, where the blue chips are the most
valuable.
Board of Trustees - A governing board elected or appointed to direct the policies of an
institution.
Bond - A bond acts like a loan or an IOU that is issued by a corporation, municipality or
the U.S. government. The issuer promises to repay the full amount of the loan on a
specific date and pay a specified rate of return for the use of the money to the investor
at specific time intervals.
Bond fund - A mutual fund that invests exclusively in bonds.
Breakpoint - The level of dollar investment in a mutual fund at which an investor
becomes eligible for a discounted sales fee. This level may be achieved through a
single purchase or a series of smaller purchases.
Bull market - Any market in which prices are advancing in an upward trend. In general,
someone is bullish if they believe the value of a security or market will rise. The
opposite of a bear market.
- C -
Capital - The funds invested in a company on a long-term basis and obtained by issuing
preferred or common stock, by retaining a portion of the company's earnings from date
of incorporation and by long-term borrowing.
Capital gain - The difference between a security's purchase price and its selling price,
when the difference is positive.
Capital gains ex-date - The date that a shareholder is no longer eligible for a capital
gain distribution that has been declared by a security or mutual fund.
Capital gains long term - The difference between an asset's purchase price and selling
price (when the difference is positive) that was earned in more than one year.
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Capital gains reinvest NAV - The difference between an asset's purchase price and
selling price (when the difference is positive) that was automatically in vested in more
shares of the security or mutual fund invested at the security's net asset value.
Capital gains short term - The difference between an asset's purchase price and selling
price (when the difference is positive) that was earned in under one year.
Capital loss - The amount by which the proceeds from a sale of a security are less than
its purchase price.
Capitalization - The market value of a company, calculated by multiplying the number of
shares outstanding by the price per share.
Cash equivalent - A short-term money-market instrument, such as a Treasury bill or
repurchase agreement, of such high liquidity and safety that it is easily converted into
cash.
Common stock - Securities that represent ownership in a corporation; must be issued
by a corporation.
Contingent deferred sales charge (CDSC) - A back-end sales charge imposed when
shares are redeemed from a fund. This fee usually declines over time.
Corporate bond - A long-term bond issued by a corporation to raise outside capital.
Country breakdown - Breakdown of securities in a portfolio by country.
Custodian - A bank that holds a mutual fund's assets, settles all portfolio trades and
collects most of the valuation data required to calculate a fund's net asset value (NAV).
Cut-off time - The time of day when a transaction can no longer be accepted for that
trading day.
- D -
Daily dividend factor (date) - Daily dividend distributed by a money market mutual fund.
Default - Failure of a debtor to make timely payments of interest and principal as they
come due or to meet some other provision of a bond indenture.
Distribution schedule - A tentative distribution schedule of a mutual fund's dividends and
capital gains.
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Diversification - The process of owning different investments that tend to perform well at
different times in order to reduce the effects of volatility in a portfolio, and also increase
the potential for increasing returns.
Dividend - A dividend is a portion of a company's profit paid to common and preferred
shareholders. Dividends provide an incentive to own stock in stable companies even if
they are not experiencing much growth. Companies are not required to pay dividends.
Dividend paid - Amount paid to the shareholder of record a security or mutual fund.
Dividend reinvest NAV - Dividends paid to the shareholder of record that are
automatically invested in more shares of the security or mutual fund that are purchased
at the security's net asset value.
Dividend yield - Annual percentage of return earned by a mutual fund. The yield is
determined by dividing the amount of the annual dividends per share by the current net
asset value or public offering price.
Dollar cost averaging - Investing the same amount of money at regular intervals over an
extended period of time, regardless of the share price. By investing a fixed amount, you
purchase more shares when prices are low, and fewer shares when prices are high.
This may reduce your overall average cost of investing.
Dow Jones Industrial Average (Dow) - The most commonly used indicator of stock
market performance, based on prices of 30 actively traded blue chip stocks, primarily
major industrial companies. The Average is the sum of the current market price of 30
major industrial companies' stocks divided by a number that has been adjusted to take
into account stocks splits and changes in stock composition.
- E -
EPS - The portion of a company's profit allocated to each outstanding share of common
stock. EPS serves as an indicator of a company's profitability.
Equities - Shares issued by a company which represent ownership in it. Ownership of
property, usually in the form of common stocks, as distinguished from fixed-income
securities such as bonds or mortgages. Stock funds may vary depending on the fund's
investment objective.
Equity fund - A mutual fund/collective fund in which the money is invested primarily in
common and/or preferred stock. Stock funds may vary, depending on the fund's
investment objective.
Ex-Dividend - The interval between the announcement and the payment of the next
dividend for a stock.
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Ex-Dividend date - The date on which a stock goes ex-dividend. Typically about three
weeks before the dividend is paid to shareholders of record.
Exchange privilege - The ability to transfer money from one mutual fund to another
within the same fund family.
Expense ratio - The ratio between a mutual fund's operating expenses for the year and
the average value of its net assets.
Expense ratio (date) - Amount, expressed as a percentage of total investment that
shareholders pay annually for mutual fund operating expenses and management fees.
- F -
Federal Funds Rate (Fed Funds Rate) - The interest rate charged by banks with excess
reserves at a Federal Reserve district bank to banks needing overnight loans to meet
reserve requirements. The most sensitive indicator of the direction of interest rates,
since it is set daily by the market, unlike the prime rate and the discount rate, which are
periodically changed by banks and by the Federal Reserve Board.
Federal Reserve Board (The Fed) - The governing board of the Federal Reserve
System, it regulates the nation's money supply by setting the discount rate, tightening or
easing the availability of credit in the economy.
Fixed income fund - A fund or portfolio where bonds are primarily purchased as
investments. There is no fixed maturity date and no repayment guarantee.
Fixed income security - A security that pays a set rate of interest on a regular basis.
Fund - A pool of money from a group of investors in order to buy securities. The two
major ways funds may be offered are (1) by companies in the securities business (these
funds are called mutual funds); and (2) by bank trust departments (these are called
collective funds).
- G -
Growth investing - Investment strategy that focuses on stocks of companies and stock
funds where earnings are growing rapidly and are expected to continue growing.
Growth stock - Typically a well-known, successful company that is experiencing rapid
growth in earnings and revenue, and usually pays little or no dividend.
Growth-style funds - Growth funds focus on future gains. A growth fund manager will
typically invest in stocks with earnings that outperform the current market. The manager
attempts to achieve success by focusing on rapidly growing sectors of the economy and
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investing in leading companies with consistent earnings growth. The fund grows
primarily as individual share prices climb.
- I -
Index - An investment index tracks the performance of many investments as a way of
measuring the overall performance of a particular investment type or category. The S&P
500 is widely considered the benchmark for large-stock investors. It tracks the
performance of 500 large U.S. company stocks.
Individual Retirement Account (IRA) - A tax-deferred account to which an eligible
individual can make annual contributions up to $3,000 ($6,000 for a single-income
married couple filing a joint income tax return).
Inflation - A rise in the prices of goods and services, often equated with loss of
purchasing power.
Interest rate - The fixed amount of money that an issuer agrees to pay the bondholders.
It is most often a percentage of the face value of the bond. Interest rates constitute one
of the self-regulating mechanisms of the market, falling in response to economic
weakness and rising on strength.
Interest-rate risk - The possibility of a reduction in the value of a security, especially a
bond, resulting from a rise in interest rates.
Investment advisor - An organization employed by a mutual fund to give professional
advice on the fund's investments and asset management practices.
Investment company - A corporation, trust or partnership that invests pooled
shareholder dollars in securities appropriate to the organization's objective. Mutual
funds, closed-end funds and unit investment trusts are the three types of investment
companies.
Investment grade bonds - A bond generally considered suitable for purchase by prudent
investors.
Investment objective - The goal of a mutual fund and its shareholders, e.g. growth,
growth and income, income and tax-free income.
- J -
Junk bond - A lower-rated, usually higher-yielding bond, with a credit rating of BB or
lower.
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- L -
Large-cap - The market capitalization of the stocks of companies with market values
greater than $10 billion.
Letter of intent - A letter of intent may also be issued by a mutual fund shareholder to
indicate that he/she would like to invest certain amounts of money at certain specified
times. In exchange for signing a letter of intent, the shareholder would often qualify for
reduced sales charges. A letter of intent is not a contract and cannot be enforced, it is
just a document stating serious intent to carry out certain business activities.
Lipper ratings - The Lipper Mutual Fund Industry Average is the performance level of all
mutual funds, as reported by Lipper Analytical Services of New York. The performance
of all mutual funds is ranked quarterly and annually, by type of fund such as aggressive
growth fund or income fund. Mutual fund managers try to beat the industry average as
well as the other funds in their category.
Liquidity - The ability to have ready access to invested money. Mutual funds are liquid
because their shares can be redeemed for current value (which may be more or less
than the original cost) on any business day.
Loads (back-end, front-end and no-load) - Sales charges on mutual funds. A back-end
load is assessed at redemption (see contingent deferred sales charge), while a frontend
load is paid at the time of purchase. No-load funds are free of sales charges.
Long-term investment strategy - A strategy that looks past the day-to-day fluctuations of
the stock and bond markets and responds to fundamental changes in the financial
markets or the economy.
- M -
Management fee - The amount paid by a mutual fund to the investment advisor for its
services.
Market price - The current price of an asset.
Market risk - The possibility that an investment will not achieve its target.
Market timing - A risky investment strategy that calls for buying and selling securities in
anticipation of market conditions.
Maturity - The date specified in a note or bond on which the debt is due and payable.
Maturity distribution - The breakdown of a portfolio's assets based on the time frame
when the investments will mature.
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Median Market Cap - The midpoint of market capitalization (market price multiplied by
the number of shares outstanding) of the stocks in a portfolio, where half the stocks
have higher market capitalization and half have lower.
Mid-cap - The market capitalization of the stocks of companies with market values
between $3 to $10 billion.
Money market mutual fund - A short-term investment that seeks to protect principal and
generate income by investing in Treasury bills, CDs with maturities less than one year
and other conservative investments.
Morningstar ratings - System for rating open- and closed-end mutual funds and
annuities by Morningstar Inc. of Chicago. The system rates funds from one to five stars,
using a risk-adjusted performance rating in which performance equals total return of the
fund.
Mutual fund - Fund operated by an investment company that raises money from
shareholders and invests it in stocks, bonds, options, commodities or money market
securities.
- N -
NASDAQ - National Association of Securities Dealers Automated Quotations system,
which is owned and operated by the National Association of Securities Dealers.
NASDAQ is a computerized system that provides brokers and dealers with price
quotations for securities traded over-the-counter as well as for many New York Stock
Exchange listed securities.
Net Asset Value per share (NAV) - The current dollar value of a single mutual fund
share; also known as share price. The fund's NAV is calculated daily by taking the
fund's total assets, subtracting the fund's liabilities, and dividing by the number of
shares outstanding. The NAV does not include the sales charge. The process of
calculating the NAV is called pricing.
Number of Holdings - Total number of individual securities in a fund or portfolio.
- P -
P/B Ratio - The price per share of a stock divided by its book value (net worth) per
share. For a stock portfolio, the ratio is the weighted average price-to-book ratio of the
stocks it holds.
Par value - Par value is the amount originally paid for a bond and the amount that will
be repaid at maturity. Bonds are typically sold in multiples of $1,000.
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Portfolio - A collection of investments owned by one organization or individual, and
managed as a collective whole with specific investment goals in mind.
Portfolio allocation - Amount of assets in a portfolio specifically designated for a certain
type of investment.
Portfolio holdings - Investments included in a portfolio.
Portfolio manager - The person or entity responsible for making investment decisions of
the portfolio to meet the specific investment objective or goal of the portfolio.
Preferred stock - A class of stock with a fixed dividend that has preference over a
company's common stock in the payment of dividends and the liquidation of assets.
There are several kinds of preferred stock, among them adjustable-rate and convertible.
Premium - The amount by which a bond or stock sells above its par value.
Price-to-book - The price per share of a stock divided by its book value (net worth) per
share. For a stock portfolio, the ratio is the weighted average price-to-book ratio of the
stocks it holds.
Price-to-earnings (P/E) Ratio - A stock's price divided by its earnings per share, which
indicates how much investors are paying for a company's earning power.
P/E Ratio (1 yr trailing) (long position) - Price of a stock divided by its earnings from the
latest year.
P/E Ratio (1 yr forecast) - Price of a stock divided by its projected earnings for the
coming year.
Prospectus - Formal written offer to sell securities that sets forth the plan for proposed
business enterprise or the facts concerning an existing one that an investor needs to
make an informed decision. Prospectuses are also issued by mutual funds, containing
information required by the SEC, such as history, background of managers, fund
objectives and policies, financial statement, risks, services and fees.
Proxy - A shareholder vote on matters that require shareholders' approval.
Public offering price (POP) - A mutual fund share's purchase price, including sales
charges.
- Q -
Quality distribution - The breakdown of a portfolio's assets based on quality rating of the
investments.
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- R -
R2 - The percentage of a fund's movements that result from movements in the index
ranging from 0 to 100. A fund with an R2 of 100 means that 100 percent of the fund's
movement can completely be explained by movements in the fund's external index
benchmark.
Ratings - Evaluations of the credit quality of bonds usually made by independent rating
services. Ratings generally measure the probability of timely repayment of principal and
interest on debt securities.
Recession - A downturn in economic activity, defined by many economists as at least
two consecutive quarters of decline in a country's gross domestic product.
Redemption - Sale of mutual fund shares by a shareholder.
Reinvestment option - Refers to an arrangement under which a mutual fund will apply
dividends or capital gains distributions for its shareholders toward the purchase of
additional shares.
Relative risk and potential return - The amount of potential return from an investment as
related to the amount of risk you are willing to accept.
Rights of accumulation - The right to buy over a period of time. For example, this might
be done by an institutional investor to avoid making a single substantial purchase that
might drive up the market price, or by a retail investor who wants to reduce risk by dollar
cost averaging.
Risk tolerance - The degree to which you can tolerate volatility in your investment
values.
- S -
Sales charge - An amount charged for the sale of some fund shares, usually those sold
by brokers or other sales professionals. By regulation, a mutual fund sales charge may
not exceed 8.5 percent of an investment purchase. The charge may vary depending on
the amount invested and the fund chosen. A sales charge or load is reflected in the
asked or offering price. See loads.
Sector - A group of similar securities, such as equities in a specific industry.
Sector breakdown - Breakdown of securities in a portfolio by industry categories.
Securities - Another name for investments such as stocks or bonds. The name
'securities' comes from the documents that certify an investor's ownership of particular
stocks or bonds.
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Securities and Exchange Commission (SEC) - The federal agency created by the
Securities and Exchange Act of 1934 that administers the laws governing the securities
industry, including the registration and distribution of mutual fund shares.
Share - A unit of ownership in an investment, such as a share of a stock or a mutual
fund.
Share class net assets (date) - Fund assets included in a specific share class.
Share classes - Classes represent ownership in the same fund but charge different
fees. This can enable shareholders to choose the type of fee structure that best suits
their particular needs.
Sharpe Ratio - A risk-adjusted measure that measures reward per unit of risk. The
higher the sharpe ratio, the better. The numerator is the difference between the Fund's
annualized return and the annualized return of the risk-free instrument (T-Bills).
Short-term investment - Asset purchased with an investment life of less than a year.
Small-cap - The market capitalization of the stocks of companies with market values
less than $3 billion.
Standard & Poor's Index - Broad-based measurement of changes in stock market
conditions based on the average performance of 500 widely held common stocks
commonly known as the Standard & Poor's 500 or S&P 500.
Standard Deviation - A statistical measure of the degree to which an individual value in
a probability distribution tends to vary from the mean of the distribution.
Statement of additional information (SAI) - The supplementary document to a
prospectus that contains more detailed information about a mutual fund; also known as
'Part B' of the prospectus.
Stock - A long-term, growth-oriented investment representing ownership in a company;
also known as 'equity.'
Stockholder - The owner of common or preferred stock of a corporation. Also called
'shareholder.'
Systematic investment plan - A service option that allows investors to buy mutual fund
shares on a regular schedule, usually through bank account deductions.
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- T -
Tax-exempt income - Tax-exempt income is income that is exempt from income taxes.
A purchaser of state municipal bonds is exempt from federal taxation on the income
earned from the bonds.
Time horizon - The amount of time that you expect to stay invested in an asset or
security.
Top 10 holdings - Ten largest holdings in a portfolio based on asset value.
Top 10 long and short positions - The top 10 holdings ranked by market value in each
position category (long and short). A long position is one in which an investor buys
shares of stock and as an equity holder will profit if the price of the stock rises. With a
short position an investor will sell shares of stock that they do not own but have
borrowed. The investor in a short position will profit if the price of the stock falls.
Top five contributors - Five assets in a portfolio that generated largest negative returns
(losses).
Top five detractors - Top five industries in a portfolio based on amount of invested
assets.
Top five holdings - Top five securities in a portfolio based on amount of invested assets.
Top five industries - Top five industries in a portfolio based on amount of invested
assets.
Total return - Accounts for all of the dividends and interest earned before deductions for
fees and expenses, in addition to any changes in the value of the principal, including
share price, assuming the funds' dividends and capital gains are reinvested. Often, this
percentage is presented in a specified period of time (one, five, ten years and/or life of
fund). Also, a method of calculating an investment's return that takes share price
changes and dividends into account.
Tracking Error - The active risk of the portfolio. It determines the annualized standard
deviation of the excess returns between the portfolio and the benchmark.
Transfer agent - An agent, usually a commercial bank, appointed to monitor records of
stocks, bonds and shareholders. A transfer agent keeps a record of the name of each
registered shareholder, his or her address, the number of shares owned, and sees that
certificates presented for the transfer are properly canceled and new certificates are
issued in the name of the new owner.
Treasury bill - Negotiable short-term (one year or less) debt obligations issued by the
U.S. government and backed by its full faith and credit.
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Treasury bond - Negotiable long-term (10 years or longer) debt obligations issued by
the U.S. government and backed by its full faith and credit.
Treasury note - Negotiable medium-term (one year to 10 years) debt obligations issued
by the U.S. government and backed by its full faith and credit.
Treasury security - Securities issued by the U.S. Treasury Department and backed by
the U.S. government.
Trustee - 1. An organization or individual who has responsibility for one or more
accounts. 2. An individual who, as part of a fund's board of trustees, has ultimate
responsibility for a fund's activities.
Turnover Ratio - Percentage of holdings in a mutual fund that are sold in a specified
period.
- V -
Valuation - An estimate of the value or worth of a company; the price investors assign to
an individual stock.
Value investing - A strategy whereby investors purchase equity securities that they
believe are selling below estimated true value. The investor can profit by buying these
securities then selling them once they appreciate to their real value.
Value stock - Typically an overlooked or underpriced company that is growing at slower
rates.
Value-style funds - Value-style funds typically hold company stocks that are
undervalued in the market. Fundamentally strong companies whose stocks are
inexpensive but trending upward may also be selected for value funds.
Volatility - The amount and frequency with which an investment fluctuates in value.
- W -
Wtd. Avg. Market Cap - Most indexes are constructed by weighting the market
capitalization of each stock on the index. In such an index, larger companies account for
a greater portion of the index. An example is the S&P 500 Index.
Weighted average maturity - A Fund's WAM calculates an average time to maturity of all
the securities held in the portfolio, weighted by each security's percentage of net assets.
The calculation takes into account the final maturity for a fixed income security and the
interest rate reset date for floating rate securities held in the portfolio. This is a way to
measure a fund's sensitivity to potential interest rate changes.
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- Y -
YTD total return - Year-to-date return on an investment including appreciation and
dividends or interest.
YTD - Year-to-date return on an investment including appreciation and dividends or
interest.
YTD Return (w load) - Year-to-date return on an investment including appreciation and
dividends or interest, minus any applicable expenses or charges.
Yield - Annual percentage rate of return on capital. The dividend or interest paid by a
company expressed as a percentage of the current price.
Yield to maturity - Concept used to determine the rate of return an investor will receive if
a long-term, interest-bearing investment, such as a bond, is held to its maturity date.
Yield to maturity distribution - The average rate of return that will be earned on a bond if
held to maturity.
- # -
12b-1 fee - A mutual fund fee, named for the SEC rule that permits it, used to pay for
broker-dealer compensation and other distribution costs. If a fund has a 12b-1 fee, it will
be disclosed in the fee table of the fund's prospectus.
30-day SEC yield (date) - Represents net investment income earned by a fund over a
30-day period, expressed as an annual percentage rate based on the fund's share price
at the end of the 30-day period. The 30-day yield should be regarded as an estimate of
investment income and may not equal the fund's actual income distribution rate.
52 Week High - A security's trading high point over the last 52-week period.
52 Week Low - A security's trading low point over the last 52-week period.
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XII. References
1. https://en.wikipedia.org/wiki/Stock_market
2.https://en.wikipedia.org/wiki/U.S._Securities_and_Exchange_Commission
3. https://en.wikipedia.org/wiki/Securities_market_participants_(United_States)
4. https://en.wikipedia.org/wiki/New_York_Stock_Exchange
5. https://en.wikipedia.org/wiki/NASDAQ
6. https://en.wikipedia.org/wiki/Investing_online
7. https://en.wikipedia.org/wiki/Stock_selection_criterion
8. https://en.wikipedia.org/wiki/Fundamental_analysis
9. https://en.wikipedia.org/wiki/Technical_analysis
10. http://einvestingforbeginners.com/wp-content/uploads/2013/04/7-Steps-to-
Understanding-the-Stock-Market.pdf
11. https://www.scag.gov/wp-content/uploads/2011/03/Stocks.pdf
12. https://web.wpi.edu/Pubs/E-project/Available/E-project-081409-
154927/unrestricted/0903-final.pdf
13. https://en.wikipedia.org/wiki/List_of_stock_exchanges
14. https://en.wikipedia.org/wiki/Dow_Jones_Industrial_Average
15. https://en.wikipedia.org/wiki/S%26P_500_Index
16. https://en.wikipedia.org/wiki/List_of_S%26P_500_companies
17. https://en.wikipedia.org/wiki/NYSE_American
18. https://www.investopedia.com/ask/answers/09/amex-vs-nasdaq.asp
19. https://www.investopedia.com/terms/m/marketmaker.asp
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Page 187 of 214

Page 188 of 214

Attachment A
Seven Steps to Understanding
the Stock Market
Page 189 of 214

Investing for Beginners 101: 7 Steps to Understanding the Stock Market
Information in this eBook should not be construed as investment advice. The work is based on
SEC filings and should not be seen as a solicitation to buy or sell certain securities. The author is
not a lawyer, an accountant, or a financial planner. Any suggestions are not intended to solve any
particular financial situation and you should also seek the services of a certified professional.
The information in this guide should be considered for informational purposes only. There are links
contained in this guide that may benefit the author financially. The author does not assume
responsibility for any Third Party material or opinions that may be present in the guide.
No parts of this publication may be reproduced or distributed without the express written consent
of the author. All registered trademarks in this guide are property of their respective owners.
All readers of this guide must do their own due diligence and accept that the author does not take
responsibility for the success or failure of your investment or business decisions. As of the date of
publication, the author does not hold any positions in the securities discussed in this guide.
www.einvestingforbeginners.com 2
7 Steps to Understanding the
Stock Market
The Investing for Beginners 101 Guide
Copyright: www.einvestingforbeginners.com
Published: April 27, 2013. All Rights Reserved.

Investing for Beginners 101: 7 Steps to Understanding the Stock Market
My investing strategy centers on value
investing and is heavily influenced by
Benjamin Graham, Warren Buffett, and
investing podcasts and books.
Instead of attempting to reinvent the wheel,
my 7 Steps to Understanding the Stock
Market guide integrates proven and
successful investing strategies.
www.einvestingforbeginners.com 3
Welcome to my Free Guide!
In a market driven by emotions like fear and
greed, I present to investors a simple
numbers-based approach to consistently
picking good stocks. I’m an electrical engineer
at a Fortune 500 company with a fiery passion
for numbers and value investing.
about the stock market, to give them all the
tools they need to make smart investing
decisions.
Easy to follow and full of value, I’ve created
the course for people of all ages to be able to
understand, leaving out all the Wall Street
jargon. Young investors have such an
advantage if they just start now, and I hope
to motivate as many people as I can to follow
this path to wealth.
I’ve developed the Investing for Beginners
101 guide to give those who know nothing
I don’t have a billion dollar portfolio, I’m not a
wildly successful hedge fund manager, and I
even don’t have decades of experience. But I
do take my research very seriously and have
innovated on everything I’ve learned. Enjoy.

Investing for Beginners 101: 7 Steps to Understanding the Stock Market
Step 1 to Understanding the Stock Market ……………………………...….5
The Rule of 72 Exercise ………………………….……………………….………..7
Step 2/7: How the Stock Market Works ………………………….………….8
Step 3/7: The BEST Stock Strategy and Buying Your First Stock…..14
Step 4/7: How To Calculate P/E Ratio……….……………………………..21
Step 5/7: The Single Two Factors Most Correlated To Success……..25
Step 6/7: Cashing In With A Dividend Is A Necessity………………….30
Step 7/7: The Best Way To Avoid Risk & Putting It All Together…..36
www.einvestingforbeginners.com 4
Contents

Investing for Beginners 101: 7 Steps to Understanding the Stock Market
Investing for Beginners 101:
7 Steps to Understanding
the Stock Market
Welcome to this easy 7 step guide to
understanding the stock market, Investing for
Beginners 101. I’ve created the easy to follow
Investing for Beginners guide to simplify the
learning process for entering the stock
market. By leaving out all the confusing Wall
Street jargon and explaining things in simple
terms, Investing for Beginners 101 is the
perfect solution for those willing to learn.
Before we get started, here is a breakdown of
the 7 categories for the first official Investing
for Beginners guide.
1. Why to Invest?
2. How the Stock Market Works
3. BEST Stock Strategy; Buying Your First Stock
4. How to Calculate the Most Used Valuation
5. The Single Two Ratios Correlated to Success
6. Cashing In With a Dividend Is a Necessity
7. The Best Way to Avoid Risk, and Putting it all
Together!
Why is investing so important?
Let’s imagine a life without investing first. You
work 9-5 for a boss all your life, maybe get a
couple of raises, a promotion, have a nice
house, car, and kids. You go on vacation once
a year, eat out regularly, and attempt to enjoy
the finer things in life as best you can.
Now since you haven’t invested, you get old,
become unattractive for hiring, and live with a
measly social security allowance for the rest of
your life. You might’ve made good money
when you were young, but now you have
nothing to show for your lifetime of work.
Now let’s say you did save some money for
retirement, but again this money wasn’t
invested and won’t be invested. Let’s even
stay optimistic and assume you saved $1400
a month for 26 years. This would leave you
with $403,200 to live on, which on a $60,000
a year lifestyle would only last you 6.72 years.
You’re retiring at 65 only to go broke at 71
and you’ve been a good saver all your life.
Well then what’s the point of saving, you may
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Investing for Beginners 101: 7 Steps to Understanding the Stock Market
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ask? Now let me show you the same numbers
but add investing into the equation.
Again, let’s say you saved $1400 a month for
26 years. BUT, this money was invested
continuously as part of a long-term
investment plan, solid in the fundamentals
you learned from Investing for Beginners 101.
Now, including dividends in long-term stock
market investments, I can confidently and
conservatively say that you can average a
10% annual return on these investments.
The same $1400 a month compounded
annually at 10% turns your net worth into
$2,017,670.19 in 26 years! But the story
gets even better. With this large sum of
money at your retirement, again
conservatively assuming a 3% yield on your
dividends, you can collect $60,530 a year to
live on WITHOUT reducing your saved
amount.
See the graph to the right to get a visual
picture of the staggering difference.
Answer: Compounding Interest
By letting the power of compounding interest
assist you in saving, you leverage the
resources available in the market and slowly
build wealth over time. It’s not some mystified
secret or get-rich-quick shortcut; this is a
time tested method to become wealthy and
be financially independent, and it’s how
billionaires like Warren Buffett have done it all
their life.

Investing for Beginners 101: 7 Steps to Understanding the Stock Market
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For those who don’t want to think about
tomorrow, I can’t help you. But tomorrow will
come, it always does. Would you rather spend
the rest of your life with no plan, dependent
on others and unsure of your future? Or would
you rather be making progress towards a
goal, living with purpose and anticipating the
fruits of your labor you know you will be
reaping for years after you sow?
saved each and every year thereafter.
We want the ability to calculate how much
interest we could earn on an average
investment in order to plan sufficiently and
create goals for that investment plan.
The equation for calculating how long it takes
an investment to double is as follows:
The choice is yours, and only YOU will feel the
consequences of that choice.
The Rule of 72 Exercise
The Rule of 72 is a simple way to quickly
calculate how long it will take for an
investment to double, based on compounding
interest.
As I referred to in the previous section,
compounding interest works its wonders by
earning interest on capital, than earning
interest on the interest of that capital, thus
multiplying the amount of money able to be
[ 72 / (interest %) ] = # of years to double
So, for our previous example of 10%
compounded annually, it takes our money 7.2
years to double.
72 / 10 = 7.2 years
In a period of 26 years, our money doubles
3.6 times. When adding in the monthly
additions, this is how $1,400 a month
becomes $2,017,670.19.
The best way to learn is by doing. Work on
this exercise and then read the answer in the
next exercise section. How long until your
money doubles at 12% annually?

Investing for Beginners 101: 7 Steps to Understanding the Stock Market
Step 2/7: How the Stock
Market Works
The saying goes that knowing is half the
battle, and the same is true with investing in
the stock market. By yearning to educate
yourself about how to invest and build wealth,
you are already halfway to your goal.
My job as your teacher is to build a foundation
of educational wisdom that can be broadly
used to earn money and understand any stock
market strategy presented to you. I hope this
guide is as entertaining and easy to follow as
can be.
In order to understand investing, you must
understand how the general principles behind
the stock market work. Before I started
researching and reading about investing, the
only things I knew about the stock market
were what I saw on TV or heard on the news,
and it was never positive.
Stock Market is Overdramatized
I remember hearing about the disaster of the
Facebook IPO (initial public opening, when the
stock is first able to be bought by the public),
the failures of Freddie and Fannie Mae and
how stocks tumbled afterwards, and the great
dot com bubble that burst in 2000.
With each stock market crash or failure, there
are lots of emotional stories about everyday
people losing everything they had or big,
greedy corporate leaders succumbing to the
fall of their empire.
Because of my limited knowledge of the stock
market, I pictured it as full of Gordon Gekko
businessmen types (from Wall Street: Money
Never Sleeps) with money spilling out of their
ears and lives full of fast action and New York
speed trading. Hollywood depicts Wall Street
as this extreme roller coaster ride where
fortunes are won and lost every instant, when
in reality this isn’t the case. Yes, the stock
market has ups and downs, there is risk
involved, and some people do get burned
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Investing for Beginners 101: 7 Steps to Understanding the Stock Market
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badly, but the majority of successful investors
take very boring and safe strategies straight
to success, because they understand the basic
principles and are educated on how to stay
out of risky investments.
bit, anyone can clearly derive that investors
lost less than half their worth during that
year. But as you can see from the graph
below, the S&P quickly recovered lost ground
after the ’08 fall.
Reality: The Market Fluctuates
I feel like I must give the reader some
perspective to the reality of the stock market,
so you can understand that the big flashy
news headlines and TV specials are extremely
overdramatized. The S&P 500 is a list of the
top 500 stocks in the U.S., and is widely
accepted as the benchmark for all stock
investments; analysts consistently compare
performance to that of the S&P 500. The S&P
500 is an index that you can think of that is
similar to the DOW, which only has 30
companies. Now, the worst one day loss for
the S&P 500 in 2008 was only -9.03%. In
total for the year, the S&P 500 lost -38.49%,
which was the worst year the index has ever
had.
In fact, periods of time where the price falls
are common. An important aspect of investing
is knowing that stock prices do fluctuate up
and down but when held over long periods of
time, the chances of capital gains
exponentially increases.
If you think about these numbers for a little

Investing for Beginners 101: 7 Steps to Understanding the Stock Market
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Reality: Media Covers
the Extreme
As you can see, the majority of investors
aren’t in fact losing their shirts and the media
is choosing to cover extreme cases of people
losing money in the stock market, simply
because they make for good stories and good
TV. Those who did lose all their money weren’t
diversified in their investments, bought stock
in companies that were over leveraged,
borrowed money to purchase stocks, or a
combination of all three.
For those investors who didn’t sell their stocks
in 2008, which would’ve been the worst time
to bail out of your stocks, the market
recovered and the “devastating losses” didn’t
affect their portfolio. Therein lies the
importance of long-term investing and riding
out the storms. Since its inception in 1957,
the S&P 500 has returned on average 10.83%
annually, when dividends are automatically
reinvested.
For those who need a reminder on how
powerful a compounding 10% return can be,
recall my $2 million example. In 40 years, this
amount becomes $8,179,114!
Smart Investors Don’t
Listen to Noise
So Investing for Beginners fans, please don’t
forget that a stock is meant to be a long-term
investment. It will pay you dividends that over
time will compound and multiply, and if
invested in a good company the share price
will appreciate substantially as well. As
financial guru Dave Ramsey simply puts it,
“The only people who get hurt riding a roller
coaster are the ones that jump off.” Once you
gain the confidence to have convictions in
your investments - knowing that they will
recover when hit badly - you will easily be
able to avoid selling your stocks at the worst
possible time, when the market has a
temporary crash and it seems like everyone
else around you is doing it.

Investing for Beginners 101: 7 Steps to Understanding the Stock Market
Before I introduce the more in-depth topics of
this guide, I feel I must explain how I derived
these categories and why they are relevant to
you. While the Value Trap Indicator I teach is
my own original invention, the fundamental
ideas and ratios are all well known and widely
used by millions of investors around the world
and countless investing gurus and authors. In
fact, if you get around to reading enough
investing and stock market books you’ll realize
they are almost all the same, and many of the
various ways institutional investors evaluate a
stock run parallel to other strategies.
Step 3 will uncover the BEST stock strategy
you will ever learn, and will show you that
buying stock is easy. The first step to
swimming is first getting your feet wet.
Once you climb that obstacle of learning how
to transfer money into your investment
account and easily buy a stock, you will find
the confidence to continue educating yourself
about investing to then make the right
decisions with some real money.
Understanding this fact helps bring greater
understanding to the process and you can feel
confident in these metrics because a quick
Google search will confirm their validity. I am
not reinventing the wheel; instead I am
utilizing my obsessive passion for investing
research and presenting the most important
concepts in an easy to follow guide not yet
found on the web. For those who complete the
guide and advance as investors, my Value
Trap Indicator can be accurately implemented
for a very profitable stock picking strategy.
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Investing for Beginners 101: 7 Steps to Understanding the Stock Market
The BEST Stock Strategy
and Buying Your First Stock
For Part 3 of this guide, I will show you the
absolute best strategy you should always use
when investing and will help you overcome
the biggest hurdle beginning investors face:
buying your first stock. Buying just 1 share of
your favorite company when buying your first
stock is like taking your first step into the
market.
I can’t stress enough how important buying
your first stock is, as you can read and read
until your eyes turn blue but you won’t start
to see progress towards your results until you
take action. Trust me - a guy who has been
there already - buying your first stock gives
you a sense of empowerment and
excitement at being part of the stock market.
Before going over buying your first stock, I
am going to reveal the absolute best stock
strategy you can use and one that most
wealthy investors use. It is called:
Dollar Cost Averaging
What do investing greats have to say about
dollar cost averaging? The godfather of value
investing and Warren Buffett’s mentor
Benjamin Graham wrote in his book The
Intelligent Investor that dollar cost averaging,
“Enables you to put a fixed amount of money
into an investment at regular intervals … You
buy more – whether the markets have gone
(or are about to go up), down, or sideways.“
Warren Buffett called this book, “By far the
best book on investing ever written,” and it is
the resource many investors refer to for
guidance.
Dollar cost averaging is simply investing the
same amount of money every month, year, or
week, into the stock market with the effect of
forcing the investor to buy more when stock
prices are lower and buy less when stock
prices are higher. By dollar cost averaging,
the investor is always invested and will not be
devastated by the losses that come with
trying to time the market.
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Investing for Beginners 101: 7 Steps to Understanding the Stock Market
Stay Away from the “Psychics”
In your investing life, beware the analysts
who claim they know the exact time to buy
low or sell high. In retrospect everyone
believes they would’ve been able to predict
the highs and lows of the market, but in
reality it is impossible. Trying to profit from
timing the market will drive you nuts and
always leave you regretting your decisions.
Most investors will sell too early and miss out
on bigger gains or will sell because stocks
have fallen significantly, which is the absolute
worst time to sell. Or, investors will often feel
good about their investments when they are
doing well and will as a consequence buy a lot
more at the time where stocks are very high
already and there is very little upside.
Dollar cost averaging gives you the necessary,
patient discipline you need to stay in the
market for the long term and through the ups
and downs. How does this strategy help you
buy more when prices are low and buy less
when prices are high? Take this simple
example.
Say a stock’s price is $10 today and you are
buying $500 of stock a month in a dollar cost
averaging strategy. So the first month you
buy 50 shares of this stock. Let’s say next
month the price has dropped to $5. Instead of
getting pissed that the shares have fallen so
much and cursing the world, the smart
investor sees this as an opportunity to buy
more stock at a discount. So, again you
invest $500 in month 2 knowing that you are
in for the long term, and you end up buying
100 shares. Let’s say in month 3 the price is
still at $5 and you are buying 100 more
shares. Finally in month 4 the price recovers
and is now at a whopping $15.
Compare where’d you be if you had or hadn’t
dollar cost averaged. With dollar cost
averaging, you have 250 shares of stock now
worth $15, and you are sitting pretty with
some nice gains. Let’s say you didn’t use
dollar cost averaging and you had invested all
$1500 at once. You’d have only 150 shares,
and when the price dropped to $5 you
might’ve sold at the worst possible time,
unable to stomach any more losses.
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Investing for Beginners 101: 7 Steps to Understanding the Stock Market
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Remember: Don’t Try to
Time the Market
While this might seem like an extreme
example, you’d be surprised how often this
happens to investors, which is the reason why
many shun the market after being burned like
this. Little do they know that a simple strategy
such as dollar cost averaging reduces the
possible downside and keeps you disciplined
and invested long term.
If the price had instead gone up initially
instead of down, yes investing all of it at the
beginning might have been best in the short
term for you now, but over many trades and
years of investing, you’d find you’re getting
burned more often then you are gaining. Plus,
how would you know when to sell? No one is
able to predict the future no matter how much
convincing talk you may hear, and the true
answer is no one knows.
That’s why it’s important to stay long term
invested and taking some profits along the
way, without getting greedy or attempting to
sell at the highs or buy at the lows. Market
timing will lead you to despair, and those who
claim otherwise have yet to be burned by it
but eventually will.
Time for Action: Buying
Your First Stock
Now that I’ve showed you why to invest, how
the stock market works, and the best
investing strategy you can use, my next
recommendation is getting your feet wet and
taking the first step towards taking control of
your future by buying your first stock.
The best online broker I can recommend for
buying your first stock is TradeKing, and let
me tell you why.
Firstly, this broker is one of the few that
doesn’t have a minimum initial deposit when
opening an investment account. Most
investment brokers require at least $500 to
deposit, which doesn’t help investors just

Investing for Beginners 101: 7 Steps to Understanding the Stock Market
www.einvestingforbeginners.com 15
trying to start out. I mean who wants to pay
$500 when buying your first stock?
Plus, the site has such low fees for buying
your first stock and your next stocks, charging
only $4.95 per trade compared to most at
$6.95 or $9.95.
TradeKing also ranked number 1 on
comparebroker.com for accounts with no
minimum and ranked number 2 on top 10 list
online. I’ve made an easy picture guide to buy
your first stock below. Open a TradeKing
account
Select the type of account you want to open.
If you are starting out and just want to buy a
share, I suggest an Individual Account.
Please be aware that the process takes about
15 minutes to apply, and then 1-3 business
days to get approved. Once that is completed,
you are able to log in and buy your first stock!
Wealth building doesn’t happen overnight, so
this is a good opportunity to practice that
newfound patience. On the first page, scroll
down to open an account:

Investing for Beginners 101: 7 Steps to Understanding the Stock Market
Hit the green “continue” button then fill out
your information on the next page.
employer; they just need some sort of
recourse to ensure you aren’t wasting their
time.
Next, fill out your Employment Information.
Don’t worry, they will not be contacting your
The next page is just a survey, so TradeKing
can assist you with the best suggestions.
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Investing for Beginners 101: 7 Steps to Understanding the Stock Market
www.einvestingforbeginners.com 17
The page after is important, in the sense that
you don’t want to apply for margin. Investing
with borrowed money is one of the worst
things you can do in investing, this is how
lives are destroyed and investment portfolios
ruined. When the market crashes you need
the patience to ride it through, but with
margin accounts the broker may force
repayment on big losses and force you to sell
at the worst time, near the bottom when
everyone else is freaking out. Just don’t invest
with margin.
The final step has you reviewing terms and
conditions then signing your name. When
dating the form, do it exactly in this way
04/18/2013.
The next step involves transferring funds into
your account so you can buy stocks. Once
your checking account is approved, which I
recommend doing instead of through wire or
check, then you can transfer money in and out
of the investment account with ease. Click on
the yellow arrow on the bottom right of the
screen to continue.

Investing for Beginners 101: 7 Steps to Understanding the Stock Market
www.einvestingforbeginners.com 18
Next, enter your banking information.
Now That You Have An Account,
Buy a Stock in 4 Easy Steps
1. From the home page, highlight the
“Trading” tab and then select Stocks/ETFs ->
Regular Hours Trading.
For the last step, take a picture of your
driver’s license and a voided check for your
bank. Write down your 8-digit account number
and include it in the picture as well.
Email the picture to the link provided and
that’s it. In a few days you can be making
your first stock purchase!
2. Next, fill out the information with the
number of shares you want, the stock ticker,
and also select Market for a regular buy.

Investing for Beginners 101: 7 Steps to Understanding the Stock Market
through my affiliate link but provide the link
for a greater cause than just the money.
www.einvestingforbeginners.com 19
3. Review the information and make sure you
didn’t make any mistakes
4. That’s it! Congratulations, you’ve just
bought your first stock.
I provide this eBook for free because I want
many people who want to learn about
investing in the stock market to have that
ability. Not only would I recommend the
information in this guide to an eager learner,
but I’d also recommend this to a friend. As a
friendly suggestion, you can start your stock
career here: Open a TradeKing account.
I hope this quick picture guide was helpful and
informative. I only recommend services that
will help investors on their way to wealth in
the best way.
Take a minute to create an account, then be
sure to come back and continue the Investing
for Beginners 101 guide for analyzing stocks.
Empower Yourself by
Buying Just One Share
Once you have ownership of a stock, you gain
a sense of empowerment and can truly
understand that the market isn’t as foreign
and forbidding as some might’ve thought. I do
get paid for those who open an account

Investing for Beginners 101: 7 Steps to Understanding the Stock Market
Step 4/7: How to Calculate
P/E Ratio: The Most Widely
Used Valuation
For this part of Investing for Beginners 101,
I’m going to help beginning investors do their
own research in stocks and show how to
calculate P/E ratio from a company’s 10-k
annual report. This guide will have pictures
and links to make it very easy to follow and
learn the procedure.
In order to research companies and evaluate
whether they are good stock buys, you really
don’t need any special skills or education. In
fact, if more people knew how to research
stocks and took the time to do a little research
on some companies, I think a lot of so-called
experts and mutual fund managers would be
out of work! Unfortunately, this hasn’t been
the case and for whatever reason, individual
stock picking has been frowned upon as
reckless and risky. In reality, picking
individual stocks leaves all the responsibility of
your money on yourself, taboo for sure.
Reality: Only You Are
Responsible
In a culture where it’s never your own fault
and always someone else’s, no wonder the
average investor flocks to mutual funds every
year. If more people took responsibility for
their own money and were willing to see their
portfolios drop in value without selling at the
worst possible time, there’d be happier and
increasingly profitable investors. My hope is to
see more investors educating themselves and
making smart, disciplined stock picks with the
long term in mind.
Arguably the first thing you should learn about
individual stock picking is how to calculate P/E
ratio from a company’s annual report. P/E
ratio simply measures how much you are
paying for a company’s earnings, the higher
the ratio the more expensive the company.
A higher P/E ratio generally means a company
is more popular and more people are buying
this stock. P/E ratios vary based on industry
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Investing for Beginners 101: 7 Steps to Understanding the Stock Market
and based on market conditions, and you can
tell when the market is overvalued because
the average P/E ratio is high.
An average P/E ratio is about 17, and I only
look for companies who have a P/E below 15.
Most fundamentalists agree that any P/E over
25 is too high, regardless of the industry or
market condition. Stocks with high P/E ratios
tend to have great stories and the most
optimistic of futures but, as the stock
becomes more and more overvalued, the
bubble eventually pops and everyone who
bought in when the company had a high P/E
ratio loses money. The thing with buying
these stocks with high P/E ratios is that there
is no way to tell when the price of the stock
will catch up with its valuations, meaning
when the stock prices crash to normal levels.
While you can make some nice short term
gains from buying stocks like this, using this
strategy regularly is essentially gambling and
it is not an investment strategy I promote.
I buy companies with low P/E ratios for two
reasons.
1. Low P/E = company is potentially
undervalued, trading at a low price
2. Low P/E = company most likely has
high earnings
If you look at various studies, there has been
a proven correlation between low P/E ratio
and above average returns. What Works on
Wall Street by James O’ Shaughnessy showed
multiple back tests proving this, and also
there have been articles on the Motley Fool
website confirming the correlation.
How To Calculate P/E Ratio
To calculate P/E you take a company’s market
cap and divide by their earnings. P/E means
price to earnings ratio, and is simply:
P/E= Price/Earnings
To look up a company’s earnings from their
annual report, go to this website: SEC Filings.
Type in the company’s ticker in the search
bar, as an example I’m going to show how to
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Investing for Beginners 101: 7 Steps to Understanding the Stock Market
Once you are in the 10-k do a “Ctrl-F” to
search, and search for “consolidated balance”.
Click through until you are looking at the
company’s consolidated balance sheet; it
looks something like this:
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calculate the P/E ratio for Ford (F). Once the
company is found, type 10-k in the filling type
box.
Find the latest filing date and click on
documents for the 10-k. From there, click on
the .htm link for the 10-k, in this case the first
line, as can be seen on the right.
Note: Sometimes the company doesn’t put
their income statements on the “10-k” and
instead will file it under exhibit 13. This is a
rare case though and you will be able to
quickly tell if a company did this after clicking
on the 10-k .htm file.
Now, we want to find the Consolidated
Statement of Earnings. (Sometimes called
Consolidated Statement of Income,
sometimes called something completely
different). Most of the time the Statement of
Earnings is right above the Balance Sheet,

Investing for Beginners 101: 7 Steps to Understanding the Stock Market
occasionally it’s below. Scroll up until you see
the income sheet, and look for Net Income
attributable to Ford Motor Company. In this
case for 2012, you can see it’s $5,665
million. Now that we have the earning
number, we want to calculate market cap.
2012, simply multiply this by the share price
to get the company’s market capitalization.
Note: You always want the Diluted number
for shares outstanding, as it is more accurate
(takes into account employee stock options).
You can Google a company’s market cap,
which is updated regularly on most financial
websites. If you want to be detail oriented like
me, or be able to look up a company’s market
cap for previous years, search the 10-k
document for “shares outstanding”. Once you
have the number of shares outstanding for
So, once you have these values, simply take
market cap/ earnings to calculate P/E ratio.
For Ford, using today’s stock price of $13.36,
we get a market capitalization of $53.6
Billion. Divide this by the earnings, $5.6
Billion, and the P/E is 9.46. Auto makers tend
to have a low P/E due to the industry, so
compare to its competitors to see if the ratio
is favorable.
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Investing for Beginners 101: 7 Steps to Understanding the Stock Market
Keep in mind that most P/E ratios you see on
financial websites are calculating future
earnings, based on projected numbers. Thus,
these numbers can fluctuate greatly and
quickly, which is one reason I like to use past
earnings to calculate P/E ratio. I also like to
average the past 3 years of earnings to make
my calculations more accurate and with a
longer term outlook. Depending on the rigor
of the analysis, I’d also recommend
calculating P/E ratio over an average of 7
years of earnings, as Ben Graham did in his
book The Intelligent Investor.
Real Example: P/E Ratio
Answer to previous section: 6. For this next
exercise, take into consideration the numbers
for both of these companies in 2011 and
calculate their P/E ratios. Also, for a bonus
exercise use the Rule of 72 again to calculate
how long it would take for your investment to
double if considering these returns.
First thought, without knowing any numbers,
would you rather own Netflix or Coinstar?
Let’s look at the numbers and make an
educated decision based on the P/E ratio.
In 2011, Netflix (NFLX) had 54,369 shares
outstanding and net earnings of $226,126.
(numbers here in thousands). The average
share price for Netflix in 2011 was $183.58.
In 2011, Coinstar (CSTR) had 31,869 shares
outstanding and net earnings of $103,883.
(numbers also in thousands). The average
share price for CSTR in 2011 was $49.07.
At first glance Netflix may look more attractive
because of the greater net earnings. This is
why we have ratios, to give perspective to all
the numbers thrown at us.
NFLX P/E = (54,369 x 183.58) / (226,126)
NFLX P/E = 44.14
CSTR P/E = (31,869 x 49.07) / (103,883)
CSTR P/E = 15.05
As P/E ratio shows, Coinstar is the better
alternative here. CSTR is up 15%, NFLX is
down -7.7% as of today (4/17/13).
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Investing for Beginners 101: 7 Steps to Understanding the Stock Market
Step 5/7: The Single Two
Factors Most Correlated To
Success
In the past 50 years, there have been two
single ratios that have correlated most with
stock market gains. Low P/B ratios and low
P/S ratios have done far better than any
single one parameter. As James
O’Shaughnessy proved in his book What
Works on Wall Street, when these single ratios
are implemented with various other
strategies, the downside risk is greatly
reduced, while positive gains are more
commonly seen. Combine these ratios with
the other categories of Investing for Beginners
101 to really see some results.
Low P/B and P/S Correlated to
Success Because They Indicate
a Potentially Undervalued Stock
A big reason why these ratios are so
successful is because they both indicate if a
stock becomes overvalued from the price part.
As the P/B and P/S ratios become higher and
higher, there are more people buying the
stock and driving the price up, making it less
valuable to a smart investor. Also, they are
more reliable than P/E ratio because revenue
and book value fluctuate much less than
earnings do. Earnings and earnings per share
can be easily manipulated by companies
depending on accounting practices. In fact,
there have been many instances where
companies were caught manipulating their
earnings after the fact - and it is more
common than people realize. However, sales
(revenue) and book value can’t be
manipulated and this is another reason why
these two ratios are so extremely useful and
correlated to success.
Also, think about revenue. Revenue is not
easily increased or decreased from year to
year like earnings is. To increase earnings a
company can quickly cut costs by firing
workers. Revenue can only be increased
through more sales. Or, a company with a
successful product may have bad earnings one
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Investing for Beginners 101: 7 Steps to Understanding the Stock Market
year because it is using its profits to pay down
debt. The P/S would tell the picture that the
company is in better shape than the P/E might
be telling at that time. A sufficient P/S is
anything under 1, with a good one correlated
to under 0.8. To calculate P/S, simply divide
market cap by revenue.
P/S = market capitalization / revenue
The P/B ratio, compared to the P/E ratio that
is only correlated to earnings, is a better way
to determine the cheapness of a stock and is
utilized in many conservative value investing
strategies. The father of value investing, Ben
Graham, popularized the use of P/B ratio and
successfully amassed a fortune while teaching
countless investors how to do the same.
The Buy Low Strategy
The basic premise behind buying stocks with
low P/B ratios involves buying a company that
is selling close to or below their book value,
with the idea that you are buying a stock with
very little downside because it has already
been shunned by the market, hence its low
P/B ratio. By coupling a low P/B ratio with the
limitation of only companies with a strong
balance sheet and a stable dividend, you
ensure the purchase of great companies
trading out of favor in the short term but with
great upside potential in the long term. With
this strategy, you also prevent overpaying for
a company, which further decreases the
possible downside. A true buy low, sell high
strategy involves ignoring the critics and
sifting around for good companies with low
P/B ratios.
This strategy has been proven to be
correlated to success, as you can see from the
following. James O’Shaughnessy extensively
researched many fundamental ratios and
found that investing in the companies with the
50 lowest P/B ratios over a period of over 40
years would’ve given you the second highest
portfolio compared to any other one single
variable. When combined with other
limitations to reduce risk, a low P/B ratio
becomes an integral part of any good value
investor’s portfolio.
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Investing for Beginners 101: 7 Steps to Understanding the Stock Market
www.einvestingforbeginners.com 27
To calculate P/B ratio, simply divide price by
book value. A company’s book value is easily
calculated from the consolidated balance
sheet, and equals total assets minus total
liabilities. Book Value can be seen to be
correlated with stability because it measures
how much a company’s assets cover their
liabilities. To find the consolidated balance
sheet, search for it in the company’s 10-k as
demonstrated in the How to Calculate P/E
Ratio link below. An example of Apple’s
($AAPL) balance sheet is shown below (in
millions):
Total Liabilities = $57,854 So, book value =
$176,064 – $57,854 = $118,210
The price part of the formula comes from the
market capitalization, calculated the same
way as shown in How to Calculate P/E Ratio.
So, again price to book value is calculated like
this:
P/B = Market cap/ book value = Market
cap/ (total assets – total liabilities)
For the example, Apple’s market cap is
(945,355 shares) * (market price of $452.08)
= $427.3 billion. So, their P/B ratio in this
case is 427.3/ 118.2 = 3.6 and the stock is
therefore still quite a high valuation.
Total Assets = $176,064
Take a Break, and then Push On!
With 5 of the 7 categories completed by this
point, the information may seem overwhelming
and a little intimidating. If you have
made it this far, I must commend you and I
know you have what it takes to become a
good investor. Really all you need is a desire
to educate yourself, and by making it this far

Investing for Beginners 101: 7 Steps to Understanding the Stock Market
you have more than proved this fact. It is the
reason why I urge you not to stop here. With
only 2 steps left to go, it may be easy to think
you’ve learned enough and in it lies a true
danger. The danger that you’ve stumbled
upon this guide, only to not utilize it to fully
benefit yourself.
I urge you to take a break at this point if you
feel fatigued, and just bookmark the page and
continue when you are ready. If you are
taking notes and attempting these exercises
as we go along, only then will you learn and
retain the information. You must have full
attention and feel rested to complete through
the rest of this guide and have it benefit you
as much as it potentially can. So please, take
a break and then push on through the rest of
the guide. I know it will be worthwhile for you
in your quest to long term wealth.
Real Example: P/B Ratio
Again we are going to look at Apple, and also
Barnes and Noble, which both have retail
stores that can be found in any mall. How do
you know which to pick? It’s a little more
complicated than which store is busiest during
holiday season, and let me show you why.
In 2012, Barnes and Noble (BKS) had 57,337
shares outstanding and shareholder’s equity
of $747,657 (numbers here in thousands).
The average share price for Barnes and Noble
in 2012 was $15.20.
In 2012, Apple (AAPL) had 945 shares
outstanding and shareholder’s equity of
$118,210 (numbers here in millions). The
average share price for AAPL in 2012 was
$529.65.
BKS P/B = (57,337 x $15.20) / ($747,657)
BKS P/B= 1.16
AAPL P/B= (945 x $529.65) / ($118,210)
AAPL P/B= 4.23
A P/B analysis in 2012 would have proven that
Apple was expensive while Barnes and Noble
was cheap, and buying BKS then would have
given you a gain of 11.7% today (4/19/13).
You would’ve avoided a -26.2% loss in AAPL.
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Investing for Beginners 101: 7 Steps to Understanding the Stock Market
www.einvestingforbeginners.com 29
While it’s true that buying Apple stock in 2012
would’ve been a really bad move, please
realize that stock analysis is dependent on
time and price. Just because a stock was a
bad play in the past doesn’t make it a bad
play in the future. In fact, some of the best
stock picks come from stocks that have been
hammered and abandoned by the public.
very selective in our stock picking process in
order to limit the downside risk.
Real Example: P/S Ratio
In the apparel textile industry I again present
two stocks, Coach (COH) and the much less
sexy Sketchers (SKX).
By using the valuations in this eBook, you will
be able to understand when a stock becomes
favorable again. If we continue to see Apple’s
stock price deteriorate and as a result the P/B
ratio fall to acceptable levels, then Apple could
be reexamined as a good play. As long as the
other valuations indicate a sound company,
(which they do) then once the P/B becomes
acceptable than Apple could be poised for a
comeback.
It’s so important to remember that we want to
see acceptable levels in all 7 categories before
buying a stock. As you can see from the
example, even just one bad valuation can
result in losses for the investor. With over
10,000 stocks to choose from, we must be
In 2012, Coach (COH) had 294,129 shares
outstanding and revenue of $4,763,180
(numbers here in thousands). The average
share price for Coach in 2012 was $62.70.
In 2012, Sketchers (SKX) had 49,942 shares
outstanding and revenue of $1,560,321
(numbers also in thousands). The average
share price for SKX in 2012 was $16.79.
COH P/S=(294,129 x $62.70) / ($4,763,180)
COH P/S= 3.87
SKX P/S=(49,942 x $16.79) / ($1,560,321)
SKX P/S= 0.53
SKX has gained 28.8%, COH has lost -18.3%.
The numbers don’t lie; need I say more?

Investing for Beginners 101: 7 Steps to Understanding the Stock Market
www.einvestingforbeginners.com 30
Step 6/7: Cashing In With a
Dividend is a Necessity
Welcome to Step 6 of this comprehensive
guide. First and foremost, I explain why a
dividend is so important to investors, then I
explain how much of a dividend a company
should pay, and then move on to other
parameters. This section covers a lot of
important ground and each of these
parameters diversifies your stock picking
requirements to reduce risk.
important because a good investment is
constantly returning cash to the shareholders.
Receiving a dividend and reinvesting that
dividend is so crucial for you in utilizing the
power of compounding interest. Dividends are
guaranteed return on investment, and as I’ve
said before I never suggest buying a stock
that pays no dividend. A healthy dividend
yield and dividend payout reflects a company
that is using excess cash efficiently. It’s really
as simple as that, but it is also very
important. That being said, let me show you
how to calculate these parameters.
Simply put, this step makes sure that the
entire picture of the stock looks good. As with
all parameters examined in the stock picking
process, each category should be regarded
with equal weight.
A Dividend Creates
Compounding Interest
The first parameter we want to examine is the
dividend yield of a company. This aspect is
Dividend yield is quite easy to calculate, and
will often be explicitly stated next to a stocks
price as a %. For those who are more
ambitious and want to be able to accurately
calculate this % at all times, just divide
dividends the company paid for the year by
the current share price.
Dividend yield % = dividend/share price
The only hard part about this is finding the
information. You can quickly Google this to

Investing for Beginners 101: 7 Steps to Understanding the Stock Market
www.einvestingforbeginners.com 31
find it out, however if you are researching
years prior it’s really good to know how to
extract this from the 10-k annual report.
Here’s what I do: Once you have the annual
report document open; hit Ctrl+F to search for
“dividends”. You can also search “quarter” or
“quarterly” to see the dividends paid along
with share price numbers for each quarter of
the year you are looking at. Sometimes the
dividend paid is included in the statement of
income, which helps out if you are filling out
spreadsheets.
On the surface the company may still seem to
be in good shape, but a prudent investor who
has done his/her due diligence will be able to
identify this by use of the payout ratio. To
calculate this, take the dividend paid for the
year divided by the company’s EPS (earnings
per share found in the statement of income).
Payout ratio % = dividend / EPS
The next parameter to consider is price to
cash (or P/C) ratio. This ratio reflects the
profitability of a company and their ability to
generate cash. Basically by buying a company
with a low P/C ratio, you are getting access to
their cash flow at a low price. A stock with a
P/C of 10 means you are paying $10 for $1 of
cash generated.
Next we want to know dividend payout %. If a
company had too high of a %, this could
indicate a company being irresponsible. It also
commonly warns of a company in trouble who
is trying to hide its balance sheet failures by
still paying high dividends.
Over time, a ratio of 10 or lower will usually
pay the investor great dividends, both literally
and metaphorically. Many well respected
investing figures swear by the price to cash
ratio, notably Warren Buffett and Porter
Stansberry.

Investing for Beginners 101: 7 Steps to Understanding the Stock Market
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The ability for a company to convert profits
into cash is absolutely essential, and is
uncovered by the P/C ratio. To derive this
ratio, simply divide a company’s market
capitalization by their net cash at end of year.
P/C = market cap/ net cash
To find the net cash at end of year, scroll
down to statement of cash flows in the 10-k
annual report. This section can be found
directly below either the balance sheet or
statement of income.
Near the bottom of the page lies the net cash
numbers, organized by year.
Earnings: Don’t Get
Pulled In but Be Aware
Last but not least is the parameter of earnings
growth. Earnings are the name of the game
for most investors, and therefore can’t be
ignored. While earnings can be manipulated
and don’t show the whole picture, they are
useful for discovering momentum. High
earnings usually correlate with a high stock
price.
Popularized by mutual fund phenomenon
Peter Lynch in his bestselling book Beating the
Street, so called growth investors’ primary
focus is earnings growth. And because it is so
widely popular, the type of stocks with good
earnings growth can be volatile, as minor
changes in growth can cause major upswings
or downswings because of the multitude of
investors focusing so intently on growth.
In picture: Net cash numbers for 2010-2012
For example, a highflying stock with stellar
growth may see its growth slow down, and in
turn many growth investors might see this as

Investing for Beginners 101: 7 Steps to Understanding the Stock Market
www.einvestingforbeginners.com 33
unfavorable and their selling could drive the
stock low very quickly. Because of this
volatility, earnings growth becomes only one
part of my investing strategy instead of the
whole focus. A good long term plan won’t be
adversely affected by such short term swings.
Earnings growth percentage is calculated by
subtracting the previous year’s earnings from
current year earnings and dividing by previous
year’s earnings; then multiplying this quotient
by 100 to get the percentage.
Earnings growth =100* (Current
earnings – last year’s earnings) / last
year’s earnings
To increase accuracy and get a better feel for
how much a company is growing over a longer
time period, average the warnings growth
percentage over the 3 most recent years. For
example, if earnings growth for a company
was:
company is (2.4+4.6+3)/3 = 3.33%. A good
earnings growth is around 3%, and indicates a
stock with possibly a very bright future.
Make sure to catch the last and final step to
Investing for Beginners 101. The topic
covered is the BEST way to avoid risk, how
this ratio prevents catastrophic losses and
then the final step to putting it all together to
make precise buy and sell decisions.
Real Example: P/C Ratio
Let’s look at 2 oil giants in 2010 for a good
representation of P/C ratio, Chevron (CVX)
and Occidental Petroleum (OXY).
In 2010, Chevron (CVX) had 2,007 shares
outstanding and net cash at end of year at
$14,060 (numbers here in millions). The
average share price for Chevron in 2010 was
$79.61.
2012 2.4% 2011 4.6% 2010 3%
Then the average earnings growth for the
What about one of their competitors, OXY? In
2010, Occidental Petroleum had 812 shares

Investing for Beginners 101: 7 Steps to Understanding the Stock Market
outstanding and net cash at end of year at
$2,578 (numbers here in millions). The
average share price for OXY in 2010 was
$85.63.
CVX P/C = (2,007 x $79.61) / ($14,060)
CVX P/C= 11.36
OXY P/C= (812 x $85.63) / ($2,578)
OXY P/C= 26.97
A difference of 15 in the P/C ratio may not
seem like much on the surface, but in fact the
difference is great. Any stock with a P/C ratio
over 20 is both overvalued and potentially
dangerous, as it signals a company with
cashflow problems. You generally want P/C
ratios hovering around 10, steering clear of
those hovering around 20 or more.
Real Example: Dividend
Yield and Payout
For this next example we are going to look at
2 stocks that have increased their dividend for
more than 50 years in a row. While these
companies are long established and have
outstanding long term track records, this
factor alone doesn’t constitute a good buy.
Just because a company has a history of
increasing stock prices and dividends does
not mean a blind buy and hold strategy will
be profitable.
In 2012, 3M (MMM) had a cash dividend of
$2.36 per share, average share price of
$88.72, and EPS of $6.32.
The results in this example show a 45.5%
gain in CVX, and a -7% loss in OXY. Much
strength can be found in companies with cash,
and thus there are 2 categories dedicated to
the subject. The next parameter in
determining this strength is in the dividend.
In 2012, Diebold (DBD) had a cash dividend of
$1.14 per share, average share price of
$35.29, and EPS of $1.23.
How can we use this information effectively?
Let’s first calculate dividend yield %, then look
at payout ratio to determine sustainability.
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Investing for Beginners 101: 7 Steps to Understanding the Stock Market
Div. yield MMM = ($2.36) / ($88.72)
Div. yield MMM = 2.6%
Div. yield DBD = ($1.14) / ($35.29)
Div. yield DBD = 3.2%
From this DBD initially looks more attractive.
However, we can’t look only at yield to decide
which stock to purchase.
Payout Ratio MMM = ($2.36) / ($6.32)
Payout Ratio MMM = 37.3%
Payout Ratio DBD = ($1.14) / ($1.23)
Payout Ratio DBD = 92.6%
As we can see from the calculations Diebold’s
dividend is unsustainable at these levels. 3M’s
dividend is much healthier, as it is below 40%.
As a result, 3M’s stock price has seen a gain
of 19% since 2012. Meanwhile, DBD has lost
-17% as of today (4/21/13).
Real Example: Average Earnings Growth
With plenty of companies showing earnings
growth year after year, there is no reason to
gamble with negative growth. Instead, wait
for a company to prove it has made a
comeback, and only the numbers can truly
identify such a time.
The average stock price for RadioShack (RSH)
in 2010 was $20.85. Earnings numbers for the
years 2007-2010 for RSH looked like this:
2010 RSH $206.1
2009 RSH $205
2008 RSH $189.4
2007 RSH $236.8
At the same time, competitor Walmart (WMT)
had an average stock price of $50.72.
Earnings numbers for 2007-2010:
2010 WMT $14,355
2009 WMT $13,400
2008 WMT $12,731
2007 WMT $11,284
The growth numbers for RSH were 0.5%,
8.2%, and -20%. Average growth = -3.7%
The growth numbers for WMT were 7%,
5.2%, and 12.8%. Average growth = 8.3%
Since 2010, WMT has gained 54.3% while
RSH has lost -85%. Growth numbers matter.
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Investing for Beginners 101: 7 Steps to Understanding the Stock Market
The Best Way to Avoid Risk,
and Putting it all Together!
shareholder’s equity.
Avoid Risk by Avoiding Debt
Congratulations on making it to the final step
of Investing for Beginners 101! I’ve done my
best to save the best for last, but each part of
this guide is equally important and I
encourage those who have skipped sections to
go back and read what was missed.
In this final step, you will learn what I’ve
found to be the best way to discover and
avoid risk to save yourself from catastrophic
losses. Through many back tests for my Value
Trap Indicator dating back to 1994, I’ve found
a common characteristic in companies about
to experience substantial stock price drops or
bankruptcy. These companies would
consistently score above 1,000 on my Value
Trap Indicator, triggering a strong sell in my
system before the stock price greatly
deteriorated.
The common characteristic I discovered was
too much debt when compared to
Debt to equity is a common measure of risk in
investing. If you think about it, it makes sense
too. A person more likely to become bankrupt
is one with too much debt, and the same is
true for companies.
If the company considered doesn’t have
enough assets to cover their liabilities, or
shareholder equity, then they have debt to
equity ratios that skyrocket to the sky.
Financial companies like banks have
extremely high debt to equity ratios compared
to other industries because of the nature of
their business, but in my opinion you can still
use debt to equity ratio to determine their risk
as well. For a normal company, you want to
see a debt to equity ratio that is at least
below 1. For financial companies, a number
below 10 is best to avoid risk.
A company like Lehman Brothers had a debt
to equity ratio of 60 right before their
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Investing for Beginners 101: 7 Steps to Understanding the Stock Market
bankruptcy, and my Value Trap Indicator
would’ve triggered a strong sell signal to
prevent investors from losing their shirts at
that time. Many investors overlook the debt to
equity ratio and in turn become shocked at
seeing staggering portfolio losses, which is
why I’ve saved this ratio as the last and most
important one. Now that I’ve uncovered its
importance, it’s time to show how to calculate
debt to equity ratio.
Take a look at Citigroup’s balance sheet:
There are two ways to calculate debt to equity
ratio, using total liabilities or looking at only
long term debt.
It’s important to consider total liabilities
instead of only long term debt because a
company should be able to cover all their total
liabilities with their total assets in case of a
financial struggle. Also, a company with less
total liabilities is obviously in a favorable
financial condition and this must be accounted
for. Debt to equity ratio is the total liabilities
divided by shareholder’s equity, which is total
assets minus total liabilities. The lower the
ratio, the more likely to avoid risk.
As can be seen from the picture above,
Citigroup ($C) had a debt to equity ratio of
$1,673,663/ $189,049 = 8.85. This number is
under 10, which is in the preferred range for
financial companies to avoid risk.
Debt to equity = total liabilities /
shareholder’s equity = total liabilities /
(total assets minus total liabilities)
With this final lesson, I’ve equipped all my
readers with the tools they need to get started
investing in the stock market. You know how
to avoid risk, calculate important ratios, and
dollar cost average. I hope you’ve enjoyed
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Investing for Beginners 101: 7 Steps to Understanding the Stock Market
Investing for Beginners 101, as I’ve enjoyed
sharing what I know and have learned
through various sources. I strongly
recommend to my readers to take the next
step and apply what they have learned to
make specific stock selections starting as soon
as possible. To quantify this stock picking
format into an easy to follow method, I’ve
formulated my Value Trap Indicator to
explicitly state whether a stock is a buy or
not. Using the 7 steps of this Investing for
Beginners 101 guide, my Value Trap Indicator
assigns any stock a number, with a strong buy
being 0-100, a buy being 101-125, and a
strong sell being larger than 800. My Value
Trap Indicator showed an 800+ score for both
Lehman Brothers and Circuit City the year
right before their bankruptcies.
I’ve also performed multiple back tests in
which my Value Trap Indicator greatly
outperformed the S&P 500, by buying stocks
near their lows and selling stocks with bad
financials and also near their highs. I present
the method completely in my eBook, which is
available soon; complete with back tests and
free excel spreadsheets that perform the
calculations for you based on numbers you
input from the 10-k annual report. I’ve clearly
shown where these numbers can be found in
each step of my guide, and I am extremely
confident that the money you spend on the
eBook will pay for itself multiple times over. If
for whatever reason you are unsatisfied in the
first 30 days, I will refund your money
completely! That’s how good I feel about this
discovery I’ve made. I know it can help any
investor at any skill level. Being an electrical
engineer, numbers are my passion and it took
much tweaking and playing with the numbers
until I formulated the perfect indicator for
buying and selling stocks. I urge you to try it.
Example: Debt to Equity
For this final example, we will examine two
more financial companies and determine
which stock is the safer choice. In 2011, MF
Global Holdings (MFGLQ) had total liabilities of
$39,037,258 and shareholder’s equity of
$1,373,731. The average share price for
MFGLQ was $7.56.
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Investing for Beginners 101: 7 Steps to Understanding the Stock Market
www.einvestingforbeginners.com 39
In 2011, Citigroup ($C) had total liabilities of
$1,694,305 and shareholders’ equity of
$179,573. The average share price for
Citigroup for 2011 was $37.20.
Just as a reminder to you, we want a debt to
equity ratio below 10 for financial companies
and banks and a debt to equity ratio below 1
for all other companies.
Debt to eq. C = ($1,694,305) / ($179,573)
Debt to eq. C = 9.4
D/eq. MFGLQ = ($39,037,258) / ($1,373,731)
D/eq. MFGLQ = 28.4
As we can see from the results, MF Global
Holdings was extremely overleveraged in
2011. Consequently, the company went out of
business the next year. At the same time, a
company like Citigroup with a healthy debt to
equity ratio remained intact and saw stock
price appreciation.
As of today (4/22/13), Citigroup has gained
21% while shareholders in MFGLQ have lost
everything (-100%).
7 Rules to Invest By
1. Don’t buy any stock with negative earnings
for the year
2. Don’t buy a stock not paying a dividend
3. Remember you are a long term investor
4. Don’t sell a stock that you haven’t owned
for more than a year
5. Don’t sell a stock just because it has gone
down in price
6. Sell a stock that no longer has good ratios
7. Remember, mistakes are part of learning
Resources
Additional Suggested Readings
The Intelligent Investor; Benjamin Graham
The Richest Man in Babylon; George Clason
What Works on Wall Street; J. O’Shaughnessy
My Value Trap Indicator eBook
Barnes&Noble.com
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I’d Like to Say Thank You
First and foremost, thank you God for giving
me a second chance at life when I didn’t
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I’d like to say thank you to my loving fiancée,
who dealt with my many long hours of work
and supported me the whole way through. I
strive to give you and our daughter everything
you both deserve.
Thank you is in order to my mentor Mike, who
introduced me to investing and has shared so
much wisdom that I try to apply every day.
Also I’d like to thank Pat Flynn from
www.smartpassiveincome.com. I’ve learned
Finally, I have to thank you, the reader of my
eBook. My message is only as effective as the
actions from my readers, and I am confident
in all of your future successes.
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thank you. This eBook wouldn’t be free for all
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For those who have shared my website link
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I hope to have at least planted the seed to
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beginning for many in their investing journey,
there is so much power in educating yourself
by reading this book. I wish the best to you.
www.einvestingforbeginners.com 40

Page 190 of 214

Attachment B
The Basics for Investing in Stocks
Page 191 of 214

Investing 101
A Complete Introduction to
Investing, Stock Markets &
Online Trading for Beginners

table of contents
Table of Contents
Introduction 3
1 Understanding Investment Choices 4
2 How the Stock Market Works and Why It Moves 26
3 Making Your First Trade 44
4 Building Your $100,000 Portfolio 58
5 Now That I Own It, What Should I Do? 70
6 Fundamental Analysis: Understanding Earnings & Cash Flow 82
7 Technical Analysis: Common Charts & Terms 102
8 Current Topics In Trading 130
9 Introduction to Options 150
10 The Survivors’ Guide To Success 168
Quiz Answers 184
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wall street survivor • investing 101
2

introduction
Introduction
Whether you are working at McDonald’s or
working on Wall Street, education is the key
to empowering yourself to take charge of your
financial future.
Whether you have $100 or $10,000,000 in savings, we believe
that you should have a basic understanding of how the
stock market works. You should know how to manage your own money
,so that you can control your financial future. If you’re paying others to
manage your money, now you can learn to do it yourself — it’s not as difficult
as you might think.
It’s a fact that most brokers and money managers can’t outperform the
market. They pay themselves and their secretaries and their marketing
expenses first, and then the investors get to share whatever profits are left.
Learn to manage your money yourself, and you’re already ahead because
you don’t have a broker or money manager’s expenses!
Investing 101 will teach you about the different investment choices available
to you, how the stock market works, how to evaluate stocks, and how to
build and manage a well balanced portfolio.
Before we jump in, please understand that this course is not about getting
rich quick; this course is about getting rich slowly.
Successful investing requires constant education and a disciplined
approach. The goal is to grow rich over a lifetime of savings and prudent
investing decisions, so please resist offers from so-called investment gurus
who promise to make you a million dollars in the next year. Investing 101
will show you how money and wealth are really generated; by carefully
investing over time, and by balancing risk with potential returns.
Ready? Then let’s begin.
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wall street survivor • investing 101
Mark’s Tip!
During these sunny and
stormy conditions you are
sure to experience the “the
thrill of victory and the
agony of defeat” (to borrow
a line from the old ABC
Wide World of Sports).
The thrill of victory is buying
a stock and having it
double in a few weeks and
the agony of defeat is losing
your shirt on a trade when
you “knew” it was going to
be a solid performer.
Chapter 1
Understanding Investment
Choices
T
he first time Tiger Woods grabbed a golf club he couldn’t
hit the ball perfectly straight 300 yards and the first time Michael
Jordan touched a basketball he couldn’t dunk it, so don’t think that you
will be able to earn a 100% return in the first year. Before Tiger could swing
a club, he had to learn which end of the club to hold, and how to hold it.
When learning any new skill, you must begin understanding some of the
tools and terms involved. Without this basic knowledge, it is difficult – if
not impossible – to practice your new skill properly.
As you navigate through this investing course, you will become a knowledgeable
and smarter investor. This first lesson covers the primary tools
you will use to empower yourself to become more financially successful.
Once you become comfortable with these tools and understand what each
can accomplish – and what they cannot – you will begin an exciting journey
toward financial security.
As with most journeys, you will encounter some twists, turns, and detours.
With your newfound knowledge, however, you should navigate successfully
during both sunny and pleasant periods and during stormy conditions.
Enjoy your trip!
4

chapter one • understanding investment choices
1.1 Bank and Credit Union Products
So, you just got your year-end bonus of $2,000.
Now, what are you going to do with it? Let’s
review the obvious choices…
M
ost financial institutions, banks, credit unions, mutual
savings banks, and savings and loan associations have a similar
menu of investment products from which you may choose. Here are the
most common and popular products:
Savings Accounts
The benefit of a savings account is that you can make deposits and withdrawals
whenever you want, no questions asked. Plus, your deposit is
protected by the full faith and credit of the U.S. government. If the bank
ever goes belly-up, the Federal Deposit Insurance Corporation (FDIC),
which is a branch of the U.S. Government, will guarantee your money up
to $250,000 per person, per bank account. And in 2009, the FDIC has been
very busy protecting the deposits for people in about 100 banks that went
bankrupt!
From bank to bank, savings accounts are all basically the same, but you
need to pay close attention to the fine print. The typical differentiators are:
• Interest rate
• Frequency of interest (earnings) posting periods
•
•
Different minimum balance accounts that pay higher interest rates if you
maintain the minimum amount on deposit
Fees for withdrawals, statements, etc.
Here is a savings account interest rate table from one of the leading U.S.
banks:
Balance Required
Interest Rate
$0 0.05%
$10,000 0.25%
$25,000 0.75%
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wall street survivor • investing 101
As long as you are investing $250,000 or less, this is a very safe investment,
but on the downside, you can see that your return is practically nothing at
this time.
Certificates of Deposit (CDs)
You agree to deposit a specific amount of money for a fixed period of time
called the maturity. In return, your financial institution agrees to pay you
interest, usually higher than regular savings accounts, over this period.
However, you will have limited opportunities to access these funds, so only
use CDs for cash you don’t anticipate needing until after your CD matures.
Should you need some or all of your money in CDs, you can withdraw it,
but you will pay a substantial penalty, often forfeiting all the interest you
have earned since you purchased the CD.
There are several different terms for CDs: 3 months, 1 year, 2 years, 5 years,
even 10 years. Generally, the longer the term of the CD, the greater return
on your money. However, there is a catch: you risk interest rates going up
when you buy a longer term.
When you buy a CD, you are locked into that interest rate for the life of the
CD. If you take out your money before the full term, the bank will charge
you a substantial penalty as we mentioned before, so you can’t just sell a CD
and then buy a new one with a higher interest rate if your current CD has a
lower yield.
On the flip side, you are practically guaranteed a fixed rate of interest on
your money for the complete term of that CD. In an era of high inflation
rates, CDs are an excellent investment.
The last time there were high interest rates in the U.S. was the 1980s, when
rates of return on CDs were in the mid-to-high teens! Now, however, interest
rates for CDs are very low: 2 percent for a one-year CD and just 3 percent
for a 5-year CD.
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chapter one • understanding investment choices
Money Market Accounts (MMAs)
These accounts are designed to be a combination of the features of a classic
savings account and a CD. Some typical features include:
•
•
•
•
Higher interest rate than classic savings accounts
No maturity date as with a CD
A minimum balance that must be maintained (e.g., $2,500)
Limited withdrawals each month (typically up to six transactions per month)
Do not confuse bank MMAs with the similarly named accounts offered by
investment firms. They are very different. Bank MMAs are another form of
savings account and carry the federal insurance, currently up to $250,000
per depositor, which all other deposit accounts enjoy. The similarly named
product offered by investment houses is typically a short-term investment
in one or more mutual funds that may or may not generate positive
earnings. There is also no federal insurance protecting your principal
(investment).
When you have one of these savings accounts, you are really “loaning”
your financial institution your money. In return, the bank or credit union
pays you interest for making these loans. Unlike most loans, however, you
are usually guaranteed repayment; even if your institution fails. In case of
the bank’s failure, the free federal insurance you receive covers the loss.
Stocks
Mark’s Tip!
If you are sitting on some
cash and you know you
have a substantial payment
or purchase coming due in
a few months — like your
children’s tuition, or you are
planning on buying a car at
year-end — go to your bank
and see what your choices
are. Even a 1% extra return
on $10,000 over 6 months is
$50. Think of it as spending
5 minutes visiting the bank
today and then getting a
free dinner in 6 months!
Stocks are equity investments, which means that buying even one share of a
company’s stock means you are a part-owner.
For example, if you own one share of Apple, Inc. (AAPL) stock and Apple
has 100,000,000 shares that are “issued and outstanding,” then you own
.000001% of the company. If Apple were then to be sold to XYZ company
for $50,00,000,000 then you would receive $50 for your share.
So, as a stock owner, you are really becoming a business owner. And what
do business people care about? That’s right, you guessed it: maximizing
sales and minimizing expenses. This equals increasing profits and making
money! Therefore, the price of a stock is generally dependent on a combination
of current profits and expected future profits of that business.
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wall street survivor • investing 101
When business is good and companies are making lots of money,
the prices of stocks generally rise. The opposite is also true; as businesses
do poorly, their stock prices decline.
The place where you can buy or sell shares of stock is called a stock
exchange. In the U.S. there are two major exchanges: the Nasdaq (originally
NASDAQ, an acronym for the National Association of Securities Dealers
Automated Quotation) and the New York Stock Exchange (NYSE), famously
located on Wall Street in New York City.
(A third, the American Stock Exchange or AMEX, was acquired by NYSE
Euronext and merged in 2009.)
Exchanges play a key role in the financial markets. When a company raises
money in a stock offering it sells shares directly to the initial investors. But
when those investors no longer want to hold shares, the exchanges provide
a place where buyers and sellers come together to buy and sell shares. This
is called liquidity.
If you owned 1,000,000 shares of Apple Inc. (AAPL) but you couldn’t find
anybody willing to buy it, then it would really be worthless. But if you
knew you could call your broker, who could send an order to an exchange
where all of the buyers would be standing by, then you would be confident
that your shares would be sold to the highest bidder. The exchanges
provide this liquidity, helping to ensure that sellers get the highest price
possible, and buyers get the lowest price possible.
Investors can make money with stocks two ways:
•
•
through the rise in price of a stock
through the dividends that companies give to shareholders
Companies that have stable earnings and are generating more cash than
is needed to fund additional growth opportunities pay out part of their
reserves every three months as “dividends.” It is a direct cash outlay per
share owned. Companies will actually send you checks in the mail for
owning their stock! Or if you prefer, larger companies will even take that
cash dividend that they would normally pay you and buy you additional
shares of the company. This way your 100 shares of Apple stock will grow
over time based on the cash dividend amount and the price of the stock
when the dividend is paid. And yes, you will end up with fractional shares.
8

chapter one • understanding investment choices
Over long periods of time, stocks have proven to be a very valuable investment
because of their very good returns. Over the last 100 years, stocks
have gone up, on average, about 6% per year. Dividends add about another
1.5% per year, so in total, stocks appreciate in value:
Stocks Rise In Value Stock Dividends Total Stock Return
6 percent 1.5 percent 7.5 percent
As you are probably aware, the prices and values of stocks are volatile.
Some change dramatically and rapidly (for better or worse) while others
can remain stable for long periods. Unlike most bank checking and savings
accounts, investments in stocks are not guaranteed by the FDIC.
Many people are afraid to start picking individual stocks, and would rather
pay money managers on Wall Street to invest for them. In the United
States, over $1.7 Trillion is invested in mutual funds.
Mutual Funds
A mutual fund is a type of investment where the money manager takes
your cash and invests it as he sees fit, usually following some rough guidelines.
For example, the Fidelity Group has a fund that specializes in finding
high dividend paying stocks, one that specializes in bank stocks, one that
specializes in European stocks, etc. You simply find a fund that matches
your objective, you review its past performance and its management team,
and then you write a check to that mutual fund.
Mark’s Tip!
The average dividend payout
of the top 500 stocks is
2.0%.
General Electric (GE) is
currently paying out $0.75
per year; as of this writing,
the stock is at $15.00 so it
is paying out 5%. That’s a
great return when banks
are paying out less than one
percent interest!
Most mutual funds are called “open-ended” funds because they will
continue to take your cash, manage it for you, and issue shares to show
your ownership. Each night the mutual funds calculate the value of all of
their holdings and divided that value by the number of shares they have
issued, and that number is called the Net Asset Value or NAV. So if the
Fidelity Bank Fund had a value of $10.00 and your write them a check for
$5,000 you would now own 500 shares of this fund. Gains, losses, and
earnings are mutually shared with investors in proportion to the size of
their investment.
Since one of the primary rules of investment is to diversify portfolios,
a mutual fund can be a simple and successful way to accomplish this
goal. With one investment, you might own shares of stock in many
corporations.
9

wall street survivor • investing 101
Morningstar.com is one of the top web sites to research mutual funds.
Some of the information they provide includes:
•
•
•
•
•
1-to-5 scale fund ratings for quick performance reviews
Comparisons of mutual fund performance against relevant sectors
and other funds
Listings of the top stock holdings in all mutual funds
Listings of the people who manage these funds
Data including the expense fees (i.e., overhead costs) for each fund
Below is a screen shot from Morningstar.com, showing the Fidelity
Magellan mutual fund, one of the largest in the world with over $45 billion
in investments as of June, 2009.
Mark’s Tip!
Mutual funds are a great
way to start investing,
but because they are so
easy they also carry a cost.
Mutual fund companies
have to make money, of
course, and they do that
by taking some of the
funds’ assets to cover their
salaries and other expenses.
These are called management
fees. As noted in
the Introduction, mutual
fund companies have to
pay salaries and marketing
expenses and they always
get paid FIRST before the
investors/owners get paid!
The other negative about
mutual funds is that if you
$10,000 in 5 different funds,
then you probably own
as many as 1,000 different
stocks! It becomes harder
to outperform the market
when you own so many different
stocks.
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chapter one • understanding investment choices
As an investor, management fees are one of the key metrics you need to
watch out for, because they can quickly and devilishly eat into your
profits over time. Do higher management fees correlate to higher returns
and better performance? As it turns out, the answer is no; in fact, many
studies show that higher fees actually correlate to lower performance.
Mutual funds are not traded on an open market like stocks, and their
prices are calculated just once, at the end of every trading day. The price for
a mutual fund is called the Net Asset Value (NAV) because it is a calculation
of the entire value of stocks and other assets held by the fund divided by
the total number of shares outstanding:
Mutual fund NAV =
Value of stocks and other assets
Shares outstanding
Since Mutual fund NAVs are calculated just once a day, mutual funds can’t
be traded several times during the day like a stock. In fact, active trading
is generally discouraged, as most mutual funds impose penalties and
redemption fees upon withdrawal.
Exchange-Traded Funds (ETFs)
At first glance, ETFs appear very similar to mutual funds, in that one investment
allows ownership in a group of stocks; however, there are differences
of which you should be aware. Unlike mutual funds, ETF shares can be
traded whenever the host stock market is open for transactions. This ability
to react quickly comes at a price, as making these trades usually incurs a
broker fee; therefore, larger trades are more cost-efficient.
ETFs are also often tied to an index, which make them exchange-traded
index funds. These ETFs are a bit less diversified, as they concentrate their
stocks on a particular asset type, region, or other recognizable index.
For example, many ETFs try to mirror the composition of the Standard &
Poor (S&P) 500, using their performance as an index (see the S&P 500 ETF,
ticker symbol SPY).
At WallStreetSurvivor.com, ETFs are very popular; often, the top Weekly
prize winners have an ETF as their “hot stock” which rocketed them to the
top of the rankings page.
11

wall street survivor • investing 101
ETFs are great for winning the Weekly and Monthly prizes at WSS because
you can trade specific sectors of the market like Agriculture, Energy or
even foreign countries.
Many ETFs even offer leverage: when the sector gains 1 percent, the ETF
can 2 or 3 percent! See the chart below for a comparison between the
Nasdaq banking sector index (IXF - the orange line) and the Direxion 3x
Leveraged Financial Bull ETF (FAS – the blue line):
Mark’s Tip!
ETFs are the rage these
days as many investors are
shunning mutual funds.
Visit Wall Street Survivor’s
ETF Center to see the most
active, best-performing ETFs
every day.
If you had invested in IXF in the summer of 2009, you would have done
well, earning about 17% in one month. But if you had invested in FAS,
you would have made a killing of over 70%! That is the power of leveraged
ETFs. However, remember that leverage cuts both ways: up and down.
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chapter one • understanding investment choices
1.2 Bonds
Unlike stocks, which are equity instruments,
bonds are debt instruments. In effect, you’re
loaning the bond issuer money, which they repay
with interest.
When bonds are first issued, the investor/lender typically
gives the company $1,000, upon which the company promises to
pay a certain interest rate every year, called the coupon rate, and then repay
the $1,000 loan when the bond matures, at the maturity date. For example,
General Electric (GE) could issue a 30-year bond with a 5% coupon. The
investor/lender gives GE $1,000; every year the lender receives $50 from
GE, and at the end of 30 years the investor/lender gets their $1,000 back.
Bonds differ from stocks in that they have a stated earnings rate and will
provide a regular cash flow, in the form of the coupon payments to the
bondholders. This cash flow contributes to the value and price of the bond,
and affects the true yield (or earnings rate) bondholders receive; there are
no such promises associated with common stock ownership.
After a bond has been issued directly by the company, the bond then trades
on the exchanges. As supply and demand forces take effect, the price of the
bond changes from its initial $1,000 face value. On the date the GE bond
was issued, a 5% return was acceptable given the risk of GE, but if interest
rates go up and that 5% return becomes unacceptable, the price of the GE
bond will drop below $1,000, so that the effective yield will be higher than
the 5% coupon rate.
Conversely, if interest rates in general go down, then that 5% GE coupon
rate starts looking attractive, and investors will bid the price of the bond
back up above $1,000. When a bond trades above its face value, it is said
to be trading at a premium; when a bond trades below its face value it is
said to be trading at a discount. If you ever trade bonds, understanding the
difference between your coupon payments and the true yield is critical.
13

wall street survivor • investing 101
There are three common types of bonds available for general sale, each of
which offer different levels of security and projected earnings:
Treasuries: U.S. Treasury bonds carry the full faith and credit of
the U.S. federal government, eliminating much of the risk associated with
investments. As you can imagine, in return for this minimized risk, your
earnings rate will be less than more “exotic” investment choices.
Treasuries, particularly the 3-month Treasury bill, are sometimes quoted
as the “risk-free rate of return,” the minimum rate of return an informed
investor will accept for enjoying the minimum risk. In the real world there
is no true risk-free investment, although Treasuries do come close. Below is
a snapshot of the Government Bond page from Bloomberg.com:
Mark’s Tip!
Bonds are not nearly as
liquid as stocks and ETFs,
and therefore there is not
nearly as much information
about them publicly and
freely available. If you are
going to buy bonds, always
buy them from a reputable
source and always check to
make sure you are getting
a fair price.
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chapter one • understanding investment choices
You should also understand the meaning of a yield curve, as displayed on
the Bloomberg.com screenshot opposite. A yield curve is the relationship
between the interest rate offered and the time to maturity of an investment.
While all investments have a yield curve, many traders and economists
closely follow the yield curve of Treasuries of different maturities to
help make other financial decisions and projections.
Corporate Bonds: These bonds can be quite secure or sometimes
risky; their inherent value is greatly determined by the creditworthiness
of the corporation offering them, and corporate stability can change
over time. For example, until 2009, most bonds offered by U.S. automakers
implied good levels of security. The bankruptcies of GM and Chrysler,
combined with serious financial problems at Ford Motor Company, generated
much higher risk factors for their corporate bonds. Typically, however,
corporate bonds are more secure than corporate stocks.
Municipal Bonds: States, cities, or other local governments often
issue bonds to raise money to fund services or infrastructure projects (road
and bridge repair, sewers, purchasing open land, etc.). The primary advantages
to investors are security and tax benefits; most municipal bonds offer
interest earnings that are exempt from federal taxes. In addition, if you
are a resident of the state in which you own one or more municipal bonds
issued by local governments, your earnings may also be exempt from state
or local taxes. Never assume a high security factor, however — some local
governments may be in dire financial condition and your risk factor may
outweigh any tax benefits you enjoy.
Mark’s Tip!
Bonds are not nearly as
liquid as stocks and ETFs,
and therefore there is not
nearly as much information
about them publicly and
freely available. If you are
going to buy bonds, always
buy them from a reputable
source and always check to
make sure you are getting
a fair price.
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wall street survivor • investing 101
1.3 Gold & Other Precious Metals
Precious metals, particularly gold and silver, are attractive
investments to many people, but as usual, assume nothing. While
they can fluctuate in value as rapidly as common stocks, from a real-world
perspective, gold and other precious metals offer advantages that other
options do not. You have five options on how to invest in metals:
• Coins and bars: If you enjoy a high degree of “tangibility,” accumulating
coins or gold bars should satisfy that craving.
• Certificates: If you’d rather not have your spare bedroom filled with gold
bars, choose certificates that indicate your ownership in specified amounts
of precious metals.
Mark’s Tip!
We all wear gold around
our necks and fingers, it’s
used in electronics, and
if you’re King Tut, you’re
buried in a gold casket.
If all the gold in the world
was melted into one big
cube, it would only be 20
yards wide; that means
limited supply, which is
why the price is on a solid
upward slope. Buy GLD
when you think the world
is in chaos, but only if you
beat everyone else to it!
• Precious metal mutual funds: If you’d like to spread your risk over several
precious metals, you might like this option.
• Purchase stock directly in mining corporations: Get right to the source of
your favorite precious metals if you wish; for example, Barrick Gold (ABX).
• Purchase precious metal futures: This is often the most “exciting” (and
risky) option as you would gamble a bit on what gold or other precious
metals will be valued in the future.
Investing in precious metals is more challenging then trading stocks.
With Apple Inc., we all know what computers, iPhones and iPods are,
so at least we think we understand the company. Investing prudently in
precious metals is much more complicated since it is simultaneously a
global commodity, a hedge against inflation, interest rates, and “end-ofthe-world”
scenarios. That being said, many advisors are recommending
that up to 10% of one’s portfolio should be invested in precious metals. At
Wall Street Survivor, you can trade precious metals using the following
ETFs: GLD (gold) and SLV (silver).
This graph shows how the
GLD ETF effectively matches
the spot price of gold. These
ETFs allow regular stock
traders to trade these
precious metals in a stock
account, without going into
the riskier futures markets.
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chapter one • understanding investment choices
1.4 Foreign Currency & Foreign Stocks
Investing in foreign exchange (forex or fx), currency speculation,
and hedging are variations of the same basic investment strategy
— you’re betting that one currency will strengthen or weaken against
another. Not for the faint-hearted, these investments involve more due
diligence and savvy than any of the other security types we have covered
so far. Trading in FX requires a strong macroeconomics background and an
understanding of interest rates.
Investing in foreign stocks is just like investing in local stocks, except
you introduce another level of risk. If you try to buy a foreign stock, for
example, you are really making two bets at the same time: First you must
convert your currency into that used by the foreign exchange, and then
you use that foreign currency to buy one or more foreign stocks. You now
have all of the risk and return possibilities of stock ownership, but you
are also investing in a foreign currency, which you hope will be profitable
when you sell your foreign stock and convert the proceeds back into your
local currency.
Mark’s Tip!
Don’t trade FX unless you
have an MBA from one of
the top business schools,
you have a mentor, AND
you have $1,000,000 to
burn!
Currency speculation and hedging, usually through hedge funds, are similar.
You invest in foreign currency believing (or hoping) that the exchange
rate against the dollar becomes more favorable — and therefore profitable
— over time. As you can imagine, you can make or lose a great deal of
money in the arenas of FX, currency speculation, and hedging.
You should become very knowledgeable or employ a trusted expert to help
you become a smart and successful investor in these areas. Most advisors
would agree that this area is consistently one of the most exciting options
for investors.
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wall street survivor • investing 101
1.5 Real Estate
Buying and selling real estate as an investment strategy
is quite different from simply buying a home or commercial building.
Just as important in determining fair market value (fmv) as comparable
properties are when buying a home, the income stream generated by a
property is a primary component for an investor. You typically have three
options if you want to invest in real estate:
•
Buy specific pieces of residential and commercial property
Mark’s Tip!
If you plan on living in a city
for more than 5 years, you
should buy a house. After
you have a house and you
have started to grow your
nest egg, buy a vacation
home somewhere that you
want to go to for the next
20 years.
Home-building company
stocks are generally leading
indicators; their activity
gives you an indication
of where the economy is
heading. That said, just as
you should never put all of
your money in one stock,
you should never have all
of your personal wealth in
the stock market, even with
home-building stocks. Use
REITs in your stock portfolio
if you are seeking highdividend
yields, but always
get out before the next
recession hits.
• Invest in mutual funds focused on real estate investments or a REIT (real
estate investment trust). REITs invest in properties like shopping centers and
other rental properties, and therefore, generally pay off a high dividend as
long as they properties they invest in stay leased.
• Invest in mortgage-backed securities (MBSes) or mortgage-backed obligations
(MBOs)
In normal or expanding economies, real estate investing can be quite
lucrative and relatively safe. In down markets, both the potential rewards
decline and the possible risks escalate quickly.
To invest in the Real Estate market at Wall Street Survivor, you can trade
Real Estate Investment Trusts (REITs), ETFs like SRS, or the stocks of any of
the following home-building companies:
•
•
•
•
•
DR Horton (DHI)
Toll Brothers (TOL)
Lennar (LEN)
Pulte Homes Inc (PHM)
Centex Corp (CTX)
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chapter one • understanding investment choices
1.6 Recent Performance of Investments
For those just beginning, a good point of reference is the recent
performance of the common investments described above. How have
they done over the last five years? These charts illustrate their performance
over the same time period. When looking at the charts, keep in mind what
you read earlier in the lesson and what you’ve heard about the economy in
the news.
For example, regarding real estate, you’ll see the price of homes has fallen
from 2006 to 2009, in part owing to a bad economy. As we stated earlier,
in normal or expanding economies, real estate investing can be quite
lucrative and relatively safe. In down markets, both the potential rewards
decline and the possible risks escalate quickly.
19

wall street survivor • investing 101
Mark’s Tip!
The single most important
point to consider when
investing is to have clear
and reasonable objectives,
which includes knowing
how long you are planning
to invest.
“Making as much as you can
as fast as you can” is not a
clear, reasonable objective.
“Investing $500 a month
and earning a 5% annual
return for the next 10 years
so I can put my kids thru
college” is a clear and reasonable
objective.
If you are young, then you
should be taking some risks
because you have time
working in your favor. If you
are approaching retirement
age, need monthly income
and want to protect your
nest egg, then you should
consider that in your investment
selection.
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chapter one • understanding investment choices
1.7 Understanding Risk and Investing
Regardless of your choice of investment types, you should learn about and
understand the correlation of risk to the size and type of your investments.
First, become familiar with the traditional risk levels of various types of
asset groups (stocks, bonds, real estate, etc.) and compare this data with
classic expected returns in different economic climates.
Use this historical information in conjunction with the projected investment
horizon for the future to identify your own comfort level and threat
index. Use all the solid expert data you can find. For example, if gold
values typically increase when the real estate market spirals downward,
build this probability into your investment strategy.
Remember, there is no risk-free rate of return or investment. The key is
to establish the risk, evaluate the potential return in light of this risk, and
decide which investments suit your personality. Your journey into the
investment world has now begun. Enjoy the ride!
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wall street survivor • investing 101
Chapter 1 Exercise
Browse through the business section of any major newspaper or online
financial news site and look for stories about the different types of investments:
CDs, Bonds, Stocks, Mutual Funds, ETFs, Precious Metals, and Real
Estate.
Suggested Financial News Sites
• Wall Street Survivor — www.WallStreetSurvivor.com
• MSN — moneycentral.msn.com
• The Motley Fool — fool.com
• The Street — thestreet.com
• Yahoo has two dedicated research pages in their Finance section:
http://finance.yahoo.com/bonds and http://finance.yahoo.com/funds
• Morningstar Research — www.morningstar.com
Can you recognize the different types of investments just by looking at
the headlines? If not, don’t worry, we’ll go into detail about these investments
in the chapters that follow.
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chapter one • understanding investment choices
Chapter 1 Quiz
Question 1
Which options can you select when opening a savings account?
A. Interest rate
B. Frequency of interest posting periods
C. Choice of toaster or blender
D. Both A and B
Question 2
What are the typical Money Market Account (MMA) features?
A. Higher interest rates than classic savings accounts
B. No maturity date
C. A minimum balance requirement along with limited withdrawals
D. All of the above
Question 3
What is a mutual fund?
A. An open-ended equity investment containing a group of stocks or assets
B. A debt instrument
C. A federally insured investment
D. A collection for sharing
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wall street survivor • investing 101
Question 4
Which feature do Exchange-Trade Funds (ETFs) have in common with
mutual funds?
A. They can be traded at any time
B. They are tied to an index
C. One investment purchases a group of assets (ed: correct answer)
D. They are both deliberately confusing
Question 5
What are some basic features of bonds?
A. They are debt instruments
B. They can be secure or risky, depending on the type of bond
C. Bonds form between good friends
D. Answer a and b
Question 6
Which bond type carries the least amount of risk?
A. Corporate bonds
B. Treasuries
C. Municipal bonds
D. All bonds carry the same risk
Question 7
Outside of buying coins and bars, which other ways can you invest
in precious metals?
A. Certificates
B. Mutual funds and mining corporation stock
C. Precious metal futures
D. All of the above
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chapter one • understanding investment choices
Question 8
Which investments require a high level of due diligence
and business savvy?
A. Savings accounts and CDs
B. Precious metals
C. Foreign exchange, currency speculation and hedging
D. Stocks, mutual funds, and bonds
Question 9
Which statement about real estate investment is not true?
A
The strategy for real estate investment is the same as buying a home or
office building
B. Determining income stream is a primary component
C. Real estate investing includes buying residential and commercial properties
D. Real estate investing can be risky during economic downturns
Question 10
How can you enhance your investing experience?
A. Familiarize yourself with the traditional asset group risk levels
B. Identify your own level of comfort when it comes to risk
C. Research appropriate historical information
D. All of the above
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wall street survivor •• investing 101
Chapter 2
How the Stock Market Works
& Why It Moves
Forty million transactions, representing a
staggering 9.5 billion shares, are exchanged
in U.S. stock markets every day.* The total value
of all of the publicly traded stocks in the world
is about $40,000,000,000,000.
Are you part of these numbers? Are you part of the 50%
of Americans that own equities either directly in the brokerage
accounts or thru mutual funds in their retirement accounts? If you
are, congratulations for participating in the greatest wealth-building
opportunity that exists today. If you are not part of these numbers, then
keep reading and we will educate you and give you the confidence to
become a successful investor.
2.1 What Are Stock Exchanges?
So
what exactly is Wall Street and the New York Stock
Exchange? You have probably heard these words thousands of
times, but unless you are an active trader they might have gone in one
ear and out the other. Stock exchanges are simply organizations that allow
people the ability to buy and sell stocks. Think of a stock exchange as
a cross between a neighborhood flea market and an auction. The “flea
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chapter two • how the stock market works & why it moves
market” is a central gathering place for buyers and sellers of various products;
the auction format ensures that whatever is being bought and sold is
done so at the best possible price for all parties involved.
Each day at the exchange brings a new group of individuals with different
expectations and different amounts and qualities of products to sell. These
differences result in slight prices changes each day.
The stock exchanges, through the use of computers, allow simultaneous
auctions to proceed for every stock that trades on the exchange every
second that the exchanges are open. When the buyers and sellers agree
on a price, a trade occurs; when buyers and sellers don’t agree on a price,
a trade does not occur, but the computers show what price the buyers are
willing to pay and what price the sellers are willing to sell.
The stock exchanges provide a convenient environment that allows buyers
and sellers to act quickly and easily. The ever-increasing sophistication and
speed of computers and software helps all investors and stockbrokers to
receive up-to-the-second prices and execute trades nearly instantaneously.
A History Lesson: Wall Street
In the mid-1600s, simple fences denoted plots and residences in the New
Amsterdam settlement, in what we now call lower Manhattan. This location
on the island was critical as it allowed easy access to both the Hudson
and East Rivers. To protect this settlement, in 1653, the Dutch West India
Company led the construction of a 12 foot high wall of timber as a defense
against external attackers.
In 1685, the city planners laid out a street running parallel to the timber
wall, the prosaically named “Wall Street.” It became an important thoroughfare;
in 1789, the Federal Hall building at the corner of Wall Street
hosted the inauguration of George Washington, and was later where the
Bill of Rights was passed into law.
In the late 18th century, a group of traders and speculators started meeting
informally beneath a shady buttonwood tree on Wall Street to trade investments.
In 1792, twenty-four of these most active traders formalized their
association with the Buttonwood Agreement.
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wall street survivor • investing 101
A stock exchange also developed in Philadelphia at about the same time.
The members of the Buttonwood Agreement, fearing the success of the
Philadelphia exchange, formally created the New York Stock and Exchange
Board on March 8, 1817. Originally, there were five securities traded in New
York City; the first listed company on the NYSE was the Bank of New York
(which still exists today as BNY Mellon).
In 1889, the Customers’ Afternoon Letter, a newspaper that was the first to
list stocks and their afternoon prices changed its name to The Wall Street
Journal — for obvious reasons.
Other Stock Exchanges
In addition to the New York Stock Exchange, there is also the American
Stock Exchange (AMEX) and Nasdaq. In the past, the Nasdaq was for
smaller companies that were just getting started, and it was prestigious for
them to move to the NYSE or AMEX. These smaller companies included a
few you might have heard of, like Apple Computer (AAPL), Intel (INTC),
and Microsoft (MSFT). In the past decade, with the success of the Nasdaq
and the linking of these exchanges via computers, companies don’t bother
switching from one exchange to the other like they used to.
2.2 How Stock Trades Work
When you place an order with your stock broker, your stock broker sends
your request to one of the stock exchanges to see what the best price is. The
price that buyers are willing to pay is called the bid price, and the price that
sellers want to sell for is called the ask price.
If you are willing to accept the prices currently quoted, your broker will
send a market price order, meaning your order will get filled at the best
price available when your order hits the exchange. If you are buying stock,
your order will get filled at the price sellers are “asking”, and if you are selling,
your order will get filled at the price that buyers are “bidding.”
The system is very efficient, and the difference between the bid and ask
prices, known as the bid/ask spread, is usually only a few cents.
Seeing the bid/ask prices in the North American exchanges isn’t free – you
generally have to pay for the data, and that is one way that the exchanges
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chapter two • how the stock market works & why it moves
make money. (At Wall Street Survivor, you can see real-time bid/ask prices
when you sign up for one of our WSS Advance upgrades.)
Even when powered by millions of digital real-time bid/ask transactions,
the stock exchanges themselves still function much as they have for centuries.
To casual observers, it seems like a chaotic morass, with people in
specially-colored jackets running around, shouting, making coded hand
signals, clutching handfuls of papers bearing buy and sell orders. If this
was any other business, you’d naturally assume bankruptcy, a tornado, or a
tsunami was at the front door!
Yet talk to any trader on the floor of an exchange and they’ll tell you it all
works well. While it appears to be total, unbridled chaos, the system has
worked seamlessly for many years and continues to be effective today.
“Stock exchange” is actually a misnomer; securities exchange is more
technically correct. Along with equity securities (stocks), stock exchanges
also facilitate trading of options, bonds, pooled investment products (such
as mutual funds), investment trusts, commodity futures and some of the
other financial products described in Chapter 1.
2.3 Public vs. Private Companies
& IPOs vs. Secondary Market Securities
Now that you know what an exchange is, it’s important to make
a distinction between what shares trade on exchanges and what
shares don’t, and why.
Most companies are privately owned and don’t trade on exchanges. The
barber shop and the florist on the corner, the guy that cuts your grass,
and the plumber that fixes your sink are usually small companies that are
owned directly by the founders. As companies grow, they may need additional
money to expand, and one way that they can do this is to sell partownership
of their company to the public.
When a company decides to “go public,” they enlist an investment banking
or brokerage firm to sell their shares to the public. You may have heard
the term IPO; this stands for initial public offering. This represents the first
opportunity for the public to purchase shares in a particular company.
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wall street survivor • investing 101
Until a company’s IPO date, they have been functioning as a privately held
entity. One or a few people owned all of their stock and they were not
registered or approved by the Securities & Exchange Commission (SEC)
As a potential investor, you should understand a bit about the IPO process
from its beginning. The IPO doesn’t happen on a whim. At a bare minimum,
it involves the company compiling an impressive track record in
business, displaying good profits and future income trends, and carefully
considering the following:
•
•
Market for the stock (Would people be interested in buying shares?)
Ramifications of giving up large chunks of ownership to others
Mark’s Tip!
Don’t think that just
because you have a brokerage
account at E*Trade or
Schwab that you will be
able to participate in an IPO;
the investment banks typically
sell those initial shares
only to other banks, brokerage
firms, and select, high
net-worth individuals.
When Google went public,
E*Trade was given the right
to sell a certain number of
shares, but you had to enter
a lottery to win the right to
buy them — and you were
limited to 100 shares only.
•
The potential benefits (How much money could it raise?)
• The high cost of lengthy IPO preparation (There is a ton of paperwork
required.)
•
•
How the new money could help grow the company
Assembling a team of accountants, attorneys, and advisors who are experienced
in IPOs and SEC registration and approval.
• Being financially stable enough to afford the time (the process is time
consuming and time sensitive) and the large expense of assembling all the
SEC-required paperwork (which is massive and detailed), which is necessary
to obtain approvals and permissions for an IPO.
• Locating a securities dealer or investment bank willing to sponsor your IPO
to the investment market. These entities are the underwriters of your first
public sale of stock.
As an investor, you should be aware that you are typically taking more
risk when dealing with an IPO than with other stock purchases. Since the
company has never had publicly traded stock, you have little assurance that
their IPO price will stabilize or increase.
Sometimes you encounter an IPO like Google’s (GOOG) and your newly
acquired stock may double, triple or even quadruple in a short period!
Google went public with their IPO in 2004 at $85/share. GOOG now trades
above $400.
When you buy shares from an IPO, you’re essentially buying directly from
the company, who use the proceeds for their expansion plans. Afterwards,
if you want to sell your IPO shares, you must sell them on secondary
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chapter two • how the stock market works & why it moves
markets like the NYSE, AMEX, or NASDAQ. Shares that trade on exchanges
are traded between individuals and other businesses; no more cash goes
directly to the company after the IPO. Secondary markets are where the
vast majority of securities transactions take place.
To see the latest IPOs hitting the market, see Yahoo!’s IPO center:
http://biz.yahoo.com/ipo/
2.4 Market Timing & Movement
Now that you know what the stock market is and what role
the stock exchanges play, let’s take a step back and look at how stock
prices and the economy move in tandem.
Timing is extremely important in investing, and your first requirement is
to understand business cycles. Understanding what business cycles are is
relatively easy, but predicting them is nearly impossible — even the best
Harvard economists struggle at it.
We’ve all heard the terms recession, depression, expansion, boom and bust.
The economy seems to go strongly for a while: Everyone has a job, we hear
about the stock market setting new highs, and consumers are spending
freely. Then suddenly, we hear about companies that have overbuilt, layoffs,
foreclosures and wage freezes. You may not have realized it, but you were
witnessing the ups and downs of a business cycle.
Don’t confuse one company’s sudden success with business cycles. Fads,
single industries or market conditions seldom influence a business cycle.
Like a perfect storm, business cycles are the product of multiple components;
as a newer investor, you should understand and accept that they
happen. It’s never a question of “if,” only “when” a business cycle will
peak or bottom out. Investing just before a peak can be costly. Conversely,
investing at the bottom can be quite profitable.
cont’d...
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wall street survivor • investing 101
The typical business cycle consists of periods of economic expansion,
contraction (or recession) and recovery to a new peak as seen in the graph
below:
The premise behind economic cycles is that they’re more than just mere
fluctuations in economic activity, they’re actually statistically significant
oscillations of human behavior, consistent and powerful enough to impact
an entire economy.
Knowing where you are in the overall business cycle is very important as
an investor. As you might expect, just as the economy moves in cycles, so
too does the stock market. In fact, the stock market generally moves in
advance of the business cycle because the stock prices are based on both
past earnings and future expectations of earnings.
Furthermore, as the economy and
stock market are moving in their
respective cycles, stocks also move
in cycles. After all, you can find the
best stock to buy in the world, but
if your purchase isn’t synchronized
with the overall business and market
cycles, it may turn into a loss. Just as
the economy moves through the business cycle, every stock or asset class
goes through a cycle of four stages: accumulation, markup, distribution,
and markdown, as shown in the graph above.
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chapter two • how the stock market works & why it moves
Now compare this with a chart of how
the the Dow Jones Industrial Average
(DJIA) has performed since 1900. This is
simply a composite price of the 30 largest
U.S. companies, used as a benchmark
as to the market’s overall performance.
You’ll note many up and downs
in the market, but with the overwhelming
trend still being upward movement.
Can you spot the cycles of accumulation,
markup, distribution and markdown?
When you look at the chart of
any stock or index, it typically moves
in cycles that are closely related to the overall business cycle. The market
bubble of the late 1920s is visible, as is the precipitous 1929 stock market
crash and the Great Depression; since then, there have been regular, if not
entirely predictable, cycles of expansion and recession.
2.5 Bull vs. Bear Markets
Bull and bear Markets play a strong role in extending or
ending business cycles. Millions of words have been written about
bull and bear markets, but here’s what you really need to know:
In a bull market, the majority of investors feel very positive about the
current business cycle, the stock market, and the overall condition of U.S.
and/or global business. More investors
leave the spectator position, get into the
game and buy stocks. More investors mean
more money in the market. More money
in the market usually translates to more
buying activity and higher stock prices.
This is a perfect example of supply and
demand in action.
Bear markets indicate that investor confidence is down, and the community
perceives that the current business cycle is at or in a downturn. Many
investors tend to retreat to spectator positions and sell their stocks. They
Mark’s Tip!
“The trend is your friend”
and “Buy low and sell high”
are classic pearls of wisdom.
In a bear market, there’s
a counterintuitive saying,
“Sell high and buy low.”
This is called selling short
and we’ll discuss this in
Chapter 3.
Another adage is to “Buy
high and sell higher.”
This is about identifying
stocks with strong momentum
that are breaking out
of a narrow trading range
—we’ll learn more about
momentum trading in
Chapter 8.
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wall street survivor • investing 101
are fearful about the prospects for investing and as money leaves the
market, stock prices tend to drop.
The reason why these two market extremes are called “bull and bear” is
not clear. Some say that a bull wants to “buck up” prices while the Bear
wants to “claw down” prices, or that a bull market charges ahead while a
bear market is going into hibernation.
In any case, the bull and bear are iconic symbols on Wall Street, continually
fighting for control over the market’s overall direction. As an investor,
you need to know who is winning the battle and invest appropriately. Once
you understand the trend – bull or bear – treat the trend as your friend.
Mark’s Tip!
When trading stocks, we’d
all like to be able to buy at
the very bottom and sell
at the very top of a stock’s
trading range, but you need
to accept the fact that this is
impossible!
A more reasonable goal is
to try to estimate the stock’s
current trading range (using
tools like Technical Analysis,
which we’ll discuss later) so
that you can buy it somewhere
in the bottom 25%
of its range, and then sell
when it’s in the corresponding
top 25%.
If we are in a bull market and the trend is up, then it is a perfect time to
buy low and sell high. In a bear market, the trend is also your friend, and
there are ways to make money when stock prices are declining.
2.6 The Danger of Trying to Time the Market
The mere perception that a market is becoming bearish is not
a predictor of disaster. Fortunes have been made in bear markets —
the trick is to know when one is coming and react appropriately. If you can
learn to anticipate market trends before they occur, you will become a very
successful investor.
Be careful though: Timing, which can make or lose you money, is not easy
to master. There is no simple secret to getting it right.
Timing markets requires you to be correct twice; first when you buy a
stock at a cheap price, and a second time when you sell it back at a higher
price. Most investors have a hard enough time simply buying low, let alone
selling high.
This difficulty in market timing has led many investors to adopt a buy and
hold strategy where they buy a stock and hold it for as long as it is profitable.
When famed billionaire investor Warren Buffet was asked how long
he likes to own a stock, he shot back, “Forever.”
There can be serious costs if you have poor market timing. Unlike other
investments like real estate, stock trading often comes with a short clock.
Prices can change – for better or worse – very quickly. Even expert stock
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chapter two • how the stock market works & why it moves
pickers experience losses because of timing. The best thing an investor can
hope for is merely to be right a bit more often than wrong.
The table below shows that over 2,516 days (a 10-year period from 1997 to
2006), $10,000 invested in an S&P 500 index would have generated a gain
of $12,444. If an investor tried to time the market and missed the top 20
days with the largest gains in that 10-year period, they would have ended
up with a different result:
Mark’s Tip!
Remember that stock
market prices are based on
future earnings potential,
not past or current results
necessarily.
Nevertheless, don’t let the dangers of timing the market dissuade you from
trying to learn and recognize the trends in order to buy low and sell high.
That’s what Wall Street Survivor was designed for — to practice investing
in a safe, risk-free environment where no “real” money is at stake.
2.7 How to Choose the Right Broker
Therefore, even though
the economy might be in
a recession, that doesn’t
mean stock prices are
falling. If the majority of
investors feel that the
recession has ended and a
bull market is coming, stock
prices will start going up.
When you’re ready to make your first trade, you must open
a brokerage account. Brokers fall into two categories: full-service
and discount brokers.
Full-service brokers like to make the decisions for you and will call you
frequently with ideas, suggestions and corporate research — but they will
also charge hefty commissions for the services they provide. Full-service
brokers generally want you to have at least $100,000 in cash to invest.
Finding the right full-service broker is somewhat like locating the right
doctor, accountant, lawyer, or psychologist — you have to kiss a lot of frogs
before you find a prince. If you ask around, you can get recommendations
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wall street survivor • investing 101
from trusted friends or family members, and with luck, you’ll have immediate
chemistry with a good broker. Much depends on how active you want
to be in the investment market, and which types of investments you favor
(stocks, mutual funds, bonds, etc.).
The very fact that you have read this far indicates that you want to be more
of a do-it-yourself type of person, so a discount broker is probably all you
need. Discount brokerage accounts are easy to open, and generally require
as little as $1,000.
Nearly universally, discount brokerage accounts offer online trading. Wall
Street Survivor is specifically designed to provide a similar environment,
so you can transfer the skills you acquire here directly to a real-world trading
account.
Discount brokers frequently advertise their services on Wall Street
Survivor — just click on one of their ads to learn more about what services
they offer and the fees they charge.
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chapter two • how the stock market works & why it moves
2.8 Why Stocks Are a Good Choice
to Earn High Returns
While wild successes and tragic losses usually make the
headlines, stocks are an excellent choice to achieve a high – and
steady – return on investment (ROI). You will learn that the most important
measurement of all investments is ROI. After all, when comparing different
investing choices, isn’t it all about how much money can be earned?
Over time, stocks have proven to achieve a consistently high ROI.
From 1900 to 2000, global stocks returned 9.2% on average, per year (U.S.
stocks returned an even better 10%) while bonds generated 4.4%, and cash
(short term Treasuries) returned only 4.1% on average, per year.
The difference between investing in stocks versus Treasury bonds, over a
lifetime of saving, can be hundreds of thousands of dollars. Let’s compare
two different investors, one of whom invested in cash, the other in stocks.
Both investors had $100,000 to invest over 20 years. Look at the difference:
The cash investor ended up with $214,567, a 114% return – not bad. But the
investor who bought stocks ended up with $532,590, a 433% return. By
simply buying into the broad stock market through the S&P 500 Index,
they made $317,823 more than if they had invested in U.S. Treasury bonds.
To the uninformed, stocks are seen as a roller-coaster ride, as compared to
more stable investments, and it’s true: If you don’t know what you’re doing,
you can lose money quickly. The simple rules you learn in this course will
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wall street survivor • investing 101
Mark’s Tip: Why We Emphasize Long-Term Investing
Investing in the stock market will not allow you to “get rich quick,”
but, as the last 100 years prove out, investing in stocks WILL allow
you to get rich slowly. Timing is important, and the amount of time
you leave your money invested will determine your success.
Take a look at this table below. If you had only one year to invest in the stock market,
depending on the year you invested (over the last 100 years) your earnings range
might have swung between 61% down to -39% - quite risky. Ifyou had a longer investment
period, say 10 years, it averages out much more positively, ranging somewhere
between 19% and 0.50% per year, with a likely end return of 11.10%.
US Stocks Average Returns for Different Holding Periods
Years Invested Highest Return % Lowest Return % Average %
1 61.00 -39.00 13.20
3 33.00 -11.00 11.60
5 30.00 -4.00 11.90
10 19.00 0.50 11.10
20 15.00 6.40 9.50
help you prevent falling into that trap. After all, it’s a fact — over the last
100 years, stocks have proven to be the best investment despite their daily –
even hourly – ups and downs.
2.8 Buying Individual Stocks
vs. Investing in Mutual Funds
As
a newer investor, you can save some research time by
investing in mutual funds instead of individual stocks. Mutual
funds contain a mix and diversity of stocks in which one investment is
spread out into many small blocks of shares.
Mutual funds have been available since the mid-1970s and ETFs since the
early 1990s, attracting billions of investment dollars; they’re an easy way
for casual (or perish the thought, lazy) investors to diversify their portfolio
without doing extensive research on individual companies and stocks.
Over time, mutual funds, ETFs, and Index ETFs — funds specializing in and
tied to an industry index — have performed quite well.
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chapter two • how the stock market works & why it moves
That said, few of these
funds have outperformed
the market in general. More
than 90% of mutual funds
fail to beat the S&P 500
Index (a compilation of the
500 biggest U.S. stocks)
every year, making mutual
funds an expensive way to
pay for diversification and
risk management.
One of the many reasons
that funds cannot beat the
2.4 % %
97.6
Loser Managers Lucky Managers
markets is because of the obvious expenses that they have. They buy ads in
magazines and on TV, they have large legal and accounting expenses, and
they have to mail you your statements every month. Some mutual funds
charge rather large fees for trades and/or management. Always learn about
these fees before you decide which is the best mutual fund for you. In most
cases, these fees reduce your return by 0.50-2.00% and make investing in
individual stocks by yourself the logical choice.
One of the myths about the stock market is that you get what you pay for
and that by paying big fees, you’ll get a big return on your return. That
simply isn’t true and, in fact, the opposite is more often true: low fees and
no expenses usually lead to the biggest returns on your money.
Summary
The stock markets of the world offer a wonderful opportunity to increase
your wealth. You must bring your brain and knowledge with you when you
enter these waters. Learn all that you can about the market: how it works,
market cycles, how it faces roadblocks and problems, and how you should
react to the highs and lows that eventually occur. Be strong, be confident,
be smart, hopefully be lucky – and enjoy.
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wall street survivor • investing 101
Chapter 2 Exercise
If you haven’t done so already, sign up and open a fantasy stock brokerage
account at Wall Street Survivor, and place at least one stock trade.
There are video tutorials on the site that explain how to set up a trade
using the online stock trading interface. You should be up and trading in
minutes!
Chapter 2 Quiz
Question 1
What are stock exchanges?
A. A place for organizations to trade stocks and securities
B. A game that involves players from around the world
C. A financial product offered by a bank
D. A service that sells real estate
Question 2
What is involved in an Initial Public Offering (IPO) process?
A. Compiling an impressive track record of good profits and proof of future
income
B. Assembling a team of accountants, attorneys and advisors with IPO
experience
C. Finding a securities dealer or investment bank willing to underwrite the IPO
D. All of the above
Question 3
What influences business cycles?
A. Fads and trends
B. Single industries
C. Multiple components
D. Specific conditions
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chapter two • how the stock market works & why it moves
Question 4
What partially defines a Bull Market?
A. A positive outlook about the current business cycle
B. Lack of investor confidence
C. Stimulating energy drinks
D. Low stock prices
Question 5
What defines a Bear Market?
A. High investor confidence
B. Increased stock prices
C. Investors become spectators rather than players
D. A period of hibernation
Question 6
What are the challenges involved in market timing?
A. Understanding who is winning the battle between a Bear Market and a Bull
Market
B. Knowing when to buy and sell
C. Having a sense of when trends will change that affect business cycles
D. All of the above
Question 7
How should you pick the right broker to administer
your investment portfolio?
A. From unsolicited emails
B. Recommendations from a trusted family member, friend or colleague
C. It doesn’t matter as they are largely all the same
D. From an advertisement in the phonebook
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wall street survivor • investing 101
Question 8
Which of these four investment types has shown
the highest returns historically?
A. Real Estate
B. Bonds
C
D
Stocks
Cash (Treasury Bills)
Question 9
What are the benefits of investing in mutual funds
instead of stocks?
A. You can trade one company at any time
B. You can beat the S&P 500 Index
C. It will cost less in terms of fees
D. It offers a way to diversify your investment portfolio and minimize risk
Question 10
Which statement is true about investing in the stock market?
A. Investing in the stock market does not require any research or knowledge
B. Low fees and no expenses usually lead to the biggest returns on your money
C. It is a low risk investment that is good for conservative investors
D. You get what you pay for in the stock market: good stocks are expensive.
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chapter two • how the stock market works & why it moves
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wall Wall street Street survivor Survivor • investing • Investing 101 101
Chapter 3
Making Your First Trade
Now that we’ve covered the basics, it’s time to
put this knowledge to work and place your first
trades, using virtual dollars before you risk your
real money in the markets.
3.1 How to Look Up a Ticker Symbol
Stock exchanges assign each individual stock a unique ticker
symbol for identification purposes. You usually have to know the ticker
symbol when researching stocks, getting quotes, and placing trades.
Paper ticker telegraph machine, c. 1912
The term stock ticker refers to the now-obsolete telegraph machine
which printed abbreviated company symbols and prices on paper tape,
used between 1870-1970. (Discarded ticker tape was often thrown out of
windows on Wall Street as confetti during parades to welcome returning
American war heroes and astronauts; such events became known as ticker
tape parades.) Today, the old scrolling paper tickers are recalled by electronic
display boards and digital “crawls” on financial TV channels and
websites.
Stock ticker symbols are usually one to five letters long, and occasionally
contain a period or hyphen to designate a different class of shares. Some of
the oldest and biggest companies have single-letter stock symbols:
C Citigroup S Sprint Nextel Corp
F Ford Motor Company T AT&T
H Hyatt Hotels Corporation X U.S. Steel
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chapter three • making your first trade
DJIA TIcker symbols
Below are the 30 stocks that make up the Dow Jones Industrial Average:
Company Symbol Industry Date Added
3M MMM Conglomerate 1976-08-09 (as Minnesota
Mining & Manufacturing)
Alcoa AA Aluminum 1959-06-01 (as Aluminum
Company of America)
American Express AXP Consumer finance 1982-08-30
AT&T T Telecom 1999-11-01
(as SBC Communications)
Bank of America BAC Banking 2008-02-19
Boeing BA Aerospace & 1987-03-12
defense
Caterpillar CAT Construction & 1991-05-06
mining equipment
Chevron
CVX Oil & gas 2008-02-19
Corporation
Cisco Systems CSCO Computer
2009-06-08
networking
Coca-Cola KO Beverages 1987-03-12
DuPont DD Chemical industry 1935-11-20 (also 1924-01-22 to
1925-08-31)
ExxonMobil XOM Oil & gas 1928-10-01 (as Standard Oil)
General Electric GE Conglomerate 1907-11-07
Hewlett-Packard HPQ Technology 1997-03-17
The Home Depot HD Home improvement
1999-11-01
retailer
Intel INTC Semiconductors 1999-11-01
IBM IBM Computers & 1979-06-29
technology
Johnson & Johnson JNJ Pharmaceuticals 1997-03-17
JPMorgan Chase JPM Banking 1991-05-06
(as J.P. Morgan & Company)
Kraft Foods KFT Food processing 2008-09-22
McDonald’s MCD Fast food 1985-10-30
Merck MRK Pharmaceuticals 1979-06-29
Microsoft MSFT Software 1999-11-01
Pfizer PFE Pharmaceuticals 2004-04-08
Procter & Gamble PG Consumer goods 1932-05-26
Travelers TRV Insurance 2009-06-08
United
Technologies
Corporation
Verizon
Communications
UTX Conglomerate 1939-03-14
(as United Aircraft)
VZ Telecom 2004-04-08
Wal-Mart WMT Retail 1997-03-17
Walt Disney DIS Broadcasting & 1991-05-06
entertainment
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wall street survivor • investing 101
Some ticker symbols have a sense of humor like LUV (Southwest Airlines),
and YUM (Yum Brands) which owns KFC, Taco Bell and Pizza Hut.
To look up a ticker symbol on Wall Street Survivor, click on the Symbol
Lookup link (just under the search field). Enter all or part of the company
name in the field under Company Search and press SEARCH.
Mark’s Tip!
Nothing is more frustrating
than accidentally buying a
stock because its ticker symbol
or company name was very
similar to the one you were
actually looking for.
For example, COKE is the
Coca-Cola Bottling Company,
which is not the same company
as the multinational
Coca-Cola Company (KO). Ford
Motor Company (F) doesn’t
pay a cash dividend, but Ford
Motor Credit (FCJ) pays a 10%
dividend.
Only publicly traded companies
have ticker symbols. Completely
privately held companies
- even very large ones like
Cargill, Koch, and PriceWaterhouseCoopers
- don’t trade
shares on the exchanges.
The search results will appear below the form in a second or two. If you
think you see the company you are looking for, click on its blue symbol
link to be taken to its detailed listing. Note the company, industry and
description to make sure you have the right stock.
3.2 Understanding Stock Quotes
If
you know the company and ticker symbol you want to buy,
you can obtain its current price and status online. For instance,
type in “LUV” into the text field on the WallStreetSurvivor.com Stock
Quotes page and you’ll get this:
When in doubt, I always
Google the company name.
See if you can find their
website’s About Us section to
figure out if they are publicly
traded, privately held, or are
owned by another company.
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chapter three • making your first trade
Here are some brief explanations of the numbers:
• Last Price: The most recent price this stock has traded at.
• Today’s Change: The change in price (and the percentage change)
compared to yesterday’s closing price.
• Today’s Open: The first price at which this stock traded when the markets
opened up this morning. Note that stocks DO NOT open at the same price
that they closed at the day before.
• Volume: This indicates the number of shares that have traded today. Some
stocks may trade millions of shares each day, and others only trade a few
hundred or even zero shares per day.
• Previous Day’s Close: This number is the price of the stock for the last trade
of the previous day.
• Bid/Ask: As described earlier, the bid is the highest price a buyer is currently
willing to pay for a stock, while the ask is the lowest price at which a seller is
currently willing to sell (also called the offer). The size is the number of shares
for the bid or ask price. Only available to Real-Time data subscribers.
• 52 Week High/Low: This is the highest/lowest price the stock has traded at
during the last 52 weeks (i.e., a year) and allows you to compare the current
price to its 52-week range.
• Online stock quote listings also include stock charts, which come in a variety
of formats. They all track pricing data such as the open, high, low, and
close (OHLC), usually with display options such as line charts, bar charts, and
candlesticks; selectable date ranges, and the ability to overlay information
like volume, moving averages and dozens of other indicators.
• Annual Dividends: Dividends are cash payments that some companies
make as a way of returning operating profits to the shareholders. If you own
enough stock, you might have a wonderful income just from your stock
dividends.
• Annual Dividend Yield: This is an important measure of return of the stock
and is calculated as the Annual Dividend amount divided by the current
stock price.. It the stock is at $10.00 and the company pays out a cash dividend
of $0.50, then the Annual Dividend Yield is 5%.
• EPS: The company’s earnings (profit) per share. It is calculated by dividing the
company’s most recent annual income by the number of shares outstanding.
Beta: • Also written using its namesake Greek letter, β. Beta is a measure of the
volatility of a stock compared to the market as a whole. A beta of 1 means
that it moves with the market; greater than 1 means the stock fluctuates
more quickly; a beta between 0 and 1 means the stock moves less often than
the market. A negative beta means the stock moves in the opposite direction
to the market.
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wall street survivor • investing 101
3.3 Types of Orders
Once you have the ticker symbol for the company you wish to
trade, you’re ready to place your first order. On WallStreetSurvivor.
com, go to the Trade menu and choose Trade Stocks to get started.
The Trade Stocks user interface
Enter “LUV” in the Symbol field, then click in the Quantity field. (You
can also use your keyboard’s Tab key to move between fields.) The site will
automatically calculate how many shares you can purchase and display this
underneath the Quantity field.
Wall Street Survivor’s portfolios have a position limit, which means no
more than 25% of your portfolio can be invested into any one stock; this
teaches you how to build a diversified portfolio. You can then enter any
number up to this limit; if you try to go over, it’ll ask you to enter a lesser
value. At real-world brokers, of course, you can put all of your eggs in one
basket, and buy as many shares of a stock as your cash and buying power
will allow.
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chapter three • making your first trade
There are several different types of orders you can use when you place a
trade. A few of the most popular and those you should become familiar
with include:
• Market Orders: The simplest variety, a market order instructs your broker
to execute a buy/sell immediately at market prices, whatever they may be.
Depending on which “hat” you’re wearing (buyer or seller), as long as there
are other willing buyers or sellers of the stock you want to acquire or dispose
of, your order should be quickly carried out. Your buys will always be executed
at the best ask price, and your sells will be executed at the best bid price.
• Limit Orders: When you place a limit order, you’re asking to buy a stock at
no more than or sell a stock at no less than a specified price that you set. For
example, suppose you decide you want to buy shares of LUV at $9.25 when
it is currently trading at $9.45. You would place a limit buy order for $9.25
which should fill if the price drops down to $9.25 or lower. Once you buy the
shares, you might want to place a limit sell at $10.00 which should fill if the
price gets to $10.00 or higher.
• Stop Order: When you place a Stop Order, you are asking to buy a stock
once a certain upper price point is reached, or to sell a stock once a lower
stock price has been reached. For example, suppose you bought your LUV
shares at $9.25 and instead of placing a Limit Sell Order at $10.00 you place a
Stop Sell Order at $8.75. This order, also known as a “Stop Loss” order would
sell your LUV shares if the stock price dropped to $8.75. These orders are
used to limit your losses. A Stop Buy Order would be used if LUV was trading
in a $9.25 to $9.50 range and you only wanted to buy it if the stock price
spiked up to $9.60. People use Stop Buy orders so that they can buy a stock
only when it breaks out of a narrow trading range. r.
”
3.4 Day Orders, Good Till Cancelled,
& Fill-or-Kill
Placing an order doesn’t necessarily mean it gets executed
instantaneously. You might be placing trades at night when the
markets are closed; you might be travelling and not have access to up-tothe-minute
stock price information; or you might be following a strict
strategy that has very clear entry and exit prices.
Thus, both the timing and the duration of your orders are important to
successfully managing your portfolio. When placing your Market, Limit or
Stop orders, here are the usual duration options:
Day Order:
• A day order is good for one day only. Should your broker be
unable to execute your order by the close of business, your order is automat-
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wall street survivor • investing 101
ically cancelled. Should your broker execute your order in error on the next
day, you’re not obligated to honor it. Should you forget to specify a durationwhen
you place your order, brokers will assume you’ve issued a day order.
• Good Till Cancelled (GTC): A GTC order indicates that your instructions to
your broker are “open ended;” it stays in effect until it is executed or you
cancel it. To avoid over-lengthy GTC durations which may become counterproductive,
many brokers will set an upper time limit of 60, 90, or 120 days.
• Fill-or-Kill Order: Less common than the other two, a fill-or-kill is a limit
order that you want executed immediately, if possible. If your order cannot
be filled, it is immediately killed (cancelled). Fill-or-kill is not currently available
at WallStreetSurvivor.com.
New orders typically cancel prior orders for the same stock. For example,
let’s say you issue a stop order with a day order duration to your broker.
You rethink your decision and change the duration to GTC; Your day order
is cancelled and replaced with a new GTC order.
3.5 Buying on Margin
When you open a real brokerage account, you’ll be asked if
you want to open a margin account. Buying on margin means that
you purchase securities using some of your own cash, and you take a loan
from your broker to complete the purchase. The collateral for the loan is
the stocks or cash you already own. The difference between the value of the
collateral (securities) and the loan is called the net value.
Margin buying is very convenient and cost-effective, but you should always
maintain control to avoid financial problems in the future. Here’s why:
You can normally borrow up to 50% of the value of the securities you’re
buying, within minimum margin requirements. Should your account or
collateral fall below the minimum required, you’ll be issued a margin call,
which means you’ll be required to add funds to your account or be forced
to sell off your securities at their current market value, whether you want
to or not. You should try to keep the account within its appropriate minimum
margin requirements at all times; margin calls can be costly as they
can force you to sell stocks at low prices, thereby locking in losses.
The good news? You can maximize your buying ability by using less cash
to purchase more shares. Your buying power – measured as a combination
of cash and margin — will depend on the amount of leverage your broker
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chapter three • making your first trade
allows. For example, an aggressive broker that allows an 0.25% leverage
ability gives you the power to use only $2,000 to buy up to $800,000 worth
of stock.
The bad news? You’ve maximized your buying power, but should your
stocks fall in value, your losses are maximized, too. Again, should your
account fall below the margin minimum requirement, you’ll have to come
up with more cash or stock to get your account back in compliance.
3.6 What Is Short Selling?
Short selling is the practice of selling shares that you don’t actually own.
Just as brokers will loan you cash to buy more shares on margin, they will
also loan you shares that you can sell, that you must return at sometime
in the future. This concept confuses a lot of new investors, but it’s quite
simple. Here’s how it works:
Suppose you do some research and learn that Southwest Airlines’ (LUV)
passenger traffic is falling, and also that the price of oil is skyrocketing.
You know that both of these factors will negatively effect LUV’s profitability
and earnings, and you believe it will continue to do so for at least the
short term. You then place an order to Sell Short 100 shares of LUV and
you get filled at $10.
Your broker borrows the shares for you, which you then sell. Your cash
balance will go up by $1,000, and the market value of your stocks will now
go down by the same amount (as you now owe the broker 100 shares of
LUV). If your assumptions were correct – and the price of LUV starts to
drop – you can then repurchase that number of shares at a lower price to
replace those that you borrowed. This is called covering your short, and
you’ll pocket a decent profit on the short sale.
Should you be wrong, and the price of LUV increases, say to $12.00, you
may be less than pleased — as you will now have to rebuy those shares at a
higher price and lose the difference of $200.
Your WallStreetSurvivor.com account allows you to short sell, so it’s a great
place to practice and test short-selling strategies, and to get used to the
risks involved.
Mark’s Tip!
Here’s a thought
experiment to show you
both sides of margin
trading.
Say you want to purchase
100 shares of LUV at $10.00
per share. That will cost
$1,000; you decide to make
a margin buy using $500
of your own cash and $500
borrowed from your broker.
Your net value is now $500
($1,000 stock minus $500
loan).
If the stock goes up to $15
and you sell, you’ll get
$1,500; the broker will take
$500 to pay off the loan,
and you’ll pocket the other
$1,000. You’ll make a 100%
return because you turned
your initial $500 into $1,000.
Had you not bought on
margin, you would have
only been able to buy 50
shares at $10 for a total
cost of $500, and then you
would have sold your 50
shares at $15 for $750, a
profit of $250 or 50%.
Likewise, if you bought 100
shares on margin and the
stock’s price dropped to
$5.00, the $500 from the
sale would go to pay off
your loan — leaving you
with nothing. This would
represent a loss of 100% of
your investment on a 50%
decrease in stock price.
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wall street survivor • investing 101
For a walkthrough of how to short sell at WallStreetSurvivor.com, see the
Short Selling Stocks Video Tutorial.
3.7 How to Record Gains and Losses
When it comes time to file your tax return, the IRS wants
to know how much money you made or lost in your brokerage
account. Your brokerage firm reports the total proceeds from all of your
stock sales, but they don’t report your gains and losses, because there are a
couple of different ways of calculating it.
Mark’s Tip!
A lot of people talk about
how risky shorting is,
but the reality is that the
only difference between
shorting and buying on
margin is that if you short
a stock it can go upwards
to thousands of dollars, but
when you buy a stock the
lowest value it can go down
to is zero.
When you buy on margin
you know that the most
you can lose is the value
of the stocks you bought,
but when you short stocks
you could technically have
unlimited losses if the stock
goes to infinity!
Recording the gains and losses of your stock portfolio seems simple at first
— one would assume you just calculate the difference between the cost to
acquire a security, and the price you receive when selling it.
In the real world, it’s not that clear-cut. You might buy 100 shares of LUV
at $10, another $100 at $10.10 and then 50 shares at $11. One day, you need
cash and sell 125 shares at $15. What was your profit on those 125 shares?
There are two general methods that stock traders use to record their costs.
One is First-In, First-Out (FIFO) which simply means that you sold the
shares in the order you bought them. In this case, you would have sold the
100 shares you bought first at $10, and then the 25 shares you bought at
$10.10.
The other way is to use an average cost basis. In our example, we’d add 100
shares at $10, 100 shares at $10.10 and 50 shares at $11 to get a total cost of
$2,560 for 250 shares, which averages out to $10.24 each.
Accounting stock transactions for your personal income statement and
balance sheet can be a bit overwhelming — but you should get in the habit
of keeping meticulous records. Record every purchase you make and the
price you pay; when you sell, record every transaction, including the price
you received. Then, when working with your broker, accountant, and tax
advisor, you’ll always have up-to-date records of your investment activities.
You can then let your expert advisors handle the more complex accounting
and tax issues.
On WallStreetSurvivor.com, you can view your Order History and
Transaction History under the Trade menu.
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chapter three • making your first trade
3.8 Set Goals and Targets
You should have a game plan for your investing life. Just as
you plan your workday, vacation, college financing, golf matches, and
other areas of your personal and professional life, you need a plan, objective,
and goal for your investment activities.
Spend some quality time with yourself, thinking about what you really
want to accomplish. Stating that you simply want to make money or
become wealthy isn’t helpful, because there’s no specific target or goal.
Without a target, you’re a walking example of Yogi Berra’s great quote:
“We’re totally lost, but we’re making good time.”
Create a game plan and target showing how you need to tailor your portfolio
to meet your desired objective. If you want income, decide how much
income, and in what time periods you’d like to receive it. Looking for
appreciation? Decide what appreciation and growth percentage you’d like.
The goal and target you select is less important than the requirement of
having a comparison mechanism. This gives you a working “scorecard” of
your performance. You can change, ratchet up or down your comparison
target as often as you wish. Just be sure to have something to measure your
performance against.
Comparing Your Portfolio to Benchmarks
So, you’ve bought several stocks after extensive research, and one month
later, you’ve gained 2 percent. You’re a hotshot investor, right? Maybe,
maybe not.
How well did the overall stock market perform during that time frame?
If the overall market gained 5% in that same month, then you’re really
wasting your time. Instead, you could have bought an ETF that mimics the
overall stock market like SPY and made more money with less effort.
On the other hand, if the overall market fell by five percent over that
period, then you’re quite a savvy investor (at least over that short time
frame). Many professional traders are not able to beat the market over 1
year, let alone 5 or 15 years.
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wall street survivor • investing 101
Let’s look at some common stock market benchmarks:
• The S&P 500 index takes the prices for the 500 largest companies in
America and averages them into a single number so that is easy to see the
overall direction of the stock market. It is generally the most used index for
benchmarking stock portfolios. You can buy an ETF that mimics the S&P 500
– its ticker symbol is SPY.
• The Wilshire 5000 index captures the entire field of U.S. stocks, large and
small, and is the broadest measure of U.S. stock market performance. The ETF
that mimics the Wilshire 5000 is TMW.
• The Russell 2000 index captures the world of smaller publicly traded
companies in the United States. The ETF that mimics the Russell 2000 is IWM.
• There are also benchmarks for stocks traded in other countries like the TSX
index (Canada), the Nikkei (Japan), the DAXX (Germany) and virtually every
country in the world that has a stock market.
Summary
OK, new investor, you should be ready to begin! You can now leave the
bleachers, put on a uniform, cross the white lines and play. Stay focused,
positive, and realistic. You might not make the majors right away, but you
can enter the investment world armed with solid knowledge, upon which
you can expand by practice and repetition at WallStreetSurvivor.com.
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chapter three • making your first trade
Chapter 3 Exercise
If you haven’t done so yet, go to your Wall Street Survivor account and
make at least 6 trades. Don’t worry if you’re not sure what to buy yet —
this is just for practice so you can get familiar with both trading concepts
and online trading user interfaces.
Chapter 3 Quiz
Question 1
What makes up a trading or ticker symbol?
a. One to five letters
b. Two numbers
c. A combination of letters and numbers
d. A combination of letters, numbers, and symbols
Question 2
How is the term Beta used to understand stock data?
a. It measures the change in stock price compared to yesterday’s closing price.
b. It is a test to see if a stock will sell in the stock market.
c. It indicates the total shares outstanding multiplied by the current stock price.
d. It measures the volatility of a stock.
Question 3
What is a limit order?
a. An order to buy/sell immediately at market prices
b. An order to buy or sell when the market price reaches a specified level
c. An order to buy or sell at no more or no less than a specified amount that has
been set
d. An order that is only good for a certain amount of time
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wall street survivor • investing 101
Question 4
What does it mean to buy on margin?
a. You purchase securities using some of your own money and collateral from
stocks already owned.
b. You buy the stocks completely through a loan.
c. You use the profits from one stock to buy another.
d. You pay with a credit card.
Question 5
What are the dangers in choosing a short selling strategy?
a. You may end up with very high losses.
b. You may receive a margin call order.
c. You may have to come up with money if share prices increase.
d. The bank holding your mortgage may not agree.
Question 6
What are reasons why a person may buy securities?
a. Appreciation
b. Income
c. Significant control over company operations
d. All of the above
Question 7
How should you plan your investment strategy?
a. Decide you want to make money
b. Create a specific target or goal for all investment activities
c. Plan to become wealthy
d. Make decisions as it suits you
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chapter three • making your first trade
Question 8
How can you classify your stock purchases to record gains
and losses?
a. Hold to maturity
b. Trading securities
c. Available for sale
d. All of the above
Question 9
How does the S&P 500 Index serve as a common stock market
benchmark?
a. It averages the prices of 500 companies for a view of the overall stock market
direction.
b. It considers all the stocks to gauge stock market performance.
c. It focuses on small publicly traded companies to benchmark the stock
market’s situation.
d. It combines the top U.S. and international stocks to deliver an overall
performance rating.
Question 10
When preparing to make stock trades, what is the best advice?
a. Dive in and hope for the best.
b. Stay positive and focused and keep gathering solid knowledge.
c. Pick the stocks with the coolest stock symbols.
d. Wait until the economy rebounds.
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wall street survivor •• investing 101
Chapter 4
Building Your $100,000 Portfolio
Building a stock portfolio is easy — but building
a successful portfolio is a challenge even for the
smart people on Wall Street.
New investors are often overwhelmed by the over 20,000
stocks that trade on american exchanges. We have to navigate
a plethora of opportunities, risks, timing issues, and other uncertainties
— that’s why the concepts of Chapter 4 will help you gain confidence,
make better decisions, and achieve success.
Building a successful portfolio is part art and part science; the art is in
market and stock timing as discussed in earlier chapters. The science is in
how to maximize your returns with minimal risk, which we’ll describe in
more detail in this section.
Before you build a real-world portfolio and risk your own hard-earned
money in the market, be sure to create virtual portfolios here at Wall Street
Survivor to test strategies and gain confidence and experience.
4.1 Risk, Reward & Diversification
Risk, reward, and diversification are the most important
concepts to understand before you start your portfolio.
They are factors in all investment decisions. You must learn more than
the textbook definitions of these factors; you need to understand how
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chapter four • building your $100.000 portfolio
they, in conjunction with market timing and business cycles, affect your
portfolio. Even risk, when properly managed and understood, can often
help your portfolio; there are different levels of risk, and different types of
diversification.
Simply put, risk is the term used to determine the volatility of your results.
Risk typically goes hand-in-hand with returns; the more risk you take, the
higher the expected return. Conversely, the lower the risk, the lower the
return.
The term return generally means profit. In the finance and investing world,
it’s usually expressed as a percentage and is frequently annualized. For
instance, investing $100 and getting a $6 profit in 2 years has a return or
profit percentage of 6% and an annual return of 3%. Investing $100 and
making a $50 profit over 2 years has a 50% return and an annual return of
25%.
To understand risk tolerance, consider these four brothers (Adam, Bob,
Charley and David) who each have different ways to invest $100. Each of
them has a different level of risk tolerance; where would you fit?
• Adam is extremely risk-averse, and keeps his $100 in cash in an old jam jar.
He sleeps very soundly, knowing that he will always have $100 in the jar.
• Bob is also risk-averse, but deposited his $100 in a money market account at
the oldest, biggest bank in town. That money market account pays 1% and
Bob is almost positive that in 12 months, he’ll have $101 in that account.
• Charley likes to take some risk and so he bought $100 worth of IBM stock. He
researched the stock and discovered that over the last 10 years IBM’s annual
return has varied between -10% and +57% so he is somewhat confident that
his $100 investment will turn into somewhere between $90 and $157.
• David’s broker friend tipped him to stock XYZ. This biotech company has run
preliminary tests on a drug that seemed to cure cancer in 6 out of 10 patients
that tried it, and now they are in a larger test with 1,000 people. David’s
broker says that if this second test has similar results, the stock will pop from
$1 to $100 over the next year. If it doesn’t go well, the company is out of cash
and will likely have to fold. David buys $100 shares of XYZ at $1, hoping that
the stock will at least triple, but he also knows that there is a greater chance
the company will be bankrupt and he will lose his investment.
Mark’s Tip!
Diversifying across
industries isn’t as difficult
as it might seem, if you can
take a step back and look at
things from a macro level.
History is full of examples of
some industries doing well
while others are hurting.
How do you think horse
and buggy companies
fared when Ford starting
selling Model Ts? How do
you think vacuum tube
companies did when
electronics moved towards
semiconductors? How do
defense stocks relate to
medical stocks if the current
U.S. President is expanding
the budget for the military
and asking to cut funding
for Social Security benefits?
Finally, consider that
investors also need places
to park their cash to see if
the stock market is going
down.
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wall street survivor • investing 101
Obviously, these are four different personalities (and risk-tolerances) with
four different expectations about their rewards. Since no one has a crystal
ba, none of the brothers knows what their final return will be in a year.
Adam might mistakenly throw the jar away because he forgot he put it
there; Bob’s bank could discover its money market funds were stolen by a
malicious Ponzi scheme; Charley’s IBM stock could turn worthless if the
company collapses Enron-style; and David’s bet on XYZ stock could be
worth either $10,000 or $0.
A primary investment goal is to minimize risk and diversification is the
most reliable method of doing so. Diversification is simply spreading risk
around, so that all of your eggs are not in the same basket. Your home
or car insurance works much the same way, by spreading individual risk
between everyone who pays their premiums.
Now suppose the four brothers have a fifth brother, Edward, who can’t
make up his mind what to do with his $100, so he adopts all their strategies
at the same time — diversifying his $100 by investing $25 in each of their
styles. He keeps $25 in cash, $25 in a money market account, $25 in a bluechip,
low-risk stock, and $25 on a riskier, potentially high-return biotech
investment.
Mathematically, diversification is about minimizing the variances in your
returns by averaging the expected returns of each of your stocks. If Stock A
has returns of -50% to +50% a year and Stock-B has returns of -10% to +10%
a year, then it would make sense that a portfolio that was 50% invested in
each of these two stocks would expect to have returns between -30% to
+30%.
Now if we add Stock C which always returns 5%, then a portfolio equally
weighted with A, B, and C would have expected returns between -18% and
+22%. But if I put 50% in C and 25% in each A and B, then we are at -13% to
+ 8%.
We can average out returns by buying different stocks, but the most
important way to diversify is across different industries so that each of
our stocks doesn’t perform at its extreme worst at any point in time. As we
discussed in earlier chapters, understanding the business cycle and product
life cycles helps to understand why some companies perform well at times
that other companies are doing very poorly.
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chapter four • building your $100.000 portfolio
Now suppose we add stock D to our portfolio which moves oppositely to
Stock A. When Stock A is losing 50%, Stock D is gaining 20%, and when
Stock A gains 50% Stock D loses 5%. Our equally weighted portfolio of A,
B, C, and D now has expected returns in the -9% to +15% range.
Here is a quick summary of some ways to accomplish diversification.
• Across Stocks: It certainly helps to have more than one stock in your portfolio.
College professors used to say that it took a minimum of 30 stocks to
have a well-diversified portfolio; lately, these academics are becoming more
comfortable with a portfolio of only 10 stocks as long as they’re very diverse.
• Across Industries: Investing in different industries spreads around the
risk that any one industry could suffer a serious slump. For example, totally
investing in oil, real estate, or car makers may generate wonderful returns in
the short-term, but, a downturn in any one industry will wreak havoc with
your portfolio overall.
• Across market caps: Market capitalization, or market cap for short, is a way
to identify and classify companies by the size of the total value of their
outstanding public stock. Typically, stocks are classified as large-cap (greater
than $10 billion), mid-cap ($1-10 billion), and small-cap (less than $1 billion)
companies. There are also newer classifications, like mega-cap (greater than
$100 billion), micro-cap (less than $100 million), and even nano-cap (less than
$10 million). You can classify companies along these lines or with a different
method of your creation. The key for you, as a newer investor, is to consider
investing across differently-sized market caps to mitigate risk and increase
the diversity of your portfolio.
• Across dividend yields: Companies often differ widely in their approach to
paying dividends. Some Boards of Directors strongly favor distributing earnings
in the form of dividend payments, while others want to conserve cash
to fund Research & Development (R&D) and/or growth. By investing in some
securities with a track record of high-dividend yields and also those that
display cash conservation to fund new products or expansion, an individual
gains some risk protection.
Mark’s Tip!
Don’t forget that you can
dollar cost average sell, just
like we taught you to dollar
cost average when you
calculate your purchases.
When you’re not sure about
stocks in your portfolio,
don’t hesitate to sell off 1/3
or ½ to start reducing your
position over time.
By spreading out your sales
of a group of securities, you
often “even out” the market
price changes with dollar
cost averaging, to generate
a more risk-free and stable
return..
• International and emerging markets: Economic globalization has made
emerging markets an excellent target for diversification. Emerging markets
such as those in Brazil, Russia, India and China (the “BRIC” countries) are
quickly growing their national economies and tend to reflect a marketoriented
philosophy. They typically seek direct investment at all levels of
funding, including from the smaller investor. If you do your homework, you
may find some wonderful opportunities to add your portfolio and manage
the risk factor, while enjoying good earnings and appreciation. International
markets are riskier than mature markets in North America and Europe, but
they also offer highly attractive returns.
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wall street survivor • investing 101
• Precious metals and commodity ETFs: Many people invest directly in
precious metals such as gold and silver, or indirectly through commodity
ETFs tied to precious metal indices, as diversification and risk-mitigation
tools. Once again, you should become familiar and comfortable with the
historic movement of precious metals and the global economic conditions
that preceded or existed during these price movements. In addition,
precious metals have inherent value along with market pricing.
• Dollar Cost Averaging (buying and selling): Designed to reduce risk, dollar
cost averaging strategies dictate that you buy smaller blocks of the same
securities over time to reach the investment position you want, instead of
making large lump-sum purchases. This often smoothes out the cost factor
of these securities to help you manage the vagaries of market price changes
– both up and down.
There’s more than one way to get a 10% return. Graph 1 below shows a
smooth, upward portfolio increase to a 10% return over the year; graph
2 shows a 10% return but with rollercoaster performance over the year.
Which portfolio would you rather have?
$11,000.00
$10,000 over 12 Months at 10% Annual Interest
$10,500.00
$10,000.00
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
$12,000.00
10% Annual Return with Market Volatility
$11,425.00
$10,850.00
$10,275.00
Jan 2009 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 2010
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chapter four • building your $100.000 portfolio
The 2nd portfolio would be great if you sold out on March 1st and locked in
your 20% return — but it didn’t hold that value for long. What if you had
to sell out on April 1st and lost 5%?
The relationship between a portfolio’s variance and its return can be
expressed using Nobel Prize-winner William Sharpe’s self-titled Sharpe
Ratio, which allows you to determine the excess return, or reward per unit
of risk. The higher the Sharpe ratio number, the greater the return for the
same risk.
Wall Street Survivor calculates your portfolios’ Sharpe Ratios after the
close of business each day. You can find it in the Dashboard’s Open
Positions section when you select the Performance view.
4.2 Learning Which Stocks Match
Your Goals & Knowledge
With so many stocks out there, what should a new investor
buy? You could spend thousands of hours reading all of the
newspapers, websites, financial blogs, discussion boards and newsletters
out there, that seemingly cover just about every single one of the 20,000+
stocks on the NYSE/AMEX and NASDAQ, but your “headache quotient” would
go off the charts.
Often, a KISS approach — keep it simple, stupid! — is the best way to start.
Ask yourself “What field am I an expert in?”
•
•
•
•
Are you a doctor? If so, what’s the hot new drug, equipment maker or
pharmaceutical company?
Are you a teacher? If so, do you know what books, educational services,
products and/or software your school is buying?
If you work at a grocery store, are people suddenly asking for a new
product that you can’t keep on the shelves?
Are you a parent? Are your kids constantly asking for a certain brand of
shoes, clothes, games or iPods?
Investing in what you know, based on how much you know, can provide
a good return and a higher level of comfort. Legendary investor Warren
Buffett amassed his fortune without using a wide variety of exotic strategies;
He’s a classic buy-and-hold investor who studies companies and
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wall street survivor • investing 101
determines their core values based on the products they make and sell,
profitability, management quality, and projections of their future growth
and sustainability.
Buffett never acts on rumors or pure market price indicators, and surprisingly,
for someone recognized as one the preeminent investment gurus on
our planet, seldom sells items in his portfolio, preferring to use his income
stream to enlarge his holdings with new additions.
Mark’s Tip!
Each of us knows more than
we think, because every day
we contribute to the profits
(or losses) of the companies
that we choose in the
marketplace.
We go to Starbucks (SBUX)
for coffee and skip a Diet
Coke (KO); We eat lunch at
McDonald’s (MCD) and not
at Taco Bell (YUM). We buy
our kids’ clothes at The Gap
(GPS) instead of The Limited
(LTD). Why do we make
these decisions? Because
there is something about
one product or the way one
company is run that makes
us want to go there versus
its competitor.
Do you ever walk into a
store or restaurant and say
“Wow! This place is packed
all of the time.” If so, don’t
walk out mad. Instead,
find out more about that
company and see if they are
publicly traded.
When my wife comes home
from shopping, the first
question I ask is “Where
did you go?”, then “How
much did you spend?”, and
then “Was it crowded?”
I’m not just making idle
conversation with my wife,
I’m researching stocks!
Peter Lynch, another globally respected investment genius, also embodies
a solid – not exotic – investing strategy. After graduating from Boston
College in 1965, Lynch was hired as an intern at the company that came
to be forever linked with his name, Fidelity Investments. This was mostly
because he caddied for Fidelity’s president at a local country club, but from
such humble beginnings began his meteoric financial career.
Among his many accolades, Lynch is noted for an important and simple
theory: Invest in what you know. In one of his books, he talks about spending
every Saturday with his daughters, when they’d inevitably ask, “Daddy,
take us to the Gap (GPS) so we can buy some clothes!”
So reluctantly, every Saturday, he gave his daughters $100 to shop with and
sat out in the mall waiting. After a few weekends of this routine, his eyes lit
up! Noticing all the teens dragging their parents to the store, he sat outside
and counted the number of people going through the checkout lines. After
an hour of observing and guessing at the average shopper’s spend, he had
a rough estimate of how much the store was making. He started liking the
Gap, and had his staff research the company the following Monday. Soon
it was in his portfolio and became one of his best buys ever, returning over
1,000% during the 1980s.
Investing in what you know isn’t just an excellent starting strategy — it
can be an enduring strategy. Rather than trying to become an expert on
complex investing strategies overnight, expand your local knowledge:
Use your personal life and work industry expertise to choose securities of
companies and industries you’re familiar with.
Think about your goal as building a portfolio of “non-losers” as opposed to
a group of “winners.” Non-losers, combined with investing in companies
and securities you know, often leads you to undervalued stocks and true
bargains that maximize your investment dollars.
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chapter four • building your $100.000 portfolio
You may also find one or more ten-baggers, a world-famous Lynch-ism.
In baseball, “bags” is a popular term for the bases; finding a ten-bagger
(i.e. hitting two home runs and a double) means you’ve found a stock that
returns ten times your original purchase price. Even finding a group of
two- or four-baggers should make your portfolio quite happy!
4.3 Stock Screeners
Once you get back from the shopping mall, don’t forget to
diversify! Buying a shoe company, a hat company, a jean company,
and a sock company, is not what we mean: Find a high-dividend-yielding
stock, a small-cap stock, and an international stock to complete your mix.
Thanks to the Internet, you can scan 20,000 stocks in seconds, if you
know what you’re looking for. Stock screeners can save you time by finding
stocks that meet certain financial or analytical criteria. Although some
offer more search variables than others, they all work in a similar manner.
You decide on a mix of financial and investment preferences; you then
input these parameters and allow the stock screening software to locate
securities that fit your descriptions. You can usually choose different
formats for results, including expected returns, risks, and projected yields,
while other screeners offer stock suggestions based on growth, effective
strategies, and other parameters.
The free Stock Screener tool
from Zacks Investment Research
on Wall Street Survivor:
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wall street survivor • investing 101
4.4 Popular Analysts and Websites
Myriad experts and websites offer an astounding volume of
investing information. All are useful, but only you can decide
which sources matter most for your personal investing. Here are a few
popular ones:
• MSN Money: Offering stock quotes, financial news, rumors, strategies,
and blogs, MSN Money can serve as a supermarket of investing data for
both newer and experienced investors. Microsoft has expanded and better
focused this portal at consumers over the years. Yahoo and AOL have similar
investing websites.
• The Motley Fool: Fool.com is an always-interesting mix of financial news,
investment strategies, and large doses of humor balanced by hard hitting
serious news and opinion. Tom and Dave Gardner and their talented staff
have been delivering their unique and informed message since 1993, and
the Fool is now a full-service financial media enterprise. If you’d like your
investing information tinged with some pleasant sarcasm and edgy laughs,
the Fool might be perfect for you.
• Jim Cramer, host of CNBC’s Mad Money and co-founder of TheStreet.com,
is a journalist, lawyer, and “infotainer” (his term). He’s been dispensing financial
and investment information to anyone listening since the mid-1990s. If
you need a break from reading financial statements or waiting for your stock
screener to advise you on your next hot investment, Cramer might add some
zest to your day. A former hedge fund manager, Cramer has been in the
investment trenches for some time. You may not agree with all that he says,
but you will be informed and entertained.
• Other Sources: There is a wealth of additional information available to reinforce
your investing career. Get on your Internet surfboard and visit some
of the many websites devoted to investment news and strategy. If you’ve
traded in your rabbit-ears antenna for a cable, fiber optic, or satellite connection,
you’ll find more information and strong opinions on many TV shows
and channels dedicated to finance and investing.
Summary
It’s time to decide how you’d like to construct your portfolio. Whether you
decide to invest virtual money or real funds, you should now have a sound
basis to create your own thoughtful investing plan and strategy. Using your
virtual portfolio and trading ability at WallStreetSurvivor.com, you can
test your strategy and tweak it, if necessary, to achieve profitable results in
both the virtual and real world.
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chapter four • building your $100.000 portfolio
Chapter 4 Exercise
Build a balanced, diversified portfolio at Wall Street Survivor with a
selection of stocks from different industries, market caps and countries.
Remember to use research tools and screeners to assist you with your
stock selection.
Chapter 4 Quiz
Question 1
What are some diversification options?
a. Precious metals
b. International and emerging markets
c. Stocks across different levels of market caps
d. All of the above
Question 2
What is the Sharpe Ratio Index?
a. A measure of risk that helps you select the right stocks.
b. A way to spread out your stock sales.
c. A pen that helps you calculate stock prices.
d. A conservative way to purchase and sell stocks.
Question 3
What can be learned from Warren Buffet’s approach to investing?
a
Skip the research
b. Sell, sell, sell
c. Use a buy and hold strategy (correct answer)
d. Pay attention to rumors and pure market price indicators
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wall street survivor • investing 101
Question 4
What is Peter Lynch’s primary investment theory?
a. Invest in what you know (correct answer)
b. Become an expert at complex investing strategies
c. Read many books
d. Listen to your broker
Question 5
How can you find undervalued stocks?
a. Focus on the stocks that have done well lately
b. Buy in an economic downturn
c. Find “non-losers” and invest in companies you know
d. Go to the library
Question 6
What can stock screeners do?
a. Results on expected returns and risks along with projected results
b. Offer stock suggestions for growth and effective strategies
c. Find stocks of interest and that match your desires
d. All of the above
Question 7
What is a “ten-bagger”?
a
b
A large cup of tea
A stock that returns ten times your original purchase price
c. A company that can produce 10 of something for the price of 1
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chapter four • building your $100.000 portfolio
d. A type of security that is traded in the stock market
Question 8
What is The Motley Fool?
a. A comedian
b. A stock trading program
c. An information website for financial news and investment strategies
d. The day’s worst-performing stock
Question 9
What other sources are valuable for investment information?
a. MSN Money
b. Yahoo! Finance
c. Television shows
d. All of the above
Question 10
What can the right tools help an investor achieve?
a
b
c
The right investment decisions a majority of the time
Better investment decisions
Their own televisios show
d. Less risk and a higher return
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wall street survivor •• investing 101
Chapter 5
Now That I Own It,
What Should I Do?
If your first stock purchase made a profit,
you’re probably basking in your own brilliance
and kicking yourself for not buying more.
If you’ve already lost money, you might be simply
kicking yourself, period. It’s natural, so don’t
worry, here’s what to do next.
Selling a stock is just as important of an investment decision as buying,
and you must have a strategy to maximize your profits and minimize your
losses. Developing a trading strategy is important — even a flawed strategy
is better than having no strategy. Your strategy will always evolve as you
learn from your past successes and mistakes, as the markets change, and
even as trading technology and software change.
This chapter will teach you generally accepted trading rules. Since trading
is part art and part science, we encourage you to create your own investing
strategies as you grow and learn.
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chapter five • now that I own it, what do I do?
5.1 Rule #1: Ride Your Winners,
Cut Your Losers
When learning any new skill, there are helpful rules of
thumb to learn. In golf you must keep your left arm straight (if
you’re a righty) and in blackjack you must assume the dealer has a 10. In
stock trading the first rule is: Ride your Winners and Cut your Losers.
Sounds simple? Almost all new investors share a common affliction that
causes them to do the exact opposite: They can’t admit that they were
wrong. Assume you invested $1,000 in two companies as your first two
trades. After the first month, Stock A’s market value increased to $1,200
while Stock B’s decreased to $800. What is your first reaction? Is your first
thought to sell ythe winning Stock A and take your profit, and wait until
your loser Stock B regains its value? This is the loser’s mentality — Yet, this
game plan is usually the first one followed by newer investors!
The issue is that our investor has gotten emotional about his choice in
Stock B and thinks “It’ll come back soon — I’ll sell it when I can get all of
my money back.” Don’t do this — Ride your winners and cut your losers!
This cuts your losses (and you will have some losses — everyone does).
If your winner is a hot stock, it’s likely that its market value will increase
further. Similarly, if your “problem child’s” price is declining, the declines
will probably continue, causing you to suffer further losses.
This concept can be better understood when looking at what it takes to
recoup your losses. This isn’t intuitive — due to the way percentages work,
it takes a much larger percentage gain to recover your losses. For example,
a stock that has lost 15% of its value will require a run-up of 18% just for you
to break even.
Mark’s Tip!
Gordon Gekko, the main
character in the 1987 movie
Wall Street, said it best
when he said “Don’t get
emotional about stocks, it
clouds your judgment.”
You should only buy a stock
after researching it and
having a strong conviction
as to why you want to own
that stock — but if you are
wrong, admit it and move
on to your plan B.
These calculations get worse the more your stock goes down:
My Stock Loss
Gain Required to Break Even
20 percent 25 percent
30 percent 43 percent
50 percent 100 percent
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wall street survivor • investing 101
For example, if you buy stock XYZ at $10 a share and it drops to $5, you’ve
lost 50% of your investment. Now for you to recoup your investment, the
stock must now double just to get back to $10 a share. No one wants to be
in the situation of having to pray for a stock to double, just so that they can
break even. In fact, that’s a nightmare. It is much better for you to cut your
losses early, at 8-12% rather than get into this predicament.
Ride your Winners
The law of percentages seen above also works in reverse, and in your favor
when you hold on to your winners. The longer you hold onto a winner, the
less a stock needs to move in order for you to rack up really exciting gains.
Let’s take a look at the table as stocks rise:
Mark’s Tip!
Stock trading is a zero sum
game: If you’re not the
winner, then you’re the
loser.
If you bought a stock and
it went down, then you
made the seller of that
stock happy because they
were able to pass that loss
on to you. If you bought a
stock and it went up, then
you made the seller of that
stock very sad.
Stock Gains: Gain Required to Double orig. Investment:
20 percent 66 percent
30 percent 54 percent
50 percent 33 percent
75 percent 14 percent
The gains get even better when your stock has doubled or tripled already.
For example, let’s say you bought Google (GOOG) in 2004 at $100 per
share. If the stock is trading now at $400/share, every 1 percent rise in the
stock produces for you a 4 percent gain. Not bad, eh? That’s how you get
rich: finding winners and sticking with them as long as they keep rising
consistently.
5.3 Don’t fall in love with your stock
purchases — particularly losers
You are not a welfare agency, rehab specialist, or air/sea
rescue pilot. If an investment is going south, sell it without remorse
and move on. Don’t forget, investing is a business, not a hobby or a charity.
Admitting that you were wrong to buy a certain stock is the most difficult
fact to accept in investing. It makes every investor feel bad when they see
their portfolios losing money, which paradoxically makes it even more
difficult to sell off. The reason why most investors fail is due to their feel-
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chapter five • now that I own it, what do I do?
ings about the stocks they buy and sell, so don’t let your ego get in the way
of making money, or in the case of a losing trade, from stopping the bleeding.
If you can master your ego and your emotions, you will have more
profits on your winning trades and smaller losses on your losing trades
– guaranteed.
5.4 Never, ever, ever lose more than 10%
on any single trade.
Traders, finance professors, and common sense all say that
you should never let one bad apple ruin the others in your basket.
Picking nine stocks that gain 10% will be a waste of time if your tenth stock
loses 100%, so don’t let this happen to you!
The easiest way to follow this rule is to place a stop-loss order on your
stocks as soon as you buy them. If you buy IBM at $100 a share, then
immediately place a stop-loss order at $90. This way you won’t have to
worry about a market crash erasing more than 10% of your portfolio value
in any given day, week or year.
5.5 Diversify, diversify, diversify
Always diversify your portfolio into at least ten different
stocks. It doesn’t matter if you are starting with $10,000 or $100,000
— you’ll have more success if you think big and proceed as though you
were a major-league investor. Diversification is important because while
one sector of the economy might be falling 10%, rarely does the whole
market sell off 10% in the same time period. So, with a properly diversified
portfolio, you may get stopped out on one or two stocks, but hopefully you
will have gains in others.
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wall street survivor • investing 101
5.6 Don’t fall in love with any particular
stock, and watch for market tops
Avoid falling in love with any one particular stock, as the
market can turn on it very quickly. While you may love a
particular stock, millions of others may develop a dislike on a moment’s
notice. You must be prepared to cut ties with an investment when as this
condition starts to emerge.
Mark’s Tip!
Placing a stop loss order
or a trailing stop at 8 to
10% below your purchase
price is a routine you must
practice religiously.
As we noted earlier, your possible first reaction — sell the winner and keep
the loser — is the wrong one. Remember, your winners deliver profits “on
paper,” but your losers involve real money you’ve already invested. It’s critical
that you cut (or minimize) your losses to safeguard your overall portfolio
value. For this reason, you should develop effective exit strategies.
This brings us to the only exception to Rule #1: Market Tops. As you
become more experienced, you’ll get a feel for those times when one of
your winners is at a market top. As you watch stocks day after day, month
William O’Neill, the father
of technical analysis and
the founder of Investor’s
Business Daily recommends
the 8% point, but others
say 10%. Yes, you will get
burned at times; if the stock
falls 10%, you get stopped
out, and the stock may
recover, but more often
then not, a stock that falls
10% will continue to decline
even further.
Sure, it’s OK to buy the
stock back later at the
cheaper price, but don’t
buy it on the way down.
Wait until it has bottomed,
formed a base pattern on
the chart, and then shows
signs of life again.
$10,000 over 12 Months at 10% Annual Interest
$11,000.00
$10,500.00
$10,000.00
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
10% Annual Return with Market Volatility
$12,000.00
$11,425.00
$10,850.00
$10,275.00
Jan 2009 Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan 2010
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chapter five • now that I own it, what do I do?
after month, you will get the feel when a stock has gone too far, too fast and
has to come back down a bit. This is the time to consider just selling your
winners (or tightening up your stop-loss order to 4%) so you can increase
your cash holdings, so that you can find another stock that’s on the way up.
Here are some suggestions that many experts believe will help you identify
market tops.
•
Closely watch the Dow Jones Industrial Average, NASDAQ Composite, and
S&P 500. Pay particular attention to the relationship between volume and
the index. At some point in a bull market, the volume will fade as the index
continues to be strong—this is a bad sign that there aren’t any more buyers.
• Watch the relationship between volume and your stock’s prices.
Low volume doesn’t tell us much, but large volume helps support price
movements.
• Track the above-noted activity over a four- or five-day period. This trend
often precedes an overall market downturn. Feeding upon itself, it’s almost
a self-fulfilling prophecy, and the “mood” of the market can go from bull to
bear rather quickly.
• Which leads us to Rule #6: Sell into rallies that have fading volume.
Try not to miss these market top indicators, as you may lose profits you’ve
already achieved. If you’ve been on a good streak, you don’t want to quickly
change from offense to defense if you can avoid doing so. Identifying
market tops can be a profitable component to your market strategy in both
the short and long term.
5.7 Have an Exit Plan and Target
for Every Stock
Mark’s Tip!
Some of the great investors
and portfolio managers
over the last 30 years, like
Peter Lynch and Warren
Buffett, talk about having
the “ten-bagger” in their
portfolio.
Sure, its nice to pick a stock
that gains 10 or 20 percent
a year, but what really
drives a portfolio higher is
a stock or two that tenfolds,
or earns a 1,000% return.
Apple Computer (AAPL),
The Gap (GPS) and Coca-
Cola (KO), are a few that fall
into this category.
Few experienced traders ever invest in any stock without
having an exit strategy. In its simplest form, an exit strategy
means planning when and how to sell before you even enter into an investment.
Understand your goals, set limits on market values (on both the
upside and the downside), and have an action plan that allows you to exit
successfully. Three considerations typically dictate your exit strategy:
• How long do you plan to own the security? You should have an idea of the
time period you want to own the investment, whether you favor a short- or
long-term hold. Should circumstances change, you can always modify your
original plan and shorter/lengthen the ownership target period.
75

wall street survivor • investing 101
• What level of risk do you plan to endure? Zero risk would be wonderful,
but that’s impossible. Decide how much risk you feel comfortable with —
how much are you willing to lose? This can appear to be a moving target,
but you should set a risk parameter; even if you’re wrong, making a habit of
noting risk will help your eventual success rate.
• At what price do you want to exit? This component is both the easiest and,
sometimes, the most troubling component of your exit strategy. You’ll invariably
find that you ask yourself:
»»
»»
“Should I wait until the price goes higher than my original exit target?”
“Should hold the stock a bit longer, even though it’s decreased to my exit
target, to give it a chance to recover?”
In most cases, if you’ve developed a thoughtful, fact-based exit strategy,
you should resist the temptation to change your plan. Of course, if factual
events occur that indicate a strategy change, make it to protect your
portfolio.
Protecting your values should be at the top of your exit strategy checklist.
A good exit strategy is faithful to Rule #1: Ride your winners and cut your
losers. Here are options to achieve these goals:
• Stop-Loss Orders (also known as Stops or S/L): These are common components
of many exit strategies. Stops encompass orders you can give your
broker that direct him/her to sell a security at a pre-determined price.
When your price point is reached, your stop becomes a market order to be
executed right away. Stop-Loss Orders are an excellent tool to protect your
values. By setting high and low price points, you are “programming” your
profit and capping your losses. At Wall Street Survivor, you can see some
suggested stop loss price points on every stock quote page.
Trailing Stop Orders
• (T/S): A modification of an S/L is the Trailing Stop
Order. You set a “distance” between the market price and your Stop Order.
While you don’t want this order to move downward on the loss side (you
could only increase your losses), it can be useful on the upside. For example,
assume you place a Stop-Loss Order on a stock that you bought for $85 for
when it reaches $135. But, suppose it projects to go even higher? You might
lose further profits. You decide to issue a Trailing Stop stating that your S/L
should be $20 below current market price.As long as the price of your security
keeps moving upward, your T/S will trail (follow) its rise in value. Once
your stock begins to fall, your T/S Order will become a market order to sell
when the stock’s market price falls $20 below its peak. Once again, you have
protected your values quite effectively.
76

chapter five • now that I own it, what do I do?
Summary
You’ve made your first purchases and now you have some idea what to do
with them. While you’re not yet an expert, you should now have enough
information to create a basic holding strategy and an exit plan. You understand
that you should ride your winners and dump your losers. Having a
sensible exit strategy helps you maximize your profits and minimize your
investment losses.
77

wall street survivor • investing 101
Chapter 5 Exercises
1. Create target selling prices for each stock you hold in your
Wall Street Survivor account. Use your Trade Diary to record
your exit strategy and target price.
• Tip! From the Dashboard or Open Positions pages, you can click on the little
pencil icon in the far-right column to create diary entries for the stocks you
currently hold.
2. Create Stop Loss orders for each stock in your WSS account.
Chapter 5 Quiz
Question 1
What is the best course of action when faced with two stocks, one
gaining value, the other losing value?
a. Sell the losing stock and hold onto the winning stock
b. Decide how to proceed based on your gut instincts
c. Become a deer in the headlights and do nothing
d. Sell the winning stock, take the profit, and wait for the losing stock
to regain its value
Question 2
What does it take to recoup your losses on a losing stock?
A. A smaller percentage gain
B. A percentage gain larger than the loss
C. A percentage gain about even to your loss
D. There is no percentage gain that will make up for your loss
78

chapter five • now that I own it, what do I do?
Question 4
How should you view your stock purchases?
a
You need stocks in retirement, so be patient
b. Stocks award those that remain loyal
c. Stocks are a business, so sell without remorse and move on
d. Stocks are for fun, so enjoy yourself
Question 5
When is it advisable to disregard the “ride your winners, dump your
losers” strategy?
a. When you’ve got a really good feeling
b
When the stock is in a hot sector
c. When you feel the stock market is at a top (sell!) or the stock is a value
investment (buy!)
d. When selling or buying a particular stock unbalances your portfolio
Question 6
How can you identify market tops?
a. Noticing market liquidation (stock selling) for 1-3 weeks
b. Tracking stock activity for 4-5 days and spotting a market downturn
c. Paying attention to the volume and average of the Dow 30, NASDAQ
Composite, and S&P 500
d. All of the above
79

wall street survivor • investing 101
Question 7
What is the point of an exit strategy?
a. Nothing. Who needs one anyway?
b. It’s a way to get out of investments before they kill your portfolio.
c. It’s a way to exit the market game ensure you’ve won.
d. It’s a way to deal with the chaos of the market.
Question 8
What actions will help you stick to your exit strategy?
a. Letting someone else make the decisions for you
b. Initiating Stop-Loss Orders
c. Not selling stocks – ever – like Warren Buffett does
d. Playing Devil’s Advocate when making decisions
Question 9
What are some considerations that should dictate your exit
strategy?
a. How long do you plan to own the security
b. The level of risk you are comfortable handling
c. Your target exit price point
d. All of the above
Question 10
What are Trailing Stop Orders?
a. An order that falls behind the actions on the stock market
b. An order that sets a distance between the market price and a stop order
c. An immediate order to sell a security
d. An order that comes with a set of conditions
80

chapter five • now that I own it, what do I do?
81

wall street survivor •• investing 101
Chapter 6
Fundamental Analysis:
Understanding Earnings
& Cash Flow
In this chapter, we’ll learn how to evaluate the
worthiness of a stock by looking at its basic reason
for being: Is it making money now, and how likely
is it to make money in the future?
Fundamental analysis looks at a company’s financial statements and evaluates
other attributes like:
•
•
•
•
•
•
•
Quarterly and annual revenues, profits, and trends
Profit margins, return on equity, debt ratios and other financial analysis
The ability of the company to generate a positive cash flow
Earnings estimates for future quarters and years
The company’s current products and its products under development
The history and leadership of company management
The company’s strengths and weaknesses versus its competitors
There’s no need to fear income statements, balance sheets, and cash flow
reports. While they may initially look complicated, a company’s earnings
and cash flow results are important to a stock’s value and ultimately
impact your decision to buy or sell a security. This chapter will show you
82

!
chapter six • fundamental analysis: understanding earnings & cash flow
where to find the data you need, provide tools to analyze the information
and knowledge to understand its implications, in order to make solid
investment decisions.
6.1 Public Information:
10-Ks, 10-Qs, 8-Ks
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*2R5P9B652 ! @?E

wall street survivor • investing 101
financial statements so you can see how the company has performed in the
most recent 90-day period. These financial statements are generally unaudited.
Companies are required to file their 10-Q within 45 days of the end
of their quarter.
Form 8-K This form informs company shareholders of “unscheduled
material events that are important to shareholders.” This would include
the resignation of an officer of the company, a major purchase or business
deal the company has made, and even bad news like an SEC investigation
into the company’s business practices. These are all material events that
would require an 8-K to be filed. The 8-K is extremely common, and many
companies will file a number of 8-Ks throughout the year.
Mark’s Tip!
I always like to read the
latest 10-K report first to
see how the company
has performed over its
latest fiscal year, and more
importantly, how that
performance compared to
their previous 12 months.
Then I look for the most
recent 10-Qs and compare
the sales growth, profit
margin percentage, and
net income. I hope to see
trends established in the
10-K continuing in the
10-Qs.
We’ll be honest: A company’s SEC filings are boring, dry and full of legalese
— but they are supposed to be that way. They’re full of objective facts
about the company, and facts are what you need to evaluate a company’s
prospects for success. The SEC filings deliver the pure information about a
company, unblemished by bias or brokers’ analyses.
You can find out almost everything that you ever wanted to know about
a company just by skimming through the pages of their quarterly reports.
Are their sales increasing or decreasing? Is their profit margin growing
or shrinking? How much cash do they have on hand? How much debt do
they have? How are their European operations progressing? What kind of
compensation package does the CEO of the company have? Who are the
officers and VPs of the company? What is the company’s dividend policy?
It’s all in there.
Most companies will also prepare an annual report and distribute it to
their shareholders. The annual report often contains the glitzy positive
spins on the company’s performance. While smartly constructed and wellwritten,
you should learn to separate the prose in the Annual Report from
the true financial and operational performance as exhibited in their 10-Q
and 10-K SEC filings.
84

Example: "CSCO" or "Google"
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chapter six • fundamental analysis: understanding earnings & cash flow
6.2 An Introduction to Income Statements
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Income Statement Balance Sheet Cash Flow
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52 weeks ending 2009- 52 weeks ending 2008- 52 weeks ending 2007- 53 weeks ending 2006-
In Millions of USD (except for per share items)
09-26
09-27
09-29
09-30
Revenue 42,905.00 37,491.00 24,578.00 19,315.00
Other Revenue, Total - - - -
Total Revenue 42,905.00 37,491.00 24,578.00 19,315.00
Cost of Revenue, Total 25,683.00 24,294.00 16,426.00 13,717.00
Gross Profit 17,222.00 13,197.00 8,152.00 5,598.00
Selling/General/Admin. Expenses, Total 4,149.00 3,761.00 2,963.00 2,433.00
Research & Development 1,333.00 1,109.00 782.00 712.00
Depreciation/Amortization - - - -
Interest Expense(Income) - Net Operating - - - -
Unusual Expense (Income) - - - 0.00
Other Operating Expenses, Total - - - -
Total Operating Expense 31,165.00 29,164.00 20,171.00 16,862.00
Operating Income 11,740.00 8,327.00 4,407.00 2,453.00
Interest Income(Expense), Net Non-Operating - - - -
Gain (Loss) on Sale of Assets - - - -
Other, Net -81.00 -33.00 -48.00 -29.00
Income Before Tax 12,066.00 8,947.00 5,006.00 2,818.00
Income After Tax 8,235.00 6,119.00 3,495.00 1,989.00
Minority Interest - - - -
Equity In Affiliates - - - -
Net Income Before Extra. Items 8,235.00 6,119.00 3,495.00 1,989.00
Accounting Change - - - -
Discontinued Operations - - - -
Extraordinary Item - - - -
Net Income 8,235.00 6,119.00 3,495.00 1,989.00
Preferred Dividends - - - -
Income Available to Common Excl. Extra
8,235.00 6,119.00 3,495.00 1,989.00
Items
Income Available to Common Incl. Extra Items 8,235.00 6,119.00 3,495.00 1,989.00
Basic Weighted Average Shares - - - -
Basic EPS Excluding Extraordinary Items - - - -
Basic EPS Including Extraordinary Items - - - -
Dilution Adjustment - - - -
Diluted Weighted Average Shares 907.00 902.14 889.29 877.53
Diluted EPS Excluding Extraordinary Items 9.08 6.78 3.93 2.27
Diluted EPS Including Extraordinary Items - - - -
Dividends per Share - Common Stock Primary
0.00 0.00 0.00 0.00
Issue
Gross Dividends - Common Stock - - - -
Net Income after Stock Based Comp. Expense - - - -
Basic EPS after Stock Based Comp. Expense - - - -
Diluted EPS after Stock Based Comp. Expense - - - -
Depreciation, Supplemental - - - -
Total Special Items - - - -
Normalized Income Before Taxes - - - -
Effect of Special Items on Income Taxes - - - -
Income Taxes Ex. Impact of Special Items - - - -
Normalized Income After Taxes - - - -
Normalized Income Avail to Common - - - -
Basic Normalized EPS - - - -
Diluted Normalized EPS 9.08 6.78 3.93 2.27
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Quotes are real-time for Nasdaq and NYSE. For other exchange delays, please see disclaimer.
Apple Inc. income statement,
viewed at Google Finance
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You have to know how to read an
income statement if you want to understand
fundamental analysis. Income
statements follow this format:
• Revenue/Sales The “top line” number
on an Income statement is usually the
revenue/sales number that indicates the
total sales of the company. For retail businesses,
this is the total cash register receipts
of all of the stores
• Cost of Goods Sold – the direct costs
of the product that was sold; the actual cost
of making the product and getting it on the
store shelves. If we buy a pair of shoes from
China for $45 and pay a freight company
an average of $2 a pair to get them to our
store, then our Cost of Goods Sold is $47.
• Gross Profit – how much money we make from the sale and is simply the
difference between the Sales and the Costs of Goods Sold. If those shoes
sold for $100 then our Gross Profit is $53.
• Selling, General, and Administrative Expenses – Often called SGA
Expenses, this line includes all of the other indirect costs of doing business
(except for interest charges and taxes). So this includes marketing and advertising
costs, salaries, rent, electricity, accounting, legal, and all of the other
costs involved in running a business
• Operating Income — Gross Profit less SGA Expenses. If the number is positive,
then the company is profitable. If it is negative, then the company is
losing money.
Mark’s Tip!
Notice that I said the
company prepares
an annual report and
distributes it directly to the
shareholders.
The annual report is not
filed with the SEC and
therefore has less objective
information. While the
annual report is usually
impressive and fun to read,
there will be little valuable
information in there that
is not already in the SEC
filings.
• Interest and Taxes – Usually you will see interest expense and corporate
taxes as a separate line item.
• Net income – A simple calculation of Operating Income less Interest and
Taxes shows you how much, at the end of the year or quarter, a company
believes they have made (assuming all of their accounting is correct)!
To clarify: Many people use the words revenue, earnings, and income interchangeably.
Earnings and income are interchangeable, but revenue and
income are not. When reading income statements, revenue is the top line
and earnings/income is the bottom line.
85

wall street survivor • investing 101
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6.3 Operating Income, EBITDA & Net income
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52 weeks ending 2009- 52 weeks ending 2008- 52 weeks ending 2007- 53 weeks ending 2006-
In Millions of USD (except for per share items)
09-26
09-27
09-29
09-30
Revenue 42,905.00 37,491.00 24,578.00 19,315.00
Other Revenue, Total - - - -
Total Revenue 42,905.00 37,491.00 24,578.00 19,315.00
Cost of Revenue, Total 25,683.00 24,294.00 16,426.00 13,717.00
Gross Profit 17,222.00 13,197.00 8,152.00 5,598.00
Selling/General/Admin. Expenses, Total 4,149.00 3,761.00 2,963.00 2,433.00
Research & Development 1,333.00 1,109.00 782.00 712.00
Depreciation/Amortization - - - -
Interest Expense(Income) - Net Operating - - - -
Unusual Expense (Income) - - - 0.00
Other Operating Expenses, Total - - - -
Total Operating Expense 31,165.00 29,164.00 20,171.00 16,862.00
Operating Income 11,740.00 8,327.00 4,407.00 2,453.00
Interest Income(Expense), Net Non-Operating - - - -
Gain (Loss) on Sale of Assets - - - -
Other, Net -81.00 -33.00 -48.00 -29.00
Income Before Tax 12,066.00 8,947.00 5,006.00 2,818.00
Income After Tax 8,235.00 6,119.00 3,495.00 1,989.00
Minority Interest - - - -
Equity In Affiliates - - - -
Net Income Before Extra. Items 8,235.00 6,119.00 3,495.00 1,989.00
Accounting Change - - - -
Discontinued Operations - - - -
Extraordinary Item - - - -
Net Income 8,235.00 6,119.00 3,495.00 1,989.00
Preferred Dividends - - - -
Income Available to Common Excl. Extra
8,235.00 6,119.00 3,495.00 1,989.00
Items
Income Available to Common Incl. Extra Items 8,235.00 6,119.00 3,495.00 1,989.00
Basic Weighted Average Shares - - - -
Basic EPS Excluding Extraordinary Items - - - -
Basic EPS Including Extraordinary Items - - - -
Dilution Adjustment - - - -
Diluted Weighted Average Shares 907.00 902.14 889.29 877.53
Diluted EPS Excluding Extraordinary Items 9.08 6.78 3.93 2.27
Diluted EPS Including Extraordinary Items - - - -
Dividends per Share - Common Stock Primary
0.00 0.00 0.00 0.00
Issue
Gross Dividends - Common Stock - - - -
Net Income after Stock Based Comp. Expense - - - -
Basic EPS after Stock Based Comp. Expense - - - -
Diluted EPS after Stock Based Comp. Expense - - - -
Depreciation, Supplemental - - - -
Total Special Items - - - -
Normalized Income Before Taxes - - - -
Effect of Special Items on Income Taxes - - - -
Income Taxes Ex. Impact of Special Items - - - -
Normalized Income After Taxes - - - -
Normalized Income Avail to Common - - - -
Basic Normalized EPS - - - -
Diluted Normalized EPS 9.08 6.78 3.93 2.27
A
company’s net income is one
of the most critical pieces
of data you can pull out of the
financial statements. It’s this
profit that generates cash — and cash
drives value. A company can produce
the most innovative products, be in an
industry with minimal competition,
and have superior management, but
the company may still not be viable if
they do not translate these positives
into good earnings and strong cash
flow.
The income statement from the
10-Ks and 10-Qs is the first place to
start. Make sure you look at the net
income line with caution as it might
not necessarily be showing you the
number you are expecting to see. It
is important that the net income line
shows a profit, but sometimes there
are extraordinary or non-recurring
items that impact the net income that
muddy the picture.
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For instance, a company may lay off
10% of its workforce and have a one-time expense of severance packages, or
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it may sell off a business for a one-time profit that shows up on its income
statement. These non-recurring items can make the net income line meaningless
and misleading.
It’s more important that the company is actually making a profit from its
normal business operations, and not from picking up one of these onetime
events. The income statement should contain data showing that a
company is actually earning a profit — learn to separate operating results
from overall results.
86

chapter six • fundamental analysis: understanding earnings & cash flow
Suppose Company A shows substantial net income that is well ahead of last
year’s performance. Upon close inspection, however, you discover much of
this profit was generated from sales of assets, accounting entries, or other
extraordinary events. When you eliminate all of the non-recurring line
items on the income statement, you discover that Company A only earned
very modest net income from operations. This should raise a red caution
flag, challenge you to investigate further and read the reports more closely.
Conversely, suppose Company B shows a net loss on the income statement
for its most recent accounting period. Upon further investigation, you
learn that this was because the company took a one-time charge against
earnings because it closed a non-profitable business, terminated 1,000
employees, and paid them all severance. When you review the company’s
income from operations, you see excellent earnings data from prior years.
Knowing this, Company B may be the better longer-term investment, even
though it is showing a net loss for the current year.
An easy way to see the performance of a company is through a metric
called EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation
and Amortization. This line item on the income statement throws out
all the extraneous activity in a company and reduces the core business
operations into the number that is most used to evaluate the operating
performance of a company.
6.4 Understanding Cash Flow Statements
Once you understand a company’s profitability, take a look
at the statement of cash flows. This is the second most important
element of fundamental analysis and it needs more than a cursory
examination. In fact, many experts strongly contend that good cash flow
is more important than earnings to ensure long-term company viability.
Surprised? Don’t be.
Before we discuss how to analyze a company on a cash flow basis, let’s be
clear that we understand the difference between net income and cash flow.
When we set up a lemonade stand as children, we would go to the store
and buy $20 worth of lemons, cups, and ice. We would then stand on the
street and try to sell 50 cups for $1 each. That $50 in revenue and $20 worth
87

wall street survivor • investing 101
of expenses provided us a net income of $30 and a cash flow of $30.
The reality was that we borrowed mom and dad’s table to make our lemonade
stand without paying them anything. If we wanted to expand our
lemonade business by opening another stand at another street corner, we
would have to buy another table, which might cost us $75.
On the second day of our two-lemonade-stand business, we spend $40 on
lemons and $75 on a table, and sell $100 worth of lemonade; that means we
end the day with $15 less cash than we started with.
On the third day, we don’t need to buy another table. So on the third day
we have another $100 in revenue and $40 in costs and a positive cash flow
of $60.
Day 1 Day 2 Day 3
Revenue 50.00 100.00 100.00
Expenses 20.00 115.00 40.00
Cash Flow 30.00 -15.00 60.00
The cash flow is easy to see, but what was our net income each day? The
answer is that it depends on how many days we’ll use our 2nd table. If we
think the $75 table will last for 75 days, then doesn’t that table, in reality,
cost us $1 a day to use? Accountants at publicly traded companies must
do this type of math and allocate the costs of these fixed assets over the
expected life of the asset. This process of expensing the table at $1 a day is
called amortization (or depreciation). The purchase of fixed assets and their
depreciation is one of the differences between net income and cash flow.
Now suppose in Day 2 of our lemonade business, a customer took lemonade
from us, realized he didn’t have the $1 to pay for it, but promised to pay
us the next day. On Day 2 we would have only received $99 in cash from
our $100 in sales, but on Day 3 we would have received $101 in cash on $100
in sales. The sale really occurred on Day 2; it’s just that we didn’t get paid
until Day 3.
Similarly, on Day 2 in our trip to the grocery store in the morning we
might have forgotten to take our wallet, but the grocery store manager
gave us credit as long as we promised to pay the next day. You can see how
quickly net income and cash flow get out of alignment with purchasing
and payment for our inventory, the collection of cash from our sales, and
88

chapter six • fundamental analysis: understanding earnings & cash flow
the purchases of fixed assets that have differing expected useful lives such
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as three, five or 30 years.
Now consider this: A company with excellent profitability may experience
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Example: "CSCO" or "Google"
serious problems if its sales are concentrated in a very small customer base,
Income Statement Balance Sheet Cash Flow
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if View: all products Quarterly Data are | Annual sold Data on company credit resulting in massive accounts
receivable, or if the company is slow to develop new or improved products
in a fast-moving industry. Much-needed cash flow may be missing– to
fund operating expenses, R&D, debt service, and marketing – and the
company’s long-term ability to operate profitably, or simply operate at all,
may be in danger.
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In Millions of USD (except for per share items)
13 weeks ending
2009-12-26
52 weeks ending
2009-09-26
39 weeks ending
2009-06-27
26 weeks ending
2009-03-28
13 weeks ending
2008-12-27
Net Income/Starting Line 3,378.00 8,235.00 4,039.00 2,810.00 2,255.00
Depreciation/Depletion 209.00 734.00 506.00 330.00 168.00
Amortization - - - - -
Deferred Taxes 425.00 1,040.00 -201.00 -31.00 276.00
Non-Cash Items 211.00 736.00 548.00 359.00 177.00
Changes in Working Capital 1,558.00 -586.00 2,157.00 1,311.00 1,062.00
Cash from Operating Activities 5,781.00 10,159.00 7,049.00 4,779.00 3,938.00
Capital Expenditures -381.00 -1,213.00 -741.00 -469.00 -353.00
Other Investing Cash Flow Items, Total -3,577.00 -16,221.00 -12,922.00 -11,855.00 -8,286.00
Cash from Investing Activities -3,958.00 -17,434.00 -13,663.00 -12,324.00 -8,639.00
Financing Cash Flow Items 149.00 188.00 56.00 14.00 -15.00
Total Cash Dividends Paid - - - - -
Issuance (Retirement) of Stock, Net 374.00 475.00 288.00 122.00 77.00
Issuance (Retirement) of Debt, Net - - - - -
Cash from Financing Activities 523.00 663.00 344.00 136.00 62.00
Foreign Exchange Effects - - - - -
Net Change in Cash 2,346.00 -6,612.00 -6,270.00 -7,409.00 -4,639.00
Cash Interest Paid, Supplemental - - - - -
Cash Taxes Paid, Supplemental 980.00 2,997.00 2,490.00 1,828.00 550.00
Google Finance Beta available in: U.S. - Canada - U.K. - (China) - (Hong Kong)
Apple Inc. cash flow statement
Financial Statements provided by Thomson Reuters. Information is provided 'as is' and solely for informational purposes, not for trading purposes or advice.
Quotes are real-time for Nasdaq and NYSE. For other exchange delays, please see disclaimer. from Google Finance
Another company, working on smaller profit margins, may have excellent
cash flow and inventory turnover. They have sufficient cash to meet
all operating, marketing, and debt service obligations, and have funds left
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over for future projects. Consider successful supermarket chains often
work with profit margins as low as 5%, however, their consistent profits,
combined with excellent cash flow and little to no accounts receivable,
keeps them both viable and a very stable investment.
The cash flow statement in a company’s financials should help you narrow
down the true cash flow generated from operations. Don’t be afraid to look
at these statements —you’ll find out how the company manages its business,
how it manages its cash flow, and you might discover unexpected
changes that are clues to future performance.
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wall street survivor • investing 101
6.5 EPS, PE Ratios, Cash flow per share
& ROE
We’ve discussed sales, operating income, EBITDA, and net
income. Which is the best measure of a company? The answer,
unfortunately, is none of the above.
If Stock A and Stock B are in the exact same industry, have the exact same
revenues, costs, EBITDA and net income, which is the better buy? We still
can’t answer that question until we know two more pieces of data; the
number of shares outstanding, and the share price.
Mark’s Tip!
Never, ever, ever judge a
company based on its stock
price alone.
Yahoo! and Google are both
in the online search engine
business; Yahoo! (YHOO)
trades at $20 a share and
Google (GOOG) trades at
$500 a share.
Does that mean YHOO is
cheap, and is the better
buy? Absolutely not.
You must look at the P/E
ratios of the two companies
to put their share prices
into perspective of their
earnings and number of
shares outstanding.
If you still don’t get it,
please re-read this chapter!
If Stock A and Stock B both have $5,000 of net income, but Stock A has
1,000 shares outstanding and Stock B has 100 shares outstanding, then
Stock A is earning $5 per share ($5,000/1,000 shares) and Stock B is earning
$50 per share ($5,000/100 shares). This is how earnings per share (EPS) is
calculated—the net income divided by the number of shares outstanding.
Now we can start forming expectations about a fair share price. Since
Stock A has ten times as many shares issued, then it would follow that we
would expect Stock A’s price to be one-tenth that of Stock B’s.
Fortunately, there is a common metric called the P/E, or price-to-earnings
ratio, that takes all of this into account. If Stock A is trading at $100 per
share and earning $5 per share, then its P/E is 20; if Stock B is trading at
$750 per share and earning $50 per share, then its P/E is 15. Given that
these companies are in the same industry and all else being equal, we can
conclude that Stock A is overpriced, and Stock B is underpriced.
(We are just about done with all these computations, but don’t worry —
most financial websites, including Wall Street Survivor, do the math for you.)
Assuming you understand the EPS calculation, the next obvious calculation
after EPS is cash flow per share. This is simply the cash flow from
operations divided by the number of shares outstanding. The cash flow per
share calculation eliminates the non-cash items that sometimes clutter the
income statement that don’t represent real cash outlays by the company.
Many Wall Street analysts feel cash flow per share is the best way to truly
value a company and therefore its stock.
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chapter six • fundamental analysis: understanding earnings & cash flow
Return on Equity
Return on equity (ROE) is another fundamental metric of a company’s
performance. ROE measures how much profit a company is able to generate
from the money invested by its shareholders.
Think of it this way. Your teenager asks to borrow $1,000 to start a
small business, and you lend her the money. When she comes back in
a few months to ask for $10,000, you’d examine how well her company
performed with the initial $1,000 before making the next loan. It makes
sense — such good sense, in fact, you might wonder why more people don’t
do so before pouring massive sums into a money pit masquerading as a
profitable company.
To calculate ROE, divide the profit by the initial investment. Using this
example, if your teenager was able to make a $250 profit on the initial
$1,000 investment, the ROE would be 25% ($250 / $1,000) — which would be
a very good ROE for most companies traded on Wall Street today.
6.6 Revenue & Earnings Estimates
When you’re considering buying or selling a stock, it is just
as important to look at future expectations as historical
performance. We can read all of the 10-Ks and 10-Qs we want; we can
study the income, cash flow, and balance sheets until we memorize them,
but that’s only half of the battle. A company’s value, and therefore its stock
price, is a combination of its current value and its forecast future earnings.
A company’s self-reported revenue and earnings estimates, and the opinions
of Wall Street analysts that follow that company, should be important
elements of your buy/sell decision. However, you shouldn’t read these
projections and accept them at face value.
Learn what criteria and assumptions helped create these estimates. What is
your opinion on the company’s outlook? What is your understanding and
expectation of the economy and the business cycle? Are we slipping into
a recession? Does this company truly have a product that everyone in the
world wants to buy?
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wall street survivor • investing 101
You should try to find expert opinions that comment on the validity of
a company’s projections. Sometimes this will reveal well-constructed,
thoughtful, fact-based assumptions that create a solid basis for revenue and
earnings estimates. You’ll also probably find some projections that are little
more than a “wish list” created by a company’s management that make a
few too many assumptions to be entirely credible.
As you follow the news for a particular company, you will notice how earnings
estimates change frequently as business conditions evolve or as the
economy shifts. This is normal, and goes to show how these really are only
estimates about an uncertain future. You should never invest strictly on an
earnings estimate, or on a recent change in an earnings projection.
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Mark’s Tip!
On Wall Street Survivor’s
Quote page, you will
see Zacks Average
Broker Ratings (ABR).
Zacks compiles different
brokerage firms’ Buy/Sell
ratings and calculates an
average rating.
These ratings are based
on the brokerage firms’
forecasts of future earnings
as they relate to the current
stock price. Always check
Zacks ABR to see if Wall
Street thinks your stocks are
a Strong Buy, a Buy, Neutral,
Sell, or a Strong Sell.
6.7 The Balance Sheet
Get quotes
Apple Inc. financials Watch this stock
View: Quarterly Data | Annual Data
Example: "CSCO" or "Google"
Income Statement Balance Sheet Cash Flow
Hide charts
In financial accounting, a balance sheet or statement of financial position is
a summary of a person’s or organization’s balances. Assets, liabilities and
ownership equity are listed as of a specific date, such as the end of its financial
year. A balance sheet is often described as a snapshot of a company’s
In Millions of USD (except for per share items) As of 2009-12-26 As of 2009-09-26 As of 2009-06-27 As of 2009-03-28 As of 2008-12-27
Cash & Equivalents 7,609.00 5,263.00 5,605.00 4,466.00 7,236.00
Short Term Investments 17,187.00 18,201.00 18,617.00 20,547.00 18,411.00
Cash and Short Term Investments 24,796.00 23,464.00 24,222.00 25,013.00 25,647.00
Accounts Receivable - Trade, Net 3,090.00 3,361.00 2,686.00 1,932.00 2,196.00
Receivables - Other - - - - -
Total Receivables, Net 4,881.00 5,057.00 4,180.00 3,036.00 3,413.00
Total Inventory 576.00 455.00 380.00 312.00 396.00
Prepaid Expenses 232.00 309.00 - - -
Other Current Assets, Total 2,847.00 2,270.00 6,388.00 5,492.00 5,707.00
Total Current Assets 33,332.00 31,555.00 35,170.00 33,853.00 35,163.00
Property/Plant/Equipment, Total - Gross 4,986.00 4,667.00 4,222.00 4,097.00 3,997.00
Goodwill, Net 253.00 206.00 207.00 207.00 207.00
Intangibles, Net 334.00 353.00 370.00 366.00 359.00
Long Term Investments 15,024.00 10,528.00 6,899.00 3,865.00 2,498.00
Other Long Term Assets, Total 1,868.00 1,905.00 2,841.00 2,400.00 1,980.00
Total Assets 53,926.00 47,501.00 48,140.00 43,237.00 42,787.00
Accounts Payable 6,511.00 5,601.00 4,854.00 3,976.00 4,715.00
Accrued Expenses 1,212.00 1,293.00 933.00 892.00 919.00
Notes Payable/Short Term Debt 0.00 0.00 0.00 0.00 0.00
Current Port. of LT Debt/Capital Leases - - - - -
Other Current liabilities, Total 5,374.00 4,612.00 10,874.00 8,883.00 9,123.00
Total Current Liabilities 13,097.00 11,506.00 16,661.00 13,751.00 14,757.00
Long Term Debt - - - - -
Capital Lease Obligations - - - - -
Total Long Term Debt 0.00 0.00 0.00 0.00 0.00
Total Debt 0.00 0.00 0.00 0.00 0.00
Deferred Income Tax 2,769.00 2,216.00 970.00 863.00 865.00
Minority Interest - - - - -
Other Liabilities, Total 2,292.00 2,139.00 4,621.00 4,312.00 4,256.00
Total Liabilities 18,158.00 15,861.00 22,252.00 18,926.00 19,878.00
Redeemable Preferred Stock, Total - - - - -
Preferred Stock - Non Redeemable, Net - - - - -
Common Stock, Total 8,962.00 8,210.00 7,957.00 7,643.00 7,392.00
Additional Paid-In Capital - - - - -
Retained Earnings (Accumulated Deficit) 26,695.00 23,353.00 17,878.00 16,653.00 15,448.00
Treasury Stock - Common - - - - -
Other Equity, Total 111.00 77.00 53.00 15.00 69.00
Total Equity 35,768.00 31,640.00 25,888.00 24,311.00 22,909.00
Total Liabilities & Shareholders' Equity 53,926.00 47,501.00 48,140.00 43,237.00 42,787.00
Shares Outs - Common Stock Primary Issue - - - - -
Total Common Shares Outstanding 906.28 899.81 895.74 891.91 890.41
92
Apple Inc. balance sheet from
Google Finance
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Financial Statements provided by Thomson Reuters. Information is provided 'as is' and solely for informational purposes, not for trading purposes or advice.
Quotes are real-time for Nasdaq and NYSE. For other exchange delays, please see disclaimer.
©2010 Google Google Home - Help - Privacy Policy - Terms of Service

chapter six • fundamental analysis: understanding earnings & cash flow
financial condition; of the four basic financial statements, the balance sheet
is the only statement which applies to a single point in time.
A company balance sheet has three parts: assets, liabilities and ownership
equity. The main categories of assets are usually listed first, and typically
in order of liquidity; assets are followed by the liabilities. The difference
between the assets and the liabilities is known variously as equity, the
net assets, the net worth or the capital of the company. According to the
accounting equation, net worth must equal assets minus liabilities:
Net Worth = Assets – Liabilities
Another way to look at the same equation is that assets equal liabilities plus
owner’s equity. Looking at the equation in this way shows how assets were
financed; either by borrowing money (a liability) or by using the owner’s
money (owner’s equity). Records in the balance sheet are maintained using
the double-entry bookkeeping system, where debits (liabilities) must equal
credits (equity) in order to properly balance out and account for all funds.
A business operating entirely in cash can measure its profits by withdrawing
the entire bank balance at the end of the period, plus any cash in hand.
That said, most do not; neither do the proprietors withdraw all their original
capital and profits at the end of each period. Businesses have liabilities:
outstanding accounts receivable, unsold inventories of goods, and depreciating
buildings and equipment which cannot be turned into cash at the
end of each period. In turn, they may owe money to suppliers and to tax
authorities.
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wall street survivor • investing 101
6.8 Management
As
a potential investor, you need to know about the quality
of the management team. After all, the performance of any
organization is ultimately related to its leadership and the direction they
provide; thus it’s important to know the continuity and projected future
stability of the management team.
History is full of examples of CEOs moving from one company to the next,
retiring, or getting fired. Remember when Steve Jobs was forced out of
Apple in 1985? The company and the stock seemed to get lost without any
new product development. When it became clear in the 1990s that Apple’s
product line and profitability had stagnated, and its own internal efforts
to create a breakthrough new operating system had failed, the company
acquired Steve Jobs’ NeXT. They may have thought they were just getting
NeXT’s valuable intellectual property (NeXTStep, which became the basis
for Mac OS X) — but Jobs returned as CEO, and refocused Apple onto its
wildly successful consumer digital products strategy: the iTunes ecosystem,
the iMac, MacBooks, iPod, iPhone – and as of this writing, the iPad.
Apple Inc. CEO Steve Jobs
It’s clear that Steve Jobs is incredibly important to Apple’s current success.
What implications does his recent brush with cancer hold for Apple’s
stock? Think about other key leaders: What would happen to Virgin’s stock
if Richard Branson quit? What would happen to Google in the marketplace
if Larry or Sergey resigned? (The answer isn’t always the same, as every
organization is different, and not every CEO is as closely tied to day-to-day
operations.)
Less-visible managers can also have an impact. Imagine there’s a marketing
manager at IncrediCorp that decides to eliminate its successful,
popular branded character spokesperson Alvin the Alligator, against all
evidence that Alvin still has great recognition and appeal, and works
extremely well for the company. Predictably, sales of the product fall off.
As long as that marketing manager is in place making unwise decisions,
IncrediCorp’s earnings may be negatively affected. Once he or she is given
the boot and Alvin returns, earnings increase and stabilize.
This is why you need solid knowledge about a company’s management
team. Mutual fund managers, who are responsible for investing millions
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chapter six • fundamental analysis: understanding earnings & cash flow
into a single company, will usually personally visit with management
teams and do exhaustive research on the background and experience of a
CEO and their team in order to gauge the quality of a company’s leadership.
You won’t be able to do such extensive management research yourself,
but over time and with the help of Google, you can start recognizing the
names of people who lead successful companies (and avoid those who have
a track record of failure).
6.9 New & Improved Products?
A
company with well-respected and reliable products that
have been accepted by consumers is often a valuable investment.
How many rolls of Charmin toilet paper have you purchased in
your lifetime? How many tubes of Colgate toothpaste? How many boxes
of Tide laundry detergent? How many gallons of BP gas have you pumped
into your car? How many McDonald’s fries have you eaten? These are all
strong, stable brands.
However, as global business cycles compress and rapid changes occur,
particularly in technology-based industries, the introduction of new products
or dramatically upgraded current products are important contributors
to both future earnings, cash flow levels, and ultimately — stock price.
Consumers also appear to be much less loyal to tried-and-true products
than ever before. This behavior is forcing companies, even those with a
good existing product mix, to modify their products or create new ones to
stay competitive. The formerly-effective tactic of marketing a product as
“new and improved” — could someone please explain how something can
be both at the same time? — seldom works any longer.
Skeptical? Just ask Microsoft about the Windows Vista operating system.
Many customers balked at its hefty hardware requirements, incompatibilities
with legacy systems, and complex upgrade paths. Corporate clients,
usually a steady source of upgrade revenue, opted to retain the older
Windows XP, which greatly dented Microsoft’s revenues.
Mark’s Tip!
When you’re evaluating
a stock, think about the
products that the company
offers, and ask yourself if
they have new products
under development that
will add to future revenues.
Obviously, technology
products change quickly.
Every year products
get faster, cheaper, and
boast more memory. Pay
attention to who is always
the leader. Ask the sales
reps at Best Buy what
company’s products they
like best.
Remember that even
things like toilet paper and
toothpaste do change.
Toilet paper becomes
“greener” and more earthfriendly,
and toothpaste
makers stress whitening
more than ever.
I travel a lot, and with the
“No liquids over 3 ounces
allowed” in your carry on
bags at airport security, I
was amazed at how some
companies quickly offered
their products in 3 oz
travel sizes, while others
still haven’t been able to
produce a 3 ounce size.
Look for signs like these
to spot well-managed
companies and brands.
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wall street survivor • investing 101
6.10 Competition
For a company to become and remain successful, it must pay
attention to its competition. When analyzing a stock, investors
must also do some competitive analysis.
Companies don’t operate in a vacuum; they’re in constant competition for
consumer and investment dollars. To make the best investment decisions,
you need to understand the competition facing the companies whose stock
you consider buying or selling. In fact, it is always best to analyze stocks in
terms of competitive pairs.
Mark’s Tip!
There are a few
companies that operate,
at least initially, without
competitors.
Intuitive Surgical (ISRG)
developed the first surgical
robot that performs
minimally invasive surgery
and reduced hospital
stays from 4 days to 1 day
in some instances. That
stock went from $20 to
$325 between 2004 and
2007. The large amount
of R&D required to match
their expertise (not to
mention need for testing
and government medical
standards compliance) acts
as a barrier to entry for
other competitors.
FedEx (FDX) initially had
the monopoly on overnight
package delivery — it took
UPS and the United States
Postal Service a few years
to catch up. Crocs (CROX)
shoes were a craze for at
least a year, until other shoe
companies started copying
them.
When you are evaluating Google’s stock (GOOG), you have to evaluate its
performance versus a competitor like Yahoo! (YHOO). If you are studying
Google’s P/E ratio, cash flow per share and ROE, you must compare them to
industry averages or their direct competitors’ ratios.
On Wall Street Survivor, each stock quote page has a Stock Summary tab
containing a comparison of the company’s fundamental metrics versus
those of competitors in the same industry, and against the S&P 500:
When you are evaluating Boeing (BA), you must also view its performance
versus its head-to-head competitors like Airbus (EAD.PA - traded on the
Paris Stock Exchange, but not in the US). When you are evaluating Ford
Motor Company (F), you should also be analyzing General Motors (GM).
The quality of a company’s competitors can affect its earnings and cash
flow more than any financial magic, national or global economic conditions,
dedication to R&D, or monies spent on marketing and branding.
Since the company’s competition may introduce new products at any time,
or embark on a massive marketing campaign to outspend your target
company, you should avoid basing major decisions on purely historical
data.
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chapter six • fundamental analysis: understanding earnings & cash flow
Summary
You are now acquainted with the most common tools that analysts use in
fundamental analysis of a company.
• Step one — Understand the nature of a company’s business, its revenue
sources, its profitability, and ultimately its cash flow.
• Step two — Understand the company’s market and market potential, and
how it’s performing versus its competitors.
• Step three — Weigh the strengths and weaknesses of your stock versus its
current price and decide if you feel it’s under- or over-valued.
While you can find hundreds of data sources, software tools, and financial
experts (both real and self-declared) to help you parse publicly available
stock information, you still should do at least some of your own research:
• Are current earnings and cash flow sufficient to support the current market
price of a company’s stock? Or is it overpriced/underpriced as compared to
its competitors?
•
Do available earnings and cash flow data project future increases in both? Or
do they project a potential plateau or decline?
• Do the core components of the company indicate that current earnings and
cash flow are based on safe and sound operational strategies? Or has the
company been “lucky” as the beneficiary of external factors that helped
increase earnings and cash flow?
•
Is there any market, economic, political, and legal trends that the company
could be facing in the near future?
Mark’s Tip!
You must really, really,
really pay attention to that
last question. Pro-healthy,
go-green, oil exploration,
government run health
care, and precious metals
are all currently hot trends
that could fade as quickly as
horse drawn carriages, CB
radios, and big gas-guzzling
SUVs.
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wall street survivor • investing 101
Chapter 6 Glossary
10-K The annual SEC filing by public companies that includes their
audited Income statement, Balance Sheet, Cash Flow Statement and
other detailed notes about the companies financial and operating
conditions.
10-Q The quarterly SEC filing by public companies that include
abbreviated, unaudited financial statements.
Cash flow per share Calculated as the cash flow from operations
divided by its total number of shares outstanding.
EBITDA Earnings before interest, taxes, depreciation, and amortization.
EPS Earnings per share is calculated as the net income of a company
divided by its total number of shares outstanding.
P/E Ratio The price of a stock divided by the earnings per share. This is a
measure of how pricey the stock is and should only be used to evaluate a
stock versus its competitors.
Chapter 6 Exercise
Do some fundamental research on a few stocks that you already own at
Wall Street Survivor, or that you are considering buying—and do some
research on their competitors too!
Go to www.sec.gov and retrieve the latest filings on your stocks. Read
through the most recent 10-K and 10-Qs. We guarantee you will find
information about the company that you didn’t know before.
Find the Earnings Per Share (EPS) and the Return on Equity (ROE) in the
Stock Summary tab of the Stock Quote page.
Buy the stocks that appear to be stronger and short the weaker stocks in
your Wall Street Survivor account and use your Trade Diary on Wall Street
Survivor to record your thoughts.
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chapter six • fundamental analysis: understanding earnings & cash flow
Chapter 6 Quiz
Question 1
Which attribute would one look at to determine a stock’s
fundamental value?
a. Competitors
b. Revenue and profit margin
c. Company management
d. All of the above.
Question 2
Which “red flag” could deter a stock purchase?
a. Company earnings are average and cash flow is weak
b. A company has announced, but not delivered an innovative product
c. A company has a little competition in a small market
d. A company has top-rated management
Question 3
What should determine an actual profit?
a. Extraordinary events
b. Net income
c. Total operating results and consistent net income
d. Material losses verses revenue
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wall street survivor • investing 101
Question 4
Which factor determines a company’s long-term viability?
a. Concentrating sales on a small customer base
b. Selling everything on company credit
c. Developing products slowly
d. Ensuring excellent cash flow
Question 5
What do 10-Qs and 10-Ks do?
a. Allow public companies a way to attract potential investors
b. Offer colorful and illuminating content
c. Display all pertinent information without the PR spin
d. Deliver new ways of calculating profits
Question 6
What is revenue?
a. The amount found after subtracting operating expenses
b. The amount left over after removing taxes
c. Sales-generated cash or cash equivalents
d. All of the above
Question 7
To the investor, what does a company’s earnings help to indicate?
a. Long-term viability
b. Profit available to shareholders
c. Market value
d. All of the above
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chapter six • fundamental analysis: understanding earnings & cash flow
Question 8
How should one view revenue and earnings estimates?
a. Base decisions on the company’s internally-generated projections
b. As well researched professional opinions
c. Explore what criteria and assumptions led to those estimates
d. Determine that estimates are not reliable except when issued by the
company
Question 9
What should one do when making an investment decision?
a. Base the decision on historical data
b. Ignore what the competition is doing
c. Focus on the company’s R&D strategy
d. Consider the competition’s product, marketing, tactics and financial track
record
Question 10
What are alpha and beta strategies?
a. Strategies that involve math calculations invented in Greece
b. Investment components that measure stock performance factors, market
risks, and stock behaviors
c. Two simple investment components
d. Investment strategies based on a Greek financial system
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wall street survivor •• investing 101
Chapter 7
Technical Analysis:
Common Charts & Terms
Technical Analysis looks at the price and volume
of shares to discover patterns in stock price
behavior.
Not long ago, Technical Analysis was considered the opposite
of Fundamental Analysis. Rather than looking at a company’s
products, its competitors and how much profit it makes, Technical
Analysis looks at two things only: the prices for which a stock has traded,
and the volume of shares traded at those prices. From these two data
points, technical analysts locate patterns in stock price behavior, and an
increasing number of investors see Technical Analysis as a complement to,
not the opposite of, Fundamental Analysis.
The key to Technical Analysis is the history of prices paid for a stock and
the volume of shares traded. We could create a history of the price paid for
a stock by looking in the Wall Street Journal everyday and noting the closing
price from yesterday, writing down this prices in a table like this:
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chapter seven • technical analysis: common charts & terms
GOOGLE (GOOG) PRICES
Date Open High Low Close Volume Adj Close*
18-Dec-09 596.03 598.93 595.00 596.42 3,531,500 596.42
17-Dec-09 596.44 597.64 593.76 593.94 2,638,800 593.94
16-Dec-09 598.60 600.37 596.64 597.76 2,809,400 597.76
15-Dec-09 593.30 596.38 590.99 593.14 2,263,700 593.14
14-Dec-09 595.35 597.31 592.61 595.73 1,913,400 595.73
11-Dec-09 594.68 594.75 587.73 590.51 1,720,000 590.51
10-Dec-09 590.44 594.71 590.41 591.50 1,668,300 591.50
9-Dec-09 587.50 589.33 583.58 589.02 1,781,000 589.02
8-Dec-09 583.50 590.66 582.00 587.05 1,524,000 587.05
7-Dec-09 584.21 588.69 581.00 586.25 1,636,200 586.25
4-Dec-09 593.02 594.83 579.18 585.01 2,513,600 585.01
3-Dec-09 589.04 591.45 585.00 585.74 1,428,700 585.74
2-Dec-09 591.00 593.01 586.22 587.51 1,663,200 587.51
1-Dec-09 588.13 591.22 583.00 589.87 2,320,300 589.87
However, this method of tracking prices does not easily reveal trends and
patterns. Thanks to modern computer technology, Technical Analysis has
become an acceptable research tool and not just a strange science. If we
chart this data from our table below, where price is vertical and time horizontal,
we will literally create a picture of those numbers:
Stock Chart of Google (GOOG) Dec 1-18, 2009
From this chart, we can easily see that Google has risen steadily over this
time period. This is why charting makes tracking stock prices much easier
than trying to read “raw data.”
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7.1 How to Read Stock Charts
This chapter will expose you to the most common charts
available. Their names and meanings are important to your
continuing education and the number of tools you carry in your toolbox in
order to evaluate stocks.
It’ll take some time before you’re comfortable reading and interpreting
many of these charts — this is normal. Don’t be discouraged; even many
experts will tell you that it took them years to develop a high-level ability
to read stock charts. But chart reading is just like anything else; it takes
practice. Spend 15 minutes a day reading charts, and reading about what
other people are seeing, and you’ll be surprised how quickly you start to
see patterns in stock prices.
Reading these charts is an art, not a science. However, becoming a better
chart reader will undoubtedly improve the bottom line of your investment
career.
Let’s lay out the absolute basics of what a stock chart is: the history of a
stock’s price over time. Price is on the vertical or y-axis of the chart, and
time is on the horizontal or x-axis. Thankfully, there are a few variables
that you can usually control in the display of the charts:
• Time Interval / Duration. You can have stock charts that show minutes,
days, weeks, months or even years’ worth of price history.
• Chart Style. You can display the data as a line graph, mountain graph,
Open-High-Low-Close (OHLC), candlesticks, and more.
Logarithmic or Linear Scaling.
• The vertical axis can usually be adjusted
between arithmetic and logarithmic scales. The arithmetic, or linear, scale is
what you would expect, showing the horizontal lines at even intervals; the
logarithmic scale gives you a better visualization of the percent-change in
the stock price. For instance, the distance between a price change of $20
and $40 would be the same distance as $40 to $80 (both of which are 100%
returns).
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one-Month Mountain Chart

One-Year Mountain Chart

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One-Year Mountain Logarithmic Chart
Note how the scaling has changed in the y-axis.

One-Month OHLC Chart

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One-Month Candlestick chart

When it comes to stock charts, no one time period is better than another,
but it all depends on your time horizon. In other words, how long do you
intend to hold this stock? Generally, if you are looking for a long-term buy
you would want to look at a chart displaying at least one year. If you are
looking for a quick day trade, then you’ll need to be looking at a minuteby-minute
chart.
No chart style is better than another, either; it also depends on your time
horizon. If you are looking for a quick play, then the OHLC charts will
show you the trend by your time interval, but if you are looking long-term,
the line or mountain charts work equally well.
The number and complexity of charts available and their strange-sounding
names may overwhelm even experienced investors, so relax — no-one is
expecting you to go from rookie to expert immediately.
At this point in your career, though, you should consider these questions as
you’re reading and evaluating a chart.
Mark’s Tip!
I generally start off by
looking at a one-year chart
with a line graph just to
show me where the current
stock price is compared to
its 52-week high and its 52-
week low.
Then I shorten the time
period to the last 30 days,
change the chart type to
OHLC, and try to determine
exactly where I think the
stock is headed over the
next few days.
I always leave my charts
on arithmetic scale, unless
I’m looking at really highpriced
stocks like GOOG,
or stocks that have tripled
in price or more in the given
time period.
•
•
•
•
•
Are you looking at a stock in an uptrend or a downtrend?
What are the chart patterns?
What might follow in the future?
What do the volume numbers indicate? Is it popular buying or selling?
Are there gaps or “hiccups” in the current or recent trends?
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Read the legends, which identify the lines, bars, or other measurement
icons. Understand what the chart is displaying and identify the trends and
levels shown. For example, in the one-day chart a couple of pages back, the
following numbers are displayed:

Don’t know what they mean? Let’s go over them one by one.
• Open. This is the price of Google when the market opened at 9:30AM U.S.
Eastern Time.
• High. This is the highest price of the day.
• Low. This is the lowest price of the day.
• Close. This is the last daily closing price. If the current day is not over,
yesterday’s closing price is shown.
• Volume. The total number of shares that have traded that day.
Once you understand the information stock charts have to offer, you can
analyze them to discern trends in the stocks you’re following. Price trends
amd cycles determine whether stocks go up or down, so being able to spot
them in advance can be very valuable.
Following this section are descriptions of the most popular chart patterns
and the ones that have the most consensus as to their validity. You will
start to recognize these terms as you will hear many TV and newsletter
experts refer to these patterns. And yes, even the “big money” on Wall
Street is looking for these patterns too!
7.2 Cup with Handle
The Cup with Handle is one of the best-known stock chart patterns. Cup
patterns follow outlines that resemble an inverted semi-circle (U-shape),
indicating a price fall, a bottoming out, and a price rise. Afterwards, there
tends to be a rather unstable period marked by a sell-off generated by
investors who acquired the stock near its former position. This often causes
a slight tick downward, forming the handle of the cup.
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A saucer pattern forms when a security has bottomed out for a while and
then starts to move upward. The flattened U-shape resembles a saucer:

The cup always precedes the handle. As the cup develops, the price pattern
follows a gradual bowl shape. There should be an obvious bottom to the
bowl; a v-shaped turn is not a good indicator.
The depth of the cup indicates the potential for a handle and subsequent
breakout to develop. The cup should be fairly shallow.
The handle tends to be down sloping, and indicates a period of consolidation.
Consolidation occurs when the price seems to bounce between an
upper and lower price limit. You can track the down sloping angle of the
handle by drawing trendlines across the upper and lower price limits. If
the price ascends outside of the trendlines, then it has the potential for
breakout. If the price ascends beyond the upper, right side of the cup, then
the pattern is confirmed, particularly if it is accompanied with a sharp
increase in volume.
When to Buy
Understandably, we investors like to buy at the lowest possible price.
Ideally, we would buy at the bottom of the cup formation. However, by the
time the handle formation begins to develop, investors must gauge their
level of risk. There is no surefire way to predict when the lowest point will
occur, and there is a possibility that the pattern will fail, and breakout in a
downtrend.
Some technical analysts believe that the best time to buy is after the
handle begins to ascend. According to Rick Martinelli and Barry Hyman,
“Buy stocks only as they break out of the cup-with-handle to new highs”.
Gregory Khun suggests a more aggressive approach: “[E]xperienced traders
can buy in increments in anticipation of a breakout, but it’s tricky.”
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The handle will often slope downwards initially, however, watch for the
price to breakout beyond the price at the right side of the cup. The depth of
the cup from the right side is an indicator for the potential price increase.
However, many cups fail after rising only 10% to 15%. Be sure to use stoploss
orders to limit losses or to maximize gains.
7.3 Head-and-Shoulders
Don’t you love the terminology that pictorially associates
these charts with their graphic representations? The Headand-Shoulders
is an extremely popular pattern among investors because it’s
one of the most reliable of all chart formations. It also appears to be an easy
one to spot — novice investors often see Head-and-Shoulders everywhere.
but seasoned technical analysts will tell you that it is tough to spot the real
occurrences.
A Head-and-Shoulders is considered a bearish signal and that prices will
fall after the formation is complete. A Head-and-Shoulders top chart has a
left “shoulder,” a “head,” and a right “shoulder,” usually with a horizontal
bar indicating a “neckline.” (A mirror image of the top variety, a bottom
Head-and-Shoulders chart looks like someone hanging upside down.)
Head-and-Shoulders Chart pattern
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On the top side, left shoulders result at the peak of a sustained move with
high volume numbers. The market reacts and prices decline, usually on
lesser volume. Quickly, market value rallies upward to form the “head”
on rather heavy volume. Then, fewer shares are traded, but mostly on the
sell side, causing prices to drop. Subsequently, another rally occurs, which
forms the right “shoulder” (not as high as the head). Finally, another sell
off occurs, typically on lower volume numbers, again, and the “shoulder” is
complete.
On the bottom side, the mirror image of buying/selling and increasing/
decreasing market prices occurs. Analyzing this chart involves learning of
the reasons, valid or not, for this volatile activity.
Take a look at this example of an inverse, or upside down, Head-and-
Shoulders pattern in gold prices that suggested a breakout higher was
imminent in June 2009:

Upside down Head-and-Shoulders pattern for Spot Gold, 2008-2009
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7.4 Breakouts
A
breakout occurs when market prices move through and
continue through former highs/lows that had formed
ceilings or floors in the past. Commonly called levels of support and
resistance, these former limits are breached during a breakout. This chart
is rather easy to understand as you see historic peaks and valleys that are
fairly consistent, when suddenly the most recent trendline quickly moves
up or down toward new highs/lows.
The duration of the trading range
for which the breakout occurred
can provide an indication of the
strength of the breakout to follow.
The longer the duration of the
trading range, the more significant
the breakout will be.
A classic breakout occurred for
Upside Breakout
Gold (GLD) in autumn 2009.
After twice getting halted at about $1,000/oz ($100 for the ETF GLD), gold
blasted through this resistance level as can be seen in this 3-year chart:

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7.5 Double Bottom
A double bottom chart will look like a W. It indicates that the stock hit
bottom market price, had a quick – albeit brief – uptick, and decreased
again to turn a V shape into a W. The two reverse peaks should be around
the same floor price, and the time period should be similar to create a wellformed,
symmetrical W.
A Double Bottom is only
complete, however, when prices
rise above the high end of the
point that formed the second low.
Double Bottom Chart Pattern
The two lows will be distinct. The
pattern is complete when prices
rise above the highest high in the
formation. The highest high is
called the “confirmation point”.
Analysts vary in their specific definitions of a Double Bottom. According
to some, after the first bottom is formed, a rally of at least 10% should
follow. That increase is measured from high to low. This should be followed
by a second bottom. The second bottom returning back to the previous
low (plus or minus 3%) should be on lower volume than the first. Other
analysts maintain that the rise registered between the two bottoms should
be at least 20% and the lows should be spaced at least a month apart.
The chart below shows a very well-defined double bottom and ensuing rise:
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7.6 Trendlines
You’re probably aware that trendlines are important to all
of your research on securities. Base numbers are equally important
to understand the true meaning of any trends you identify. Depending
on the type of chart you’re viewing, you’ll also want to establish a solid,
unbroken trendline of your own that graphically displays the unmistakable
direction in which a stock (or stocks) is heading.
S&P 500 Index (SPY): 1983-2009. Notice the trendline in the chart above for the overall stock market was sloping
upward, indicating a bullish, or rising, market.
The point of a trendline is to anticipate reversals (breakouts or falls) so
that you can take a position such as buying, selling or shorting. To draw
a trendline for a rising market (or uptrend), draw a line aloing the lowest
points in the trend without letting the line cross through prices. The line
should touch at least twice, as shown in the example above.
Also, be sure to watch for subtle changes in a trendline. If you plot the
trendline carefully, you’ll see that your line may take a slightly different
direction. In the above chart, see how the long-term upward sloping trendline
was broken in 2008? That tells you when the trend is changing, or has
already changed.
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Mark’s Tip!
On Wall Street Survivor you can draw your own trendlines on charts.
Click the Draw Trendlines box to turn it on, and then click on the
chart to mark the beginning and end points of the lines.
How to draw a trendline on Google’s Chart
7.7 Wedges & Flags
A wedge describes a triangular shape formed by the intersection of two
trendlines, which form the apex. The wedge need not be upward-facing;
it can easily be an inverted triangle. A falling, or bearish wedge is often
called a flag since it more resembles a pennant than a regular triangle.
Bearish Wedge, or Flag
A flag consists of two converging trend
lines which are slanted upward. Unlike
the triangles where the apex is pointed to
the right, the apex of this pattern is slanted
upwards at an angle. This is because
prices edge steadily higher in a converging
pattern i.e. there are higher highs and
higher lows. A bearish signal occurs when
prices break below the lower trendline.
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Bullish Wedge, or Flag
A bullish wedge or flag consists of
two converging trend lines. The
trend lines are slanted downward.
Unlike simple triangles where the
apex is pointed to the right, the apex
of this pattern is slanted downwards
at an angle as prices edge steadily
lower in a converging pattern of
lower highs and lower lows. A bullish signal occurs when prices break
above the upper trendline.
Mark’s Tip!
Pennants are popular
with day traders because
this chart pattern rarely
shows up in longer time
frames. If you like to trade
shorter-term, you should be
looking at charts closely for
pennants — you may start
seeing them in your dreams
at night because they are so
reliable and common.
Since the data creating the design is typically slanted against the current
trend, a descending flag is considered a “bullish” indicator, while a wedge
is viewed as a “bearish” predictor. A typical wedge or flag lasts longer than
one month but less than three months. Longer trends will often create
designs other than a wedge or a flag.
Take a look at this chart that contained a Bullish Flag formation that
preceded a strong rally:

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7.8 Candlesticks
Candlesticks are a type of stock chart developed in Japan.
Instead of lines, a vertical block which looks like a candlestick is
used to symbolize a day or week’s worth of price action.
Candlestick charts track price movements of a security over some time
period. An interesting combination of line and bar charts, candlestick
displays are easier to understand than some other varieties of chart. The
lines represent individual movement while the bars indicate the range of
price movement. This gives you a combined picture of immediate-term
market moves and short-term trends. They are similar to OHLC charts with
more detail and trend data.
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7.9 Moving Average Convergence /
Divergence (MACD)
A MACD graph shows the difference between a fast- or slow-moving average
of a stock’s prices. It is designed to identify significant trend changes. This
can be a very important tool for you to anticipate trend movements that
may occur in the near future. Even as a modest investor, you may be able to
generate knowledge that the mega investors spend many dollars and hours
to achieve. Analyzing these graphs can give you the same ability to intelligently
project what track a security may follow.
When using the Wall Street Survivor charts, note all of the different indicators
you can use:

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7.10 Fibonacci Ratios
Often called the most accomplished mathematician of the
Middle Ages, Leonardo Fibonacci is best known for his
“golden numbers.” They appear in a sequence starting with 0 and 1, after
which every third number is the sum of the previous two numbers. This
Fibonacci sequence starts as: 0, 1, 1, 2, 3, 5, 8 and continues onward. The
Fibonacci ratios — 23.6%, 38.2%, 50%, 61.8%, and 100% — show the mathematical
relationship between the numbers, and are important to traders.
For reasons that remain a mystery,
Fibonacci ratios often display the
points at which a market price
reverses its current position or
trend. These ratios, when expressed
as horizontal lines, often represent
support and resistance levels (more
on that later in this chapter).
At these Fibonacci ratio points, stocks often reverse their former trends.
You’ll often see this pattern repeat as you examine these charts. These
ratios allow investors to to predict the next high or low for a market or
stock, and thus forecast buying or selling opportunities.
Mark’s Tip!
Fibonacci ratios are one
of the most powerful and
easiest trading tools in
your investor’s toolbox.
It provides excellent
guidance for when a
trend will end and reverse
course, but don’t rely
on it alone to make your
trading decisions. Use it to
support your fundamental
observations and other
technical indicators.
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7.11 Moving Averages
Moving averages are one of the most popular , easy-to-use
and easily-understood trading tools available to you.
Moving averages are also used as components in many other charts and
analyses. By smoothing out data points and number series, moving averages
make it easier to identify trends and tendencies.
The most common examples are the simple moving average (SMA) and the
exponential moving average (EMA). The SMA is generated by calculating the
average price (usually closing price is used) over a number of time periods.
An EMA attempts to better identify the built in “time lag,” by creating a
weighted average, assigning more weight to the most recent prices to allow
for the more current data to factor more prominently in future trends.
Mark’s Tip!
You can draw moving averages on Wall Street Survivor charts by
using the Upper Indicator drop down menu, and then clicking on
the SMA link to change the number of days you want to use to
calculate your SMAs

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7.12 Relative Strength Index (RSI)
The Relative Strength Index, or rsi, was created in 1978 by J.
Welles Wilder to compare the strength and magnitude of a stock’s
gains and losses in recent time periods. The simple formula converts this
winning and losing data into a number ranging from 0 to 100.
To keep the analysis simple, examine the RSI’s three factors: Relative
Strength, Average Gains, and Average Losses. The basic formula is:
100 – (100/RS + 1)
where Relative Strength (RS) is the Average Gain divided by the Average
Loss over the period being studied.
Most analysts use the acronym RSI instead of its full name as there are
other relative strength formulae developed by analysts, which tend to be
more complex and use data from multiple stocks instead of just one.
As a newer investor, the RSI should be more relevant as you try to determine
the relative strength or weakness of a security you’re considering
putting into or removing from your portfolio. On Wall Street Survivor, you
can draw RSI lines by using the Lower Indicators drop-down menu on the
chart tool.
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7.13 Support & Resistance
Support and resistance describes the strange effect of how
market prices tend to “bounce” off established price levels.
Support in a stock chart forms at an area where the stock’s price seems to
not want to move lower, due to the presence of buyers at this lower target
price. Support levels sometimes occur by themselves, while other times
they are depicted with horizontal trend lines in chart patterns such as a
double bottom. When support is broken to the downside, a stock is free to
move lower due to the absence of buyers and demand.
Resistance in a stock chart forms at an area where the stock’s price seems
to not want to move higher, due to the presence of sellers at this higher
price. Resistance levels sometimes occur by themselves, while other times
they are depicted with horizontal trend lines in charts such as a triple top
pattern. When resistance is broken to the upside, a stock is free to move
higher due to the absence of sellers and supply.
However, during a breakout period, prices tend to fly by these former levels
until new support or resistance levels occur. As an informed investor, you
should attempt to learn the conditions that spurred the stock to increase/
decrease beyond its former support and resistance levels to determine if
it’s time to buy or sell the security. The support/resistance level is usually
shown by a horizontal line across the chart making it easy to identify.

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7.14 Bollinger Bands
In
the 1980s, financial analyst John Bollinger developed a
new technical analysis tool to measure the highs and
lows of a security price relative to previous trade data. These
trading bands help investors track and analyze the bandwidth of stock
prices over a period.
The object of Bollinger Bands is to identify a relative definition of high
and low prices over a specific period. Along with identifying trends, these
charts will help you measure the volatility of a security. As you examine
the bandwidth of a stock, you will notice the variations (standard deviations)
on both the plus and minus sides.
Veteran analysts and investors often use this information both to make
purchase and sale decisions, and to determine where support/resistance
levels are, which may also indicate future movement. You’ll see three lines
showing the moving average (as described earlier) and standard deviations
on the high and low side of the stock price.
Mark’s Tip!
John Bollinger is known
to the public for his many
years of market analysis and
commentary on television,
first on Financial News
Network, where he was the
Chief Market Analyst, and
subsequently on CNBC.
John Bollinger is also well
known to professional
investors. An avid
researcher, he has
developed a number of
widely used investment
tools and analytical
techniques. His Bollinger
Bands and related tools
have been integrated into
most of the analytical
software and charting
platforms currently in use.
Bollinger bands on WSS
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Summary
Alright, everyone, take a deep breath and relax! You’ve just been inundated
with a lot of information — don’t panic. As you view real-world examples
of these charts, you’ll become more familiar and comfortable with their
interpretations. WallStreetSurvivor.com and other sites will give you all
the additional information you need to continue your current journey and
prepare to start another trek toward becoming a charting guru.
Chapter 7 Glossary
Breakout. A breakout occurs when a stock’s price moves up quickly
above former resistance levels.
MACd. The “moving average convergence/divergence” shows
the difference between a fast (like 30 day) and a slow (like 90 day)
moving average line of a stock’s prices
Moving Average. The Moving Average is a line on a chart that
smooths out the recent price history by calculating the average
price over 30 or 60 days (or any number of days).
Resistance. Resistance in a stock chart forms at an area where the
stock’s price seems to not want to move higher. This is due to the
presence of sellers at this higher price.
Support. Support in a stock chart forms at an area where the stock’s
price seems to not want to move lower. This is due to the presence
of buyers at this lower target price.
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Chapter 7 Exercises
Use the Charting tool at Wall Street Survivor to generate a graph of
one of the stocks in your portfolio and then:
Change the chart to see how the stock looks on a 1 year graph
versus a 1 month chart versus a 1 day chart.
Change the indicator from line to candlestick
Change the Chart Type to a logarithmic chart and notice the difference
in the Y axis.
Do you see any type of chart pattern that we mentioned in this
chapter? Do you see a cup-and-handle or double-bottom
pattern?
Did the stock respond the way you would expect based on the
pattern?
Get a quote on your stock and note the left hand column of the
quote page that indicates the current technical pattern. Can you
find that pattern?
Look at charts of various stocks until you see patterns discussed in
this chapter. Use the drop down menus to select a new chart style
(ie. Candlestick) an upper indicator (ie. SMA or Simple Moving
Average) and a lower indicator (ie. MACD).
Start to become a master of charts and understand what each type
of chart has the opportunity to teach you. This is a long process
to learn and you should just start to use charts.

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Chapter 7 Quiz
Question 1
What does technical analysis look at for investment purposes?
a. A company’s revenue growth.
b. A company’s competition.
c. A company’s profit margins.
d. The price at which the stock trades.
Question 2
What should you consider when analyzing different stock charts?
a. Is the stock in an upward or downward trend?
b. Did any big investors buy this stock?
c. What are the ratio of highs to lows for the stock?
d. All of the Above.
Question 3
What is the Cup-with-Handle pattern?
a. A chart pattern for food and beverage stocks.
b. A price fall that bottoms out and rises again.
c. A chart pattern that shows a bottom followed by another bottom.
d. A chart pattern that can be used to identify a stock’s bottom.
Question 4
When should you buy a stock in the Cup-with-Handle pattern?
a
b
c
After the handle is formed and price begins to rise.
At the completion of the cup pattern.
Where the handle slopes down.
d. At the bottom of the cup.
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Question 5
What is a Head-and-Shoulders pattern?
a. A pattern for identifying stocks that are about to rise.
b. A bullish signal about prices.
c. A bearish signal that prices will fall after the pattern formation is done.
d. A pattern that is not often correct.
Question 6
What is a breakout?
a. A stock that is falling quickly.
b. When a stock price moves past and continues through former high and low
periods.
c. When a new stock is introduced to the stock exchange.
d. A stock that is showing large volume.
Question 7
What are some common names for trendlines?
a. Flags
b. Candlesticks
c. Wedges
d. Both A and C
Question 8
What are candlesticks?
a. A type of chart pattern that shows you bright stocks that are about to rise.
b. A type of chart that identifies risky stocks.
c. A chart that tracks stock prices over a short time, usually a few hours.
d. A Japanese stock chart that is made up of vertical blocks rather than
trendlines.
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Question 9
What is a MACD?
a. A tool that only seasoned and experienced investors should use.
b. Moving Average Confidence Direction
c. A graph that shows the difference between the fast- or slow-moving
averages of a stock’s price.
d. A type of stock chart that shows when prices are about to converge
before a major breakout.
Question 10
What is the objective of Bollinger Bands?
a. Smooth out data points to find an average stock price over time.
b. Create ratio sequences for stock prices.
c. Identify a relative definition of high and low stock prices
over a certain time period.
d. Compare the strength and magnitude of a stock’s gains and losses over time.
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Chapter 8
Current Topics in Trading
Just as studying the business cycle taught us about
the ups and downs of the economy, looking at
popular investment strategies and hot trends
shows they regularly move in and out of favor.
With so much contradictory information out
there, how do you avoid becoming overwhelmed
and confused?
Depending on your age, you might recall some or all of these
investing trends:
•
The Japanese stock market bubble of the 1980s
•
•
•
•
The proposed Clinton health care plan’s effect on U.S. health care stocks
in the mid 1990s
The dot-com stock bubble of the late 1990s and Federal Reserve Chairman
Alan Greenspan’s “irrational exuberance” speech.
U.S. residential real estate bubble of 2002-2007,
Oil exploration and refineries shut down after Hurricane Katrina ravaged
New Orleans; subsequent gas rationing and $140-a-barrel oil prices in 2008
Today’s hot topics revolve around some ideas such as “Go Green,” “Go
Gold,” to invest in solar and other renewable energies, or, if you’re of a
pessimistic mindset, in bulletproof vests, metal detectors, and more...
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Investment manias aren’t unusual in the history of investing, so it’s wise to
be able to spot a short-term investing trend when you’re in the middle of
it. Like everything else in your professional and personal life, it’s how and
when you notice events, determine whether these events constitute a fad or
a trend, and then act on this knowledge that will make all the difference.
This chapter highlights the current hot trends and shows you hot to profit
from (or avoid) them. As a new investor, you should learn about the
currently “hot” topics and ways to use them for your benefit. Some of these
items and techniques may eventually become “fads,” while others, like
“buy-and-hold strategies” reach the status of strong, productive methods
over time.
8.1 Manias, Bubbles & Crashes
YouR first order of business is to see if a hot trend is worthy
and justifiable, or whether it’s a mania leading to a bubble.
While it can be profitable to ride the bubble as it’s getting started, it’s
extremely important to leap out before the bubble bursts.
Mark’s Tip!
If you’ve been paying
attention, you know that
if you’re using Stop Loss
orders, then you won’t be
as susceptible to bubbles
and stock manias.
In his book Manias, Panics, and Crashes: A History of Financial Crises,
Charles Kindleberger notes that bubbles always implode, and are easily
recognizable because the bubble represents a “non-sustainable pattern
in price changes or cash flow.” In other words, prices for things like real
estate, stocks or oil simply go up too much and too quickly.
History is full of price manias and bubbles. Just in the last decade:
• March 2000: The Nasdaq composite index hits 5,048.62, the bubble pops
and the index falls to 1,114.11 in the 2002 bear market.
• April 2006: Housing prices in the U.S. peak. Home prices fall 31.9 percent to
a new low in May 2009, according to the S&P/Case-Shiller 20-City index.
• March 2008: Gold trades at over $1,000 an ounce for the first time ever, but
by the end of the year it had given up 25% of its value.
• July 2008: Crude oil prices rise over 70 percent in just six months to a high of
$147.27; in 5 months the bubble deflated to just $33.87.
• Summer 2008: Prices for soybeans and corn hit record levels. In the first six
months of the year, corn shot up more than 60 percent and soybeans rose
more than 30 percent. By December of 2008, both grains had lost half their
value.
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In Amsterdam, Holland in 1637, a tulip fad among wealthy Dutch investors
led to over-vigorous buying, and soon a bubble formed where a single tulip
bulb of the right variety was equal to an average worker’s yearly salary.
When one buyer failed to complete a purchase, a panic ensued, and with
days bulb prices were just a fraction of their former value. Needless to say,
the tulip bubble was unsustainable.
Charts are a great way for spotting investment bubbles. Sharp, quick
spikes upwards in prices are a classic sign of an over-bought and bubblelike
market. Take a look at the charts of some of the most recent bubbles.
Notice how each had a massive rise in prices and then a painful popping,
or crash, of the bubble:
1. The Nasdaq stock index’s dot-com bubble hit 5,000 in early 2000.
In 2010, this index traded around 2,000, 60% below the bubble’s peak.
2. The Tokyo Stock Market Bubble peaked late in 1989 at 37,500. Twentyone
years later in 2010, this index was still only trading at 10,000,
73% below the 1990 peak.
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Another way to recognize an investing mania is to be aware of what is
popular, and then what is too popular. Remember that prices are nothing
more than a reflection of supply and demand; if everyone wants something,
its price will skyrocket — but as soon as buyers move on to something
else, those prices must plummet.
Are news magazines all writing about an investment? Are they on the
covers with splashy headlines and creating a feeding frenzy among the
masses? If so, then beware….
Mark’s Tip!
At a holiday party in
December 1999, I was
chatting with the husband
of a colleague. As was
typical of those predot-com-crash
days, the
conversation quickly turned
to investing in technology
stocks.
He said that Qualcomm
(QCOM) was a great stock
to buy, despite the fact that
it had already gained over
1,500% that year.
He had no personal
knowledge of Qualcomm’s
business; its proprietary
technology, the potential of
the wireless phone market
or any other fundamental
reason to own the stock.
Time magazine’s cover in late 1999 made it seem like
everyone was getting rich from Internet stocks.
Time magazine’s cover in Summer 2006, at the height
of the U.S. residential real estate bubble.
Another warning sign is when friends recommend investments without
any sound rationale. If you are at a social gathering and your friends or
colleagues start recommending their “hot stocks,” then ask your friends
why the stock is “hot.” If they can’t talk about the company’s sales, costs,
profits, or strategy for at least 60 seconds, then stay away from that stock!
Unfortunately, manias and bubbles are very common, and one must always
be vigilant for the next one that might take your hard-earned investment
money. While hot stocks and asset classes are the most common forms of
investing manias and bubbles, investing strategies and trading techniques
are also subject to popularity and fads. The following are currently the
most popular methods for finding and investing in stocks.
All I could think of at this
point was the scene in
Caddyshack when Rodney
Dangerfield gets a call on
his cell phone from his
stock broker: “I told you
never to call me on the
golf course! What’s that?
Everyone else is buying?
Then sell. Sell. Sell! “
I quickly sold my shares in
QCOM.; their amazing rise
in 1999 was followed by a
money-losing 2000-2002.
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8.2 Day Trading
Buying and selling investments so that all positions are
closed before the end of the day is called day trading.
Beginning investors should understand that day trading is very difficult to
do successfully and repeatedly, because you’re trading against professionals
with faster access to information, faster computers, and faster trade execution
platforms. Sure, you’ll have a winning day or two, but the majority of
beginning investors end up getting crushed.
Day trading became popular during the dot-com stock market bubble
era. The growth of the internet made an increasing amount of data available
to the individual investor which had previously only been available
via brokerages; second, the proliferation of software and the emergence of
“boutique” trading strategy information on the Web made learning about
trading and charting stocks easier. Brokerages rushed to encourage active
trading, as they were forced to lower their commissions due to competition
from the online discount-brokerage market. Finally, in the 1990s bull
market, just about everyone began to think they were an expert, because
everything they bought went up and up!
As it turns out, if those day traders had left their money in their stocks
overnight for several months during the boom, most of them would have
been better off because they would have paid fewer commissions, paid
fewer short-term capital gains taxes, and they would have slept better!
Unlike those who are looking for long-term appreciation and growth of
a portfolio, day traders are playing an active game every day the market
is open. The securities are subject to short-term spikes – up or down – in
the market, often based on factors over which investors have no control or
even knowledge.
Should you wish to be a day trader, you should become comfortable with
making and losing money – real money, not paper profits – on a daily
basis. Also, be prepared to pay lots of fees to your stock broker. Even if you
use an online discount broker that charges less than $10 per trade, those
fees add up and begin to eat into your profits, if you manage to make any.
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A typical display of Level 2 quotes for a stock showing the queue of
Bid orders on the left and Ask orders on the right.
One popular day-trading strategy is to look at Level 2 quotes. Whereas
Level 1 quotes show you the best bid and ask prices for a stock, Level 2
quotes allow you to see all of the bids and offers and the volumes of each
order on the stock.
Theoretically, if you see a lot of buy orders and only a few sells in the
queue, then you would expect the price to hold firm or rise slightly. Or you
could see a 10,000 share sell order and only a few 100 share buy orders—
indicating a short-term price drop as those 10,000 shares being sold will
drive the market down. Trading 500 shares of a stock and catching a 10
cent rise in a few minutes is a quick $50 profit. If you could do that 10 times
a day, it is a fast $500 per day profit.
Day trading is not for the timid or the uninformed. Market prices can
change very quickly and experience wide swings as the result of heavy
trading, breaking news, or market whims. Successful day traders are the
subject of legend, books, and movies, but day-trading failures are more
numerous than successes because of the heightened risks.
Mark’s Tip!
I remember reading a story
in the Wall Street Journal
shortly after the Nasdaq
bubble had burst:
The author was out getting
the oil changed in his
car, and was upset that
it seemed to be taking
much longer than usual.
After waiting more than 30
minutes for something that
normally took less than 15,
he walked out to ask the
auto mechanic what the
problem was.
As he got closer, he saw
the mechanic staring at his
computer screen. He had
thought the mechanic was
testing some computer
component of his car — but
he was poring over stock
charts, actually day trading
instead of changing the oil!
At that point, the author
wrote, he knew the stock
bubble had gone too far. He
sold up and took all of his
profits when he got back to
the office.
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8.3 Swing Trading
Swing trading is identifying “channels” or “tunnels” of price
movements on a stock’s chart. You buy when the price gets to the
bottom of the channel, and sell when it gets to the top:
Mark’s Tip!
When I tried day trading, I
found the pace of events to
be so quick that I couldn’t
always place and manage
realistic stop loss orders.
With swing trading, I have
a little more time to react
and establish a trading
plan, so I can make better
use of limits and stop loss
orders to beter manage my
portfolio.
Another side benefit is
that with swing trading’s
relatively longer time
scales, I can easily manage
five to eight simultaneous
positions, something I
could never do when I tried
to day trade.
Apple’s (AAPL) share price bounced inside predictable “channels”
that made weekly swing trading very profitable in 2007.
Swing trading can done on any time period: intra-day, daily, weekly or
monthly depending on the trader’s temperament and ability to dedicate
time to follow the stock’s price. Done an intra-day basis, swing trading is
like day trading on steroids coupled with a safety net; it considers shortterm
price cycles caused by daily swings in market prices.
Most swing traders, however, are holding stocks for a few days or up to a
week. Their idea is that minute-by-minute or hour-by-hour price movements
are too random to predict, but when smoothed out over a few days,
a better picture of the trends, support and resistance levels emerges.
Two clear advantages of swing trading are that it doesn’t suffer as much as
day trading in terms of commissions paid, and it’s OK to step away from
your computer for a few hours if you need to; most swing trading strategies
consider price moves in short, two- to four-day periods.
Popular with individual traders, swing trading is seldom used by large
or institutional traders, since they typically can’t react quickly enough to
make this strategy work in their favor. Smaller investors and individuals,
however, can enjoy some excellent profits if their swing trading strategy is
sound. Of course, there is always substantial risk, just as there is with day
trading.
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8.4 Penny Stocks
Penny stocks are often popular with the newer and smaller
investor. These investments are classically defined as any stock that
sells for less than $5.00, traded outside the major exchanges, often on the
Over-the-Counter Bulletin Board (OTCBB) market or on the Pink Sheets. In
recent years, the names “nano caps,” “micro caps,” and “small caps” have
also become popular to identify penny stocks.
In the U.S., penny stock designations are not decided by the market cap but
by market price. In the U.K, however, penny shares do often refer to smallcap
stocks (companies with less than £100 Million) along with their low
price.
Penny stocks are tempting to throw money at. After all, who wouldn’t like
to own 50,000 shares of a 2-cent stock that jumps up to 50 cents when they
land that first deal with Microsoft, or when they get their drug approved by
the FDA? That would turn your $1,000 investment into a quick $25,000!
The truth is that a 2 cent stock is priced at 2 cents because it is probably
worth zero, but gullible or naive traders continue to hope for a breakthrough
that drives the stock up. Our advice is caveat emptor — Buyer
beware.
The biggest problem with penny stocks is that because of their low price
and light trading volumes, penny stocks can be subject to market manipulation
by criminals who conduct pump and dump schemes. A company
or individual distributes misleading or outright bogus information about
a company that it owns stock in; Then, when the suckers start buying a
few thousand shares “just in case” the stock shoots to $1.00, the original
owners who distributed the bogus information start selling their shares
into the rally. Eventually the pumping and buying recedes, and the price
falls right back to where it was originally or even lower.
Typically, pump and dump schemes will involve press releases announcing
a fictional “revolutionary product,” or circulating false rumors about a
company in a popular internet stock market forum. The SEC is on constant
lookout for these scams, but they still exist.
Mark’s Tip!
OTCBB stocks are offered
on the NASD and must file
financial statements with
the SEC. Their tickers usually
end in a “.OB”. There are
no listing requirements,
the companies are very
small in terms of revenues
and assets, and the prices
are usually very volatile.
Volume is usually very light,
and therefore these stocks
have a large bid/ask spread.
The next lowest level of
publicly traded stocks are
called Pink Sheets. Pink
Sheet stocks are quoted
by the National Quotation
Bureau; the name derives
from their being printed
on pink sheets of paper
that were circulated each
morning in brokerage
offices. Their tickers
usually end in “.PK”. These
companies are usually even
smaller than the OTCBB
stocks, and don’t even have
to file financial statements
with the SEC — so beware
when you get those emails
promoting them!
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8.5 Buy & Hold
The most popular investment strategy preached by brokers,
fund managers and old-school investors is “buy and hold.”
In its most basic form, this strategy believes that you should only buy
stocks of solid, well-managed companies that will deliver profits for
decades to come; furthermore, that you should hold onto these stocks for
decades and not worry about the wild swings of the stock market. If you
think this description sounds like the opposite of day trading, you’re right.
Mark’s Tip!
One investor who has
literally made millions in
busting penny stock “pump
and dump” schemes is
Timothy Sykes.
As a young kid he turned
$10,000 into his first
$1,000,000 by shorting
these pump and dump
schemes. If you’re
interested in learning more
about this technique, I
highly recommend Tim’s
course on shorting penny
stocks, available from his
website, timothysykes.com.
Instead of spending your time looking at charts and drawing trend,
support and resistance lines, study the companies that are the biggest and
most profitable in the country. What is the best energy company in the
U.S.? What is the best consumer products company? What is the best bank
in the U.S.? What are fund managers picking?
When you are just getting started picking stocks, it is easier to follow the
experts and ride the ups and downs just as they do. As you can imagine,
this strategy avoids the stress that comes with with day or swing trading,
but the payouts are smaller and steadier, and you’ll have less to brag about
at cocktail parties.
The acknowledged guru of buy-and-hold strategies is world-renowned
investor Warren Buffett. For decades, Buffett has never bought a stock that
he didn’t want to hold for at least 5 years, and he has seldom been a seller.
Many other experts question the “intensity” of his strategy, believing that
he is too restrictive by holding almost all of his investments. There is little
argument that his extreme buy-and-hold strategy has worked amazingly
well for him, as he is one of the wealthiest people on our planet.
Warren Buffett’s holding company,
Berkshire Hathaway (BRK.A) is
a perfect example of the buy-andhold
strategy in action, outperforming
the S&P 500 (red line in
chart, left) over the last 10 years.
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8.6 Growth at a Reasonable Price
At
the height of the dot-com explosion, growth at any
price became the rallying cry for many investors. After
the bubble burst, a more conservative strategy known as growth at a
reasonable price, or GARP, became a popular investing action plan.
Paying a high price for a rapidly-rising security can result in serious losses
if it cannot sustain its impressive growth. Take a look at the graph of Crocs
(CROX), the maker of colorful plastic shoes that became the rage in 2006-
2007:
Mark’s Tip!
In spite of the general
consensus that buy-andhold
is the way to invest,
this foundation is showing
signs of cracking as many
people are starting to
question this strategy.
The graph of Crocs, Inc. (CROX), the plastic shoe company, shows us
the risk of jumping in on a high growth company too late.
Stocks growing at a more moderate, sustainable rate may be smarter
purchases, as they tend to deliver more profit with less risk of major losses
like so-called high flyers. Google (GOOG) is clearly a growth company and
has been for a few years; it has taken its hits as the graph shows, but it has a
less dramatic, more sustainable growth rate.
Because world events,
technology and consumer
buying behavior are
changing at a faster rate,
it appears that business
cycles are constantly
getting shorter, therefore
a successfully-managed
portfolio needs to react to
these market conditions.
Are we in a new world order
now, or will the current
economy just be a blip in
the 20-year chart from 2000
to 2020? Time will tell.
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Growth investing is similar to value investing, as most people equate the
ability to grow with the intrinsic value of a company and its stock. Growth
at a reasonable price actions suggest you should value securities in relation
to similar stocks, stocks that have experienced similar growth, but carry
higher market prices.
Make value decisions on price versus your projections on the future
increase in value of these stocks. Don’t worry if you’re not right on every
occasion; no one is. But, making smart decisions should return good profits
over time.
8.7 Insider Transactions
Insider transactions and trading has become a sensitive topic
in recent years. Most thoughts tend to be negative (images of Martha
Stewart in prison may spring to mind), giving the impression that all
insider transactions are illegal or unethical. Not true.
Martha Stewart, who was a stockbroker
early in her career, served prison
time for insider trading in 2005.
Technically, insider transactions involve an employee of a company trading
his own company’s stock or other securities. However, just because an
officer of a company bought or sold his company’s stocks doesn’t mean that
he was acting on knowledge that was not available to the investing public.
Company employees buy and sell their shares quite frequently as they
receive stock options, exercise those stock options, and then sell the shares
they received from the options.
Obviously, company officers, management, and other employees often,
by necessity, have access to internal information that fits a “non-public”
definition. However, simply having this information and trading company
securities is legal and acceptable. The public, the SEC, and the Attorney
General’s office will have no issues with normal trades by “outside
insiders.”
The problem (and illegality) with insider transactions arises when corporate
employees learn of material information — important issues, good
or bad — that spurs them to buy or sell their own company’s securities.
Should these trades involve executives or officers of the company, they may
violate the fiduciary responsibility that comes with their powerful positions,
which mandates trust, confidence, and honesty.
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However, there is a way to profit from the legal trades of insiders. A
company’s management is given windows of time each year to make legal
purchases or sales of their company’s stock, and these transactions are all
public information.
Doesn’t it make sense that company insiders would have the best view as
to the future business prospects for its company? That’s the theory behind
following the insider transactions of a company’s stock. If an insider makes
a big purchase of their company’s stock, it’s usually a very positive sign,
while the opposite is also true.
Many websites offer insider trading information based on the forms that
insiders must file with the SEC when they trade. MSN Money shows you
the stocks with the most insider transactions per week, as well the insider
transactions of specific stock tickers.
Mark’s Tip!
As part of my fundamental
analysis of a company, I
always like to see the trend
in insider activity. Some
people swear by it, but I’m
just a little curious.
Just because an insider
or two is selling shares
doesn’t mean the stock is
not a good value—it just
means that someone at the
company might be buying
a nice house or topping up
their retirement fund.
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8.8 Investor Sentiment
Investor sentiment, sometimes also called market sentiment,
relates to the stock market’s attitude towards specific securities, industries,
or overall market conditions (bullish, bearish, or neutral. While of
limited importance to a buy-and-hold investor, investor sentiment can be
an effective tool if you decide to live in the fast lane by adopting a day or
swing trading strategy.
In the short-term, investor sentiment can affect market prices to a large
degree. There are even companies, like Chartcraft, that publish “investor
sentiment indexes” to indicate the level, positive or negative, of investor
and market feelings.
Mark’s Tip!
At Wall Street Survivor, we
now publish my very own
Mark’s Rating based on
four factors —Wall Street
Survivor Sentiment, the
Motley Fool CAPS rating,
the Zacks Average Broker
Rating, and a short-term
technical analysis of each
stock. We consolidate this
information every night,
and then rank each stock
based on the composite
score each stock receives.
At Wall Street Survivor, we publish Survivor
Sentiment — the sentiment in the Survivor
community for every stock, based on actual buy
and sell trades made on WallStreetSurvivor.com.
We also publish the Motley Fool CAPS Rating,
which indicates whether their community views a
stock bullishly or bearishly.
As a newer investor, if you can get a sense of how the investment community
views your stocks, you will have good information to make better
trades. Even if investor sentiment is bearish (predicting a down market),
you can adjust your strategy to make profitable trades in the short-term.
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8.9 Arbitrage
The subject of arbitrage is a bit confusing for the newer
investor, but you will undoubtedly encounter it as you read
more about investing. In its simplest form, arbitrage is taking advantage
of price differences in at least two different markets. By making simultaneous
deals to maximize this difference, you can generate some profit using
an arbitrage strategy.
For example, Stock A has a market price of $45 on one exchange, but has a
current market price of $50 on another. Buying shares at $45 and immediately
selling at $50 in a different market returns a tidy $5 per-share profit,
then sell. Because of the global economy and the efficiency of electronic
communications, this may be more of a textbook than a real-world example,
but this is how arbitrage works.
The most common form of arbitrage is with mergers and acquisitions
(M&A). When one publicly traded company wants to buy another publicly
traded company, they usually must pay a premium for their shares. For
example, let’s say Company X wants to buy Company Y. Company Y’s
shares trade for $20 and Company X proposes to buy them out at $30/share
or a 50% premium.
Here’s where the arbitrage stock trader comes in quickly. Seeing that there
is a proposed deal for Company Y’s shares at a much higher price, traders
start buying up shares and the price rises. However, there is always a
chance the deal will not go through. Effectively, M&A arbitrage is a bet that
a proposed merger or acquisition will go through.
Arbitrage operates as both an offensive and a defensive strategy. While you
hope it returns excellent profits for you, arbitrage can also function as a
protection and risk mitigation strategy. Making arbitrage trades can thus
protect you from major loss, while giving you the opportunity to enjoy a
serious profit in an upside market.
Mark’s Tip!
To put this in perspective,
we’ve probably all done
some arbitraging and just
not realized it.
Here’s a real-world example.
At Christmas time I went to
a high-end electronics store
and bought a game for my
daughter for $99. The next
day at Walmart, I saw the
same game for $89. So what
did I do?
I bought the $89 game at
WalMart and returned (sold
back) the $99 game to the
other store for a savings (ie,
profit) of $10.
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Summary
This lesson focused on current topics in the investment world. Obviously,
by the nature of discussing current or “hot” topics, conditions can change
quickly, sometimes making hot topics cold and others newly hot. However,
the issues in this lesson have been current for some time, and should
continue to be important for the foreseeable future.
Further, just because an investing theme is popular or receiving a lot of
hype doesn’t mean you should shun it, as there are always opportunities
to make money in these situations. The first way is by acknowledging
and embracing the hot trend. As the saying goes, “the trend is always
your friend;” if you are able to ride the wave of a hot investing theme,
there is lots of money to be made while the speculative bubble is growing.
However, you simply must know when to get out before the bubble pops
and prices plunge!
The other way to play a hot investing trend is to short it: Bet that the trend
can’t continue forever upward, and that prices will soon fall. The danger
in this strategy is that, as economist John Maynard Keynes has famously
remarked, markets can stay irrationally strong longer than you can stay
liquid. So, the key is getting your timing right if you want to short a hot
investing trend.
The wisest choice, especially for a new investor, is to keep your money far
away from anything that seems too popular, too hot or too much of a “can’t
miss” investment.
Once again, knowledge is power, and lack of knowledge becomes problematic.
Having a basic understanding of the popular topics in this lesson
should help you increase your investing successes and better control your
losses. Like a successful sports team, at the end of measurable periods (day,
week, month, quarter, and year), you should strive to have more wins than
losses. You needn’t strive to be perfect — you might become discouraged.
Try to build a good knowledge base and a smart strategy to maximize your
winners. Be aware of hot topics, and use them to help you achieve your
investing goals.
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Chapter 8 Exercise
Try your hand at an investing style described in this chapter that interests
you the most. Make several trades in your Wall Street Survivor practice
account to get a feel for how the strategy works.
Chapter 8 Glossary
Arbitrage. Taking advantage of price differences in at least two
different markets by buying the same security at the cheaper price
and immediately selling it at the higher price.
Bulletin Board / OTC Stocks. Stocks that trade on the NASD with
tickers that end in a “.OB”, but have no listing requirements, very
small revenues and assets, and prices that are volatile with light
volume and large bid/ask spreads.
Day Trading. The buying and selling investments (stocks, futures,
stock options, commodities, currencies, etc.) within the same
trading day, so that all positions are closed before the end of each
day.
Pink Sheet Stocks. stocks that are quoted by the National
Quotation Bureau, have tickers that end in “.PK”, are smaller
than the OTCBB stocks, and that don’t even have to file financial
statements with the SEC.
Swing Trading. Identifying “channels” or “tunnels” of price
movements on a stock’s chart and then buying when the price gets
to the bottom of the channel and selling when it gets to the top,
usually over a few days.
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Chapter 8 Quiz
Question 1
What defines an investment bubble?
a. Prices go up too much, too fast and back down too quickly
b. Prices go up quickly and stay there
c. Prices drop steadily and then rebound sharply
d. People talk a lot about an investment
Question 2
How can you recognize an investment craze?
a. Study stock charts
b. Be aware of news headlines
c. Listen to conversations at parties
d. All of the above
Question 3
Day trading involves buying and selling investments:
a. That only trade once per day
b. That new investors can be successful at doing
c. Within the same day
d. Between the hours of 9:30 am and 4 pm
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chapter eight • current topics in trading
Question 4
What is swing trading?
a. Buying when the price gets to the bottom of the channel
b. Buying when the price gets to the top of the tunnel and selling at the
bottom
c. Selling when the price gets to the bottom of the channel
d. Using swing music to find price patterns in stocks
Question 5
What are penny stocks?
a. Stocks that are popular with seasoned investors
b. Stocks that sell for less than $5.00
c. Stocks that produce a few pennies of profit on every trade
d. Stocks with prices based on the number of shares outstanding
Question 6
What is a buy-and-hold philosophy?
a. Hold a stock until the price starts to fall
b. Hold a stock until it reaches a 25% gain
c. Hang on to stocks to realize long-term gains and profit
d. A strategy often used by swing traders, sometimes by day traders
Question 7
What is the result of the “growth at any price” philosophy?
a. Big gains or big losses
b. Impressive but often unsustainable gains in stock prices
c. An eventual shift to a more conservative strategy
d. All of the above
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Question 8
What is insider trading?
a. A highly illegal and unethical method of trading stocks
b. Something reserved for rich or famous people
c. A transaction that involves private knowledge about a company and its
stocks and securities
d. A strategy that violates fiduciary responsibility while yielding big profits
Question 9
What is investor sentiment?
a. The stock market’s attitude towards specific stocks, industries, or market
conditions
b. Technical information about specific stocks, industries, or market conditions
c. Something that has no effect on market prices
d. Something that is intangible, it’s the emotional measure of a stock and can’t
be measured
Question 10
What does arbitrage involve?
a. Price similarities in two different markets
b. Price differences across two or more markets for the same investment
c. Trading one stock for another very quickly
d. A strategy that is risky and may not result in any profit
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Chapter 9
Introduction to Options
Once you have a good understanding of how the
stock market works and you’re comfortable with
trading, the next thing to understand are options.
Options appear complicated at first, but with a
little reading and practice, options trading can
become as second nature to you as riding a bike!
Most people don’t trade them, but options are an important
tool that can earn money several different ways.
When the market moves in the direction you expect, trading
options will amplify your profits.
Protective put options help you protect your profits in stocks you
currently own that have achieved gains.
Writing (selling) options can add income to your portfolio in a flat or
stagnant market environment.
The language of options is a little more difficult to understand than stocks,
but keep reading and we will try to make it crystal clear. Your Wall Street
Survivor account allows you to trade options, so you can practice all of the
option trading strategies presented here. Please pay close attention, as this
chapter can put a lot of money in your bank account (or conversely — take
it away)!
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9.1 What Are Options?
Options are agreements that gives the holder of an option
the right, but not the obligation, to buy or sell something
at an agreed-upon price by an agreed-upon time. Sometimes, the
holder or buyer of the option pays a fee to the seller in order to have this
right.
Options are found everywhere in business and investment. Employees of
larger companies frequently get stock options as an incentive to stay with
the company and help it increase in value. Many real estate transactions
involve the option to purchase additional neighboring acreage at a certain
price within a certain number of years. Leases for cars, computers and
other business equipment usually contain a purchase option at the end of
the lease term.
For example: You and your spouse locate the perfect home to buy. The only
problem is the timing, as you won’t be in a position to purchase the home
for another six months. You and the seller agree on a price to purchase the
home in the time period that you want – up to six months from now. For
this concession, you agree to pay $2,000 (non-refundable if you chose not
to buy) to the current homeowner. This contract gives you the option, but
not an obligation, to buy that house at the agreed-upon price at any time
during the next 6 months.
In options trading, the house in our example becomes a stock, and is called
the underlying security. The agreed-upon price is called the strike price and
the end date of your agreement is called the expiration date.
Mark’s Tip!
A key difference between
this house example and
stock options is leverage.
Stock options allow
investors to buy 100 shares
of stock in a single option
contract. For the rest of this
chapter, remember that
a single option contract
covers 100 shares. When
we say an option is trading
at $1.25, that means that
option contract will actually
cost $125.
The important factors are the agreement, the selling/buying price, the cost
of the option, and any conditions to which the parties agree.
Real Estate
House:
Buying price
Date agreement ends
Actually buying the house
Options Trading
Underlying Security (i.e., Stock)
Strike price
Expiration date
Exercising the option
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9.2 Call Options
A
call option is the option (remember, not an obligation) to
buy 100 shares of a stock for an agreed price (the strike
price) by an agreed date in the future (the expiration date).
Let’s say you buy one call option contract, which
expires in October, for 100 shares in Yahoo!
(YHOO) stock. For now, let’s assume that this call
option is priced at $1.00, or $100 per contract, with
a strike price of $30 a share. Therefore, you now
have the right, but not the obligation, to buy 100 shares of YHOO at $30
per share, anytime between now and the third Friday in October.
Mark’s Tip!
In the U.S., most equity
and index option contracts
expire on the third Friday of
the month. Also note that
in the U.S. most contracts
allow you to exercise your
option at any time prior
to the expiration date. In
contrast, most European
options only allow you to
exercise the option on the
expiration date itself.
Call options that are set to
expire in 1 year or more
into the future are called
LEAPS— Long-Term Equity
AnticiPation Securities —
and can be a more costeffective
way to investing in
your favorite stocks.
If the price of YHOO rises above $30 by the expiration date in October, to
say $35, then your options are in-the-money by $5.00. This means you could
exercise your option, buy 100 shares of YHOO at $30, and then immediately
sell them at the market price of $35 — for a tidy $5-per-share profit.
Since all option contracts cover 100 shares, your real profit on that one
option contract is actually $400 ($5 x 100 shares - $100 cost). Not too
shabby! (Of course, if you want to own those 100 YHOO shares, then you
don’t have to sell them.)
On the other hand, if the market price of YHOO is $25 in October, then
your options are considered out of the money. You have no reason to exercise
your option now, as you would have an immediate $5 loss per share.
That’s where your option comes in. Since you’re not obligated to buy these
shares at that price, you simply do nothing and let the option expire. When
this happens, all you’ve lost is the original $100 that you paid for your call
option, not $500 ($100 cost + the lost $5 x 100 shares)
Always remember that in order for you to buy this YHOO October 30 call
option, there has to be someone willing to sell it to you. People buy believing
the market price will increase, while sellers believe, just as strongly,
that the price will decline. The seller receives a premium in the form of
the initial option cost the buyer pays, i.e. compensation for selling you the
right to call the stock away from him if the stock price closes above the
strike price. We will return to this topic later in the chapter.
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9.3 Put Options
Whereas a call option gives the holder the right to buy the
stock at a certain price, a put option gives the holder the
right to sell the stock at a certain price. A trader that buys a put
option believes that the price of a security will fall in the near future; you
are buying the right – again, not the obligation – to sell the security for an
agreed-upon strike price in the future.
Let’s look at another example using Yahoo! (YHOO) stock. Suppose you
think YHOO’s stock price is too high and you expect a sell off. You buy a
YHOO October 25 put option at $1, or $100 per contract, with a strike price
of $25. This gives you the right to sell 100 shares of YHOO at $25 at any
time prior to its expiration on the third Friday in October.
If YHOO shares are at $20 by the expiration date in October, then you can
exercise your put option and sell shares for $25 when the market is paying
only $20 a share, giving you a $5 per share profit and an overall profit of
$400 (100 shares x $5 - $100 cost) for that one option contract.
If the price of YHOO is more than $25 by the expiration date, then you can
simply let your put option expire, as before.
Put options offer protection on the downside, limiting your losses without
severely restricting your profitability. For example, say you already own 100
shares of YHOO Stock. You enjoyed a nice 50% gain in the last six months
as the stock rose from $20 to $30 per share.; if
you buy a put option at the strike price of $30,
then you are effectively locking in your price
gains for the duration of the options contract,
without having to sell any of your YHOO shares. It’s like having insurance
against losses! There is a cost for this contract, just like there is a cost to be
paid for any real-world insurance contract.
Mark’s Tip!
Remember this old saying:
“stocks slide faster than
they glide,” meaning that a
stock’s price will generally
tend to fall quickly while
price rises tend to be
gradual over time.
For me, this has always
made put options more
attractive to speculate with,
since the time to see the
price of a stock fall is usually
shorter than the time to see
it rise the same amount.
As with Call options, you can be a buyer or seller of put options to create
protection or arbitrage positions. Puts are conceptually similar to shorts —
when you sell “borrowed” securities that you do not yet own outright.
Like all other investment strategies, you might win or lose with options.
In both put and call options, you must understand the difference between
buyers and sellers. The buyers of put or call options are not obligated to buy
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or sell at the agreed upon price. However, call and put sellers (called options
writers) are obligated to fulfill their agreement, in one way or another. That
is a significant component in the option world that we will explore next.
As an aid to memory when thinking about calls and puts, remember that
a call option gives you the right to “call” a stock away from someone (buy),
and a put option allows you to “put” a stock to someone (sell).
9.4 Making Your First Option Trade
Now that you have a high-level understanding of what options are, let’s
look at option trading in a little more detail. When you get a quote on a
stock, you can also call up its option chain:
Yahoo! (YHOO) Options Chain.
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When you call up an option chain on Wall Street Survivor, you will see the
call options listed in the left column and the put options listed in the right
column. To view other months, toggle the Expiration drop-down menu.
• Not all stocks have options. Only the most popular stocks have options.
• You can’t always buy the strike price that you want for an option. Strike
prices are generally in intervals of $5. If YHOO is trading in the $30 range, it
might have strike prices of $20, $25, $30, $35, and $40. Occasionally, you will
find $22.5 and $27.5 available for the more popular stocks.
• You won’t always find the expiration month you are looking for. Usually
you see the expiration months for the next-closest two months, and then
every 3 months thereafter.
• Even if you do find the option you are looking for, you need to make sure it
has enough volume trading on it to provide liquidity so that you can sell
it in the open market should you decide to. Like OTC stocks, most options are
thinly traded and therefore have high bid/ask spreads.
• You need to understand how option prices are determined. If YHOO is
trading at $27 a share and you are looking at the October $30 call option, the
price is determined just like a stock; totally on a supply and demand basis
in an open market. If the price of that option is $0.25, then not many people
are expecting YHOO to rise above $30; and if the price of that option is $2.00,
then you know that a lot of people are expecting that option to rise above
$30.
As you might expect, option prices are a function of the price of the underlying
stock, the strike price, the number of days left to expiration, and
the overall volatility of the stock. While the first three of these are easily
agreed upon, it is on the current and future volatility of the stock that traders
differ in their opinions, and this therefore drives prices.
Now let’s look at a specific example so this starts making sense. Let’s say
we’ve done our analysis on IBM (IBM) and we think it will go from $84 to
$87 in the next few days.
Because we think IBM will go up, we want to buy a call, and since option
strike prices are in multiples of $5, I could buy the $80 call, the $85 call, or
the $90 call. Note from Table 1 (overleaf) that the IBM April $85 Call has
the greatest percentage return.
Mark’s Tip!
When buying options, you
need to be able to calculate
your break-even point to
see if you really want to
make a trade.
If YHOO is at $27 a share
and the October $30 call is
at $0.25, then YHOO has to
go to at least $30.25 for you
to break even.
This is because when YHOO
is at $30.25, then you know
that the $30 call is in-themoney
by $0.25, so it is
worth at least $0.25 (your
cost of the option).
Likewise, if the October $30
call is $2.00, then YHOO has
to climb to at least $32.00
for you to breakeven (when
YHOO is at $32, then the
$30 call is in-the-money
$2.00 and it will be worth at
least $2.00.)
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Security Shares Purchase Price $ Cost selling Price Proceeds Profit % Return
IBM stock 100 $84 $(8,400) $87 $8,700 $300 3.57%
IBM April 80 Call 1 $4.00 $(400) $7.00 $700 $300 75%
IBM April 85 Call 1 $0.75 $(75.00) $2.00 $200 $125 167%
IBM April 90 Call 1 $0.25 $(25.00) $- $- $(25) -100%
Notice in Table 1 that we spent $8,400 on the stock position and we spent
very little on the options. Now in Table 2 below, we invest the same initial
amount in options as in the stock, so we spend $8,400 on 100 shares of
IBM and about the same on each of the calls. Naturally, the percentage
return is the same as in Table 1 above but since now look at the $14,000
profit on the April $85 Call! Even the profit on the April $80 call is nice at
$6,300.
Security Shares Purchase Price Cost selling Price Proceeds Profit % Return
IBM stock 100 $84 $(8,400) $87 $8,700 $300 3.57%
IBM April 80 Call 21 $4.00 $(8,400) $7.00 $14,700 $6,300 75%
IBM April 85 Call 112 $0.75 $(8,400) $2.00 $22,400 $14,000 167%
IBM April 90 Call 336 $0.25 $(8,400) $- $- $(8,400) -100%
Now here’s the risky part of trading options. In Table 1 and Table 2 we
showed the results assuming IBM climbed from $84 to $87 a share by the
expiration date. Of course, stocks don’t always move the way we think, so
Table 3 shows what happens if the stock price just declines a bit to $83 a
share. Note that for the $85 Call we lost all of our money, but for the $80
Call we only lost $2,100 and, of course, for the stock we only lost the $100.
Security Shares Purchase Price Cost selling Price Proceeds Profit % Return
IBM stock 100 $84 $(8,400) $83 $8,300 $(100) -1.19%
IBM April 80 Call 21 $4.00 $(8,400) $3.00 $6,300 $(2,100) -25%
IBM April 85 Call 112 $0.75 $(8,400) $- $- $(8,400) -100%
IBM April 90 Call 336 $0.25 $(8,400) $- $- $(8,400) -100%
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Conclusion
If you are sure that a stock is going to pop up a few points before the next
option expiration date, it is the most profitable (and the most risky) to buy
a call option with a strike price slightly higher than the current stock
price. If you want to be a little more conservative, you can also buy the call
option with a strike price below the current stock price. When in doubt
as to what option to buy, always look at the volume that is happening in
the real market and go where the volume is (I call this following the smart
money).
9.5 Writing Covered/Naked Calls
We noted earlier that 35% of option buyers lose money and
that 65% of option sellers make money. Option trading is like
the fable of the tortoise and the hare; option buyers are the hares looking
for a quick move in stock prices, and option sellers/writers are the tortoises
looking to make a few dollars each day.
In the YHOO examples above we said that if
YHOO is at $27 a share and the October $30
call is at $0.25 then not many option traders
expect YHOO to climb above $30 a share between now and the third
Friday in October. If today was October 1st and you owned 100 shares of
YHOO, would you like to receive $25 to give someone the right to call the
stock away from you at $30? Maybe, maybe not.
But if that October $30 call was currently trading at $2 and you could get
$200 for giving someone the right to call you stock away at $30, wouldn’t
you take that? Isn’t it very unlikely that with only a few weeks left to expiration
that YHOO would climb $3 and your YHOO stocks would be called
away? In effect, you would be selling your shares for $32 (the $30 strike
price plus the $2 option price).
Mark’s Tip!
Stock prices move in three
directions: Up, down, and
they can also stay the
same.
If prices were truly random,
then over a given period
of time you would expect
stocks to equally move
up, down or stay the same
roughly 33% of the time.
This counterintuitive theory
has actually been borne out
by academic research that
shows that buyers of calls
or puts are only profitable
about 35% of the time; that
means that the sellers of
calls and puts are profitable
65% of the time.
Option sellers write covered calls as a way to add income to their trading
accounts by receiving these little premiums each month, hoping that the
stock doesn’t move higher than the strike price before expiration. If the
October calls expire worthless on the third Friday in October, then they
immediately turn around and sell/write the November calls.
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When you own the underlying stock and write the call, it is called writing
a covered call. This is considered a relative safe trading strategy. If you do
not own the underlying stock, then it is called writing a naked call. This is
considered a very risky strategy, so don’t try this at home!
9.6 Volatility
Volatility is a concept that involves all stocks and other
securities. For good reasons, high volatility is most often viewed as
a negative in the investment world since rapid movements in market prices
inherently involve both wins and losses. In investment language, volatility
implies two scary conditions for you: uncertainty and risk.
Mark’s Tip!
The reason that option
sellers/writers usually win
on their trades is they have
one very important factor
on their side that the option
buyer has working against
them — time.
If today is October 1st,
YHOO is at $27 and we
write the YHOO $30 call to
receive $2.00, we have 21
days to hope that YHOO
stays below $30.
Each day that goes by and
YHOO stays below $30, it
become less and less likely
that YHOO will pop over
$30 so the option price
starts decreasing.
On October 10th, if YHOO is
still at $27 then the October
$30 call would probably be
trading at $1.10 or so. This
is called the “time decay”
of options, in that each day
that goes by the odds of a
price movement become
less and less. This is how the
tortoise wins the race!
For example, if you are smart — or lucky —
enough to buy at a stock’s “bottom,” positive volatility,
as a rapid price rise could generate wonderful
profits for you. Negative volatility, on the other
hand, could make you less than pleased as the price of a stock swiftly falls.
Avoid a common misunderstanding that volatility also equals a trend up or
down. It does not. Volatility is neither good nor bad, nor does it automatically
indicate a trend. It simply measures the speed of price movement.
Everyone likes volatility to the upside, when the market rises quickly, but
rarely to the downside, when the market is crashing.
As you’ll see, volatility is a key component in pricing options since the
option writer has a great deal of interest in the likelihood of a large price
swing (up or down) in the underlying security.
The general indicator for volatility in the stock market is called the VIX
index and it measures the premium that options writers assign to stock
market volatility. The VIX index is often called the “fear index” because
the VIX will rise when the stock market is falling which simply reflects
the higher premium option writers are demanding when they write put
options as investors scramble to buy insurance policies (put options) for
their stocks.
Historically, the VIX has been in a range between 10 and 20, but during
the rocky stock market swoon in late 2008 and 2009, the VIX was more
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frequently in the 20- 30 range and even hit a high of 90 in October 2008
when investors feared the world was ending and the financial system was
said to be at the brink of collapse.
The important thing to remember about the VIX is, when it is high, options
become expensive to buy as the implied volatility in the options price rises.
9.7 Implied Volatility
Implied volatility compares the current market price of a
stock with its theoretical future value, to predict the true
value of an option. This may sound like a risky probability equation –
and it is – yet it’s based on sound factual history and intelligent projections
for the near future.
Once again, volatility is a basically neutral measurement, not an indication
of a good or bad condition or decision. As a measurement or predictor of
movement, you must remember that it may move either up or down. As
an investor, you must consider the volatility of different securities when
making decisions, particularly with options, either calls or puts.
Implied volatility affects buyers and sellers, therefore affecting the price
you pay or receive for your options. High implied volatility may cost you
more on the buy or sell side, as the other party will incur more uncertainty
and risk, whether projected or real. As long as you are aware of this factor,
you can price your decisions accordingly, but count on the buyer/seller of
the asset to do the same.
Until recently, the pricing of options was a largely haphazard affair of traders
who came up with prices on their own, until the Black-Scholes model
was developed.
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9.8 Option Pricing: The Black-Scholes Model
Any discussion of option prices would be incomplete without
mentioning the Black-Scholes option pricing model.
Academics Fischer Black and Myron Scholes authored a paper in 1973,
in which they theorized that an option
was implicit to the pricing of any traded
security. Referencing the work of some
of the most famous economists, like Paul
Samuelson, Black and Scholes developed
not one, but three positions for your
consideration.
•
The Black-Scholes Model:
A mathematical calculation regarding equities (stocks).
• The Black-Scholes Partial Differential Equation (PDE):
This tracks a certain stock’s motion or movement.
•
The Black-Scholes Formula:
This attempts to compute the prices for put and call options.
The Black-Scholes Formula is used for obtaining the price of European put
and call options. It is obtained by solving the Black–Scholes PDE where:
• N(•) is the cumulative distribution function of the standard normal
distribution
• e is the exponential function
• C is the price of a European Call option
• P is the price of a European Put option
• T is the expiry date
• t is a number in years (where now = zero)
• T - t is the time to maturity
• S is the spot price of the underlying asset
• K is the strike price
• r is the risk free rate (annual rate, expressed in terms of continuous
compounding)
• σ (Greek letter sigma) is the volatility in the log-returns
of the underlying asset
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We calculate the value of a call option:
 C (S,t) = SN(d 1 ) – Ke –r(T–t) N(d 2 )
where

and (d 2 ) = d 1 – σ√T-t
And the price of a put option is calculated:
P (S,t) = Ke –r(T–t) N(–d 2 ) – SN(–d 1 )
Don’t worry — all you need to know is that many option trading websites
will show you the Black-Scholes price calculations, so you can gain a sense
of the reasonableness of the option price.
9.09 Put vs. Call Interest
Put and call interest does not involve the banking definition
of interest, but the market excitement – or lack thereof
– regarding puts or calls for a security. Before you start thinking
we’ve all lost our analytical minds, try to understand that market prices for
stocks and put/call options are not totally based on sophisticated mathematical
formulae and superior financial modeling software.
Just as the market adopts a bull or bear mentality for either good or undefined
reasons, it reacts similarly to put and call options for different securities.
Even if you spend hours at your laptop computer analyzing all available
scientific data, the mood of the market must still be factored into your
investment decisions, including buying or selling options.
For example, you’re considering call options on a few securities. You learn
that much of the market is not in favor of these options on these stocks. On
one hand, this may mean you can make beneficial deals on these options,
as the “option price” will be lower than you thought. However, you also
need to consider the reasons for this lack of popularity.
Might it affect the strength of your future purchase price on the negative
side? Or, are you simply making a wise option purchase that might
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mean higher profits for you? Are there many more put than call options?
Does the market, as a whole, believe the stock price will decline? Are their
conclusions legitimate? Are they wrong, based on your analysis?
Interest, in this sense, is important for you to consider. It should not
necessarily dictate your decision to execute a put or call option, but you
should consider the interest level as an indicator of whether the stock
might increase or decrease.
The Put-versus-call interest can also be used to measure overall market
sentiment. When more investors are buying calls than puts, sentiment
about stocks is generally bullish and they believe stocks will rise in the
future. When more investors are buying puts, this indicates a bearish sentiment
that stocks will fall. The historical average probability for investors to
buy Puts versus Calls is, not surprisingly, about equal, for a 1 to 1 ratio.
Summary
Options are exciting investment vehicles, but to be used profitably, you
need to understand what they mean and what they can or cannot do for
you. You’ve scratched the surface of the option world, but before you make
a real-world decision, take advantage of WallStreetSurvivor.com, and use
the options portfolio provided to learn how options work.
You’ve now reached a level that gives you some ammunition and skills to
play the basic options game. You have some valuable tools that give you
the chance to win, too. Options are a world of investing by themselves, and
WallStreetSurvivor.com provides you with the playing field to least practice
options and understand their value in any investment portfolio.
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Chapter 9 Exercise
In your Wall Street Survivor account:
• Buy a call option on a stock that you think is going to go up
• Buy a put option on a stock that you think is gong to go down
• Write an out-of-the-money covered call on a stock that you have in
your portfolio and see if it expires worthless
• Buy a put on a stock that you have a profit on and try to lock in those
profits
Chapter 9 Glossary
The Black-Scholes Model The most generally accepted option pricing
model.
Call Option The right, but not the obligation, to buy a stock at a certain
price before the expiration date.
Covered Call Writing/selling a call option on a stock that you currently
own.
Expiration Date The date that the option expires, usually the third
Friday of the month in the U.S.
Naked Call Writing/selling a call option on a stock that you do not
currently own.
Put Option The right, but not the obligation, to sell a stock at a certain
price before the expiration date.
Strike Price The price at which the option contract can be executed.
Time Decay The reduction in an option price that occurs over time due
to the reduced chance of a big price movement in the underlying stock.
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Chapter 9 Quiz
question one
What are options?
a. Agreements between a buyer and seller that give the buyer the right, but
not the obligation, to buy or sell something in the future.
b. Agreements between a buyer and seller in which the buyer is obligated to
buy or sell something in the future.
c. Agreements in which the seller pays the buyer.
d. Agreements only suited to stocks.
Question two
What are the most important factors to consider with options?
a. The agreement.
b. The strike price.
c. Cost of the option and conditions, including the expiration date.
d. All of the above.
Question three
What are LEAPS?
a. A call option set to expire in one year or more.
b. A new type of stock, similar to an ETF.
c. An option that indicates you believe the price of a security will fall.
d. A way to get a jump on your investment competition.
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Question four
What are put options?
a. An option to buy at an agreed-upon price.
b. An option to sell at an agreed-upon price.
c. An option that is the opposite of a short position.
d. The ability to lock in a purchase price.
Question five
What do writing covered calls enable an investor to do?
a. The writer has the ability to buy on margin.
b. The buyer owns the underlying asset.
c. The buyer can perform the agreement without incurring further risk.
d. The writer can make easy money
question six
What does volatility mean for an investor?
a. A measurement of price momentum
b. Prices are falling.
c. Prices are rising.
d. Potential risk and uncertainty.
Question seven
What is implied volatility?
a. A risk probability equation.
b. A measure of how risk could occur.
c. A calculation that compares the current market price
and theoretical future value.
d. Something that only impacts option writers.
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Question Eight
What is a common mistake new investors make?
a. Consider option spreads.
b. Disregard option spreads.
c. Avoid the use of options.
d. Consider the advice of others.
Question nine
What can the Black-Scholes calculations help you do?
a. Become better at math.
b. Create further investment questions.
c. Help protect your trading choices.
d. Succeed at options investing.
question ten
What does the put versus call interest do?
a. Measure overall market sentiment.
b. Provide a measure of banking interest rates.
c. Offer a precise mathematical formula for pricing options.
d. Indicate who is making money and losing money in options.
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Chapter 10
The Survivor’s Guide to Success
In the last nine chapters we’ve covered many key
topics and provided the wisdom of our trading
experience, but keep in mind we have merely
scratched the surface of a complex world.
You understand the vocabulary and jargon of the stock market; you have
the background to understand economic cycles and how they influence the
markets; you’ve gained some experience, through the Wall Street Survivor
stock simulator, of placing a variety of trades and seeing how they perform.
We hope that in those virtual trades, you experienced more of the thrill of
victory than the agony of defeat as we discussed in the very first chapter.
Hopefully:
•
•
•
•
You’re riding your winners and cutting your losses.
The trend has become your friend.
You’re using stop loss orders, or at least never allowing yourself to lose more
than 15% on a single trade.
You’re dollar-cost averaging into your positions and dollar-cost averaging
out on some.
This chapter will help you remember the things we’ve covered, and give
you ideas for your investing future.
Good luck!
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10.1 Ten Key Things to Remember
Here are ten important things to remember as you take the
next step in your investing journey. These are real-world keys
that you should embed into your conscious brain to help you become a
consistently smart or profitable investor.
1. Understand & control the fees and costs of your investing activities.
Ask your broker how they charge for stock and option trades. Shop
around and try other brokerages. Don’t be shy. You must find a brokerage
and platform with which you feel comfortable.
In addition to brokerage commissions, be aware of and minimize advisory
charges (if you choose to use an investment advisor), mutual fund
loads (buying and selling), expense fees for ETFs, the tax consequences
(always keep your tax adviser in the loop) of your investing, and closely
monitor the overall rate of inflation, which can eat into or destroy your
apparent profits.
2. Diversify, diversify, and then diversify. (We can’t say this enough.)
Typically, the best way to accomplish this goal is to create a good asset
mix. Some people think they have diversified if they have many different
stocks in their portfolio, but nothing else. This is not true diversity,
as the types of assets are all the same.
Make sure your real portfolio contains a mix of bonds (corporate and
U.S. Treasury), commodities like gold and silver bullion, and international
stocks and bonds as well. Also, consider the ever-important time
component. Along with the obvious, such as timing a bond’s maturity
date correctly, you should consider how assets appreciate at different
times and plan accordingly.
3. Understand your total risk. You may have a clear picture of the relative
risk associated with each investment you purchase, but have you
considered the related risks between investments? For example, what is
the source of your cash flow with which you live? Are you an employee
or a self-employed businessperson? Have you considered what may
happen if your cash flow were to stop? Would you be forced to sell your
investments before you wanted to?
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The risk to your portfolio has just greatly increased, especially if you
never considered it before. This risk may one day force you to lose
money by selling at the wrong time. Many investors have been forced
to sell their investments at market lows because they had no other
choice – they needed the cash! (You might be unable to make other
timely purchases during a market low because of your lack of cash
flow, too.) These are just example of the additional risks that you might
easily overlook when creating your investment strategy.
4. Understand percentages. Don’t look at how much the price of an
investment went up or down in dollars and cents or “points” – look at
its percentage gained or lost. Like casinos that issue worthless plastic
chips in order to more easily separate you from your money, you must
understand the value of each asset you are holding and how much each
price change impacts your overall portfolio value.
The easiest way to understand how investments are changing in
value daily, weekly, monthly or yearly is through percentages. Google
(GOOG) went up $5 today and your General Electric (GE) stock went
up 50 cents – which performed better for you? That might be a 1%
return for GOOG but a 3% return for GE!
Further, if the DJIA went up 500 points today for a 5% gain, why did
your GOOG and GE underperform the market? Pay attention to the
percentage changes in all of your assets and compare them to common
market benchmarks!
5. Avoid buying “hot” stocks — invest in what you know. Surprised? By
the time a stock is considered “hot,” you’ll probably pay too much for
it. The amount of press and TV time they command often attract many
investors on the buy side, which drives the price up to possibly dangerous
“bubble” levels. If you like a hot stock or investment, wait a few
weeks or a month to revisit the security. By then, it has probably been
replaced by a new “hot” stock and may now be priced more attractively.
A better method of investing is to buy what you know. Open your eyes
and look to see where you and your friends are spending your money—
and where you are NOT! Your own personal and professional knowledge
of companies and their products is usually more than enough
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evidence for you to start doing some fundamental research on their
stocks. Investors who stick to what they know and ignore what they
don’t know have made many fortunes.
6. Use Fundamental Analysis to identify what to buy. Fundamental
analysis is a first step in researching possible investments. For stocks,
what are the company’s P/E ratio, product lineup, and management?
For CDs and bonds, where is the overall economy in the business cycle;
what are bank CDs and bonds yielding? For commodities, what is in
demand now and what will be in high demand in the future for assets
like oil, gold, and wheat? This will tell you what is currently undervalued,
what is overvalued and what the future is likely to bring for these
investments.
7. Use Technical Analysis to help you decide when to buy. While
Fundamental analysis can tell you what to buy, Technical analysis tells
you when to buy. After all, what’s the point in making an investment
and having to wait 20 years before you make money and your fundamental
analysis is proven correct?
That’s why technical analysis indicators like price action and volume
play key roles in your life as an investor. Common chart patterns and
trend lines will easily guide you in knowing when to buy and when to
sell investments that your fundamental research has told you are solid
places to invest your money. Technical analysis works not because it
is a secret, but because every good investor knows about it, uses it and
follows it.
8. Set reasonable goals; if you outperform the market by 5% then
you’re doing great! It’s really difficult to beat the market as measured
by a benchmark like the S&P 500. Constantly striving to “double your
money in a year” will bring you disappointment; it’s a fruitless attempt
at achieving perfection. Instead, create a strategy and portfolio that
suits the amount of money you have to invest, protects you against
downside surprises, projects returns higher than inflation, and feels
comfortable. Create a realistic, achievable investing goal; remember
that over 90% of professional mutual fund managers fail to beat the
S&P 500 stock market index, and you shouldn’t expect to beat it either,
at least not right out of the gate.
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9. Be objective, not emotional. Fear and greed are your enemies. These two
emotions can be seen in every market, every day. They drive markets
up and down, making them gyrate senselessly. That’s fear and greed at
work.
When you become emotional about your investments, your previously
successful portfolio can become a train wreck. Understand that objective
investing is always the smartest strategy component. Have solid
reasons and goals for making every investment decision, and ask yourself:
is greed or fear is playing a role? And stick to your plan!
10. Be an independent thinker. This is easier said than done, and can take
a lifetime of experience to achieve, but top investors all stress that you
must invest independently. This doesn’t mean you should totally disregard
suggestions from your broker, other experts, friends, or family,
but rather to view them with a careful, critical eye.
Do your own research, investigation, and evaluation – remember, it’s
your money. Treat recommendations, regardless how strong they seem,
as just another information source, not a fierce call to action. One way
to become an independent thinker is to read many different opinions,
and then to synthesize them with your own findings and feelings based
on the visible facts.
10.2 Ten Mistakes to Avoid
1. Over-diversification. Every expert with a newspaper column, blog, or
TV show keeps telling you to diversify your portfolio. They’re right, but
they often neglect to tell you the rest of the story.
Assume you only have $200 to invest. You buy forty different stocks at
$5 each. Guess what? Now you’re too “thin,” and you’ve racked up enormous
trading fees for purchasing each stock, that start your portfolio
off at a substantial loss. Even if one or two stocks skyrocket, they won’t
make a real difference since these occupy a miniscule portion of your
portfolio. Fifteen to twenty diversified stocks should be plenty and you
can have as few as ten if you are well-diversified.
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2. Becoming a trader. Compile a list of the best investors in the world
and you won’t find one who engages in frequent intra-day trading.
Even if you have early success as a day trader, the odds, the tax code
and the markets are all stacked against you. Las Vegas casinos know
that the longer even “winners” play the game, the greater the probability
of losing and giving back all their winnings, and then some,
and day-trading the markets is no different. A buy-and-hold investor
like Warren Buffett would gladly tell you that you’re crazy to adopt a
trader’s strategy.
3. Disregarding “time horizons.” Imagine that you have $1,200 to invest.
You decide that, for an extra quarter-percent interest, you’ll put it all
in a 5-year CD. Then, in six months’ time, you find you need $400, so
you withdraw that amount and forfeit all interest earned. Then, in
one year, interest rates spike upward, and your remaining 5-year CD is
now earning well below market rates. You’ve disregarded the investment
timeline and it’s cost you money. If you plan to buy a car soon,
or a house in a few years, or to send your children to college, you need
to plan to have the cash available when you need it, not locked up or
underperforming.
4. Making investment decisions based on emotions. Your former superstar
stock dropped 10 percent today and you’re in a panic. Relax and do
nothing while in this state of mind. Place your laptop where it belongs:
In your lap. Investigate the reasons for the decline. You might find
that, instead of dumping this stock, you might want to buy more. A
funny thing about Wall St. is that it’s the only place on Earth that when
there’s a “sale” on the product, people run away.
5. Paying too much for investment advice. Many investors, particularly
newcomers, overpay for their investment services. Feeling that you
need full-service brokers is understandable, but the service is usually
unnecessary. First, all fees are negotiable. Second, if you’re doing your
homework, you can make your own investment decisions. Third, if
you’re always dependent on someone else’s advice, you’re never truly
free and in control of your life. Learn how to invest for yourself and
you’ll never have to depend upon costly advisors!
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6. Impatience that leads to paying too much for your investments.
Shopkeepers will tell you the key to retail profitability isn’t how much
you sell something for, it’s what it costs you. You can’t predict the future
to see exactly when and how much you will sell something for, but you
can certainly control the cost. The same is true for investing: The selling
price is much harder to predict than the purchase price, so only pay
a fair price for your investments. Don’t chase a stock price higher and
let greed get a hold of you. Remember, new investment opportunities
always come around if your current one has escaped your price range.
7. Assuming that the future looks like the past. This is a common
mistake made by many newer and casual investors. They assume that
current earnings will continue and project future earnings at the same
or higher level. For example, if a consistently mediocre company has
a wonderful year, don’t automatically assume the company has found
the secret to profitability. Once again, adopt a critical, independent
viewpoint. Assume nothing. Do the research to see if they’ve really
improved or if they were just lucky.
8. Unrealistic expectations. Avoid setting unrealistic or impossible
expectations for any investment. It clouds your judgment, generates
bad buy/sell decisions, and erodes your confidence. Be realistic with
your performance projections. There are no shortcuts on the lifetime
road of investing decisions!
9. Suffering paralysis by analysis. You understand that you should be an
independent investor, do your own research, and make smart, personal
evaluations. However, many newer investors spend too much time
exercising their newfound skills; they love the research and debate
so much that they forget to actually get in the game. A fast-moving
market can make analysis paralysis a costly mistake. Your aim can be
perfect, but if you can’t pull the trigger, you’ll never hit your target.
10. Lack of a plan or a strategy. Becoming an investor will seldom be
successful if you don’t have a working plan and some type of strategy.
You may as well just buy lottery tickets or visit your favorite casino; at
least there you might enjoy a wonderful dinner and a show. The level of
sophistication of your plan isn’t important — the fact that you have one
is. Think about the many strategies offered in this course and try one
risk-free using fantasy money first at Wall Street Survivor.
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10.3 Staying Informed
Even if you start out as a buy -and-hold investor, staying
informed at all times is critical to your investment career.
Should you be tempted to walk the ever-exciting and dangerous tightrope
of day trading, your stream of current information is even more important.
Here are some suggestions to stay informed, knowledgeable, and always
ready to make excellent investment decisions. Your portfolio – and your
bank account – will thank you.
Investment Newsletters
You will have many choices of investment newsletters, some of which are
sent by email and others provided as RSS feeds to your browser or newsreader.
Don’t be afraid to sign up for the free ones as long as they’re from
legitimate companies, and don’t hesitate to unsubscribe if you find yourself
overwhelmed or you don’t like their approach.
•
•
•
Some of our favorite stock newsletters include those from
Fool.com, TheStreet.com, CNBC.com, MSN Money, SeekingAlpha.com, and
PeterNavarro.com (a Harvard PhD and economics professor who also writes
for Survivor University).
Option traders might want to check out Schaeffer.com
and Philstockworld.com.
In addition to web and email-based newsletters, you can also follow Wall
Street Survivor on Twitter to get an updated streams of interesting investing
news and links to new Survivor University articles as they’re updated.
Stick with the basics for now. As your knowledge increases and you
become more comfortable with the terms and tips you’ve learned in this
course, you may want to upgrade the level of information from those newsletters
and we’re sure you will find others that you like.
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Money Management Techniques
You’ve learned some wonderful money management techniques through
this course, and there are even more sophisticated techniques and new
ideas published on a regular basis. Surf the web to stay up-to-date about
new, cutting-edge money management techniques that might help you
make better decisions.
Don’t worry, money management ideas aren’t necessarily complicated;
most depend more on common sense than deep mathematics and strangelooking
formulae. Stay informed with strategies that work for you.
Survivor University
WallStreetSurvivor.com has many tools to help you stay informed.
Survivor University offers the latest news, market updates, and money
management ideas to help you achieve investing success.
10.4 Practice, Practice, Practice
Like all good athletes, musicians, actors, and astronauts, the
word practice is central to performance success. The newer
investor should adopt a practice regimen; just as nobody is born knowing
how to hit a baseball or play the piano, successful investors are made, not
born.
Making mistakes is normal. Author Malcolm Gladwell’s book Outliers
observes that to become really good at something, one must devote 10,000
hours of practice; we say it has a corollary — you also have to make your
first 1,000 mistakes and learn from them.
To do just that, Wall Street
Survivor offers the Trade Diary.
This allows you to keep detailed
notes and set alarms regarding
stocks you own. Keeping excellent
and accurate records is critical to your future success as an investor, allowing
you to learn from your mistakes faster, and reflect on your successes.
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10.5 Develop an Investing Strategy
That Feels Right for You
Developing a workable investing strategy – and sticking to
it through its high and low points – is the major component
of your overall action plan. You need to create an investing strategy
that is comfortable for you, because if it doesn’t fit, you won’t stick to it.
Here are some proven ways to select a strategy that works for you:
•
•
•
Understand who you are, and who you are not.
Understand the true state of your financial fitness. Adopting a strategy
popular with the world’s largest investors will do little to help you if your
investment fund is less than $5,000. Be honest and create a strategy that
makes sense.
Be brutally honest when evaluating your current economic situation. While
staying positive is always a benefit, evaluation of yourself must be just as
objective as your analysis of companies and potential investments. At a minimum,
consider the following factors
»»
»»
»»
»»
»»
»»
»»
Your current age
Your asset position: What assets and available cash do you have?
Your debt position: How much do you owe?
Current income and cash flow: How much do you make from all income
sources?
Current expenses: How much do you need to spend monthly?
Your savings plan: How much can you save regularly?
Your retirement plans: How much do you think you’ll need to retire comfortably?
Use a retirement calculator to give you some guidance.
•
•
Evaluate your financial situation as compared to the statistics for average net
worth for different age groups.
Be aware of recommended asset allocations for portfolios of different age
ranges to help guide your investment strategy.
Use this and other information you accumulate to construct an investing
strategy that fits your finances, personality, and economic goals. You will
make better decisions, enjoy your investment activities, and improve your
chances of reaching your financial goals.
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R ecom m e n ded asset a l locations
at different life stages
20%
20%
40%
25%
40%
15%
Large-Cap Stocks
Small-Cap Stocks
International Stocks
Bonds
Money Market
Large-Cap Stocks
Small-Cap Stocks
International Stocks
Bonds
Money Market
25%
In your 40s, emphasize large-caps while
you can afford to take risks
15%
40%
20%
30%
10%
In your 50s, increase the role of lowerrisk,
slow-growth bonds in the investing
mix.
a g e
a v e r a g e n e t
b r a c k e t
w o r t h
Under 25 $9,660
25-29 $37,229
30-34 $136,629
Large-Cap Stocks
Small-Cap Stocks
International Stocks
Bonds
Money Market
35-39 $298,500
40-44 $491,100
45-49 $690,090
50-54 $702,552
55-59 $1,123,000
60-64 $1,507,000
65-69 $2,294,492
70-74 $2,546,213
75 and over $2,734,001
5%
15% 5%
10%
Large-Cap Stocks
Small-Cap Stocks
International Stocks
Bonds
Money Market
65%
By your 60s, you should be reducing your
higher-risk investments to 35%, but note
the added money market slice.
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Summary
Congratulations! You’ve made it through the basic
Investing 101 course unscathed, better-armed,
and ready to begin a long, successful investment
career.
You have enough information to begin with some confidence. Remember,
you can always test your personal investment strategy using the real-world
simulator at Wall Street Survivor — forever. Even just for fun — get all the
excitement and results you’d achieve in the market – without risking any
of your investment funds.
While this might be the end of this trip, it’s not the end of the journey.
Keep practicing and constantly improving your personal knowledge base.
Learn which investment types work for you and which don’t. Analyze your
losses just as diligently as you do your winners.
We wish you the best of luck.
Mark’s Final Tip!
You now have the tools you need to start investing your real
money. Start slowly and only invest in something if you fully
understand it and don’t hesitate to take profits the first couple
of times that you make them — it will build your confidence. And
stay in touch — email me at mark@wallstreetsurvivor.com and let me know how
you’re doing or if you have any questions about this course.
If you’ve enjoyed this course, why not invite your friends to take it too? As a
special thank-you gift, every time you refer a friend who registers, I’ll send you a
$25 Amazon Gift Certificate! Just send their email address and name to me at
mark@wallstreetsurvivor.com.
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Chapter 10 Quiz
question one
What is one of the ten important investment keys to remember?
a. You can’t really beat the market.
b. Set unrealistic expectations.
c. Disregard time horizons.
d. You don’t really need a plan. Just go with your gut.
Question two
What types of stocks should you invest in?
a. Hot stocks.
b. Stocks that are popular.
c. Stocks that have the potential to explode but are based on a technology you
don’t understand.
d. Stocks that you know. (correct answer)
Question Three
What is risk capable of doing?
a. Making a lot of money or losing it all. (correct answer)
b. Creating stability and security.
c. Providing the best investment strategy.
d. Generating objective investment decisions.
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Question Four
What should you remember about investment advice?
a. All fees are negotiable.
b. If you are doing your homework, then you can make your own decisions.
c. Control your own investment destiny instead of paying someone
to control it.
d. All of the above.
question five
How should investment decisions be based?
a
b
On what everyone else is doing.
On what an investment advisor tells you.
c. On careful research.
d. On gut feelings.
question six
What should you assume about the past and the future?
a. The future will generally look like the past.
b. Current earnings will project future earnings at the same or higher level.
c. The past plays little role in the future.
d. Assume nothing and do the research first.
question seven
What happens when an investor over-diversifies?
a. They are spread too thin.
b. They make more money.
c. They drive their money manager crazy.
d. They create high-risk scenarios.
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question eight
What is a key trait of a successful investor?
a. Using the same strategy all the time.
b. Staying informed.
c. Ignoring investment advice.
d. Sticking to your investment strategy, no matter what.
question nine
What is central to investment performance success?
a. High IQ.
b. Natural-born talent.
c
Practice.
d. Who you know, not what you know.
question ten
What should your overall action plan include?
a. A workable investment strategy.
b. A workout strategy.
c. An exit strategy.
d. A cash flow strategy.
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Quiz Answers
Chapter 1 Quiz
1.Which option can you select when opening a savings account?
d. Both A and B, Interest rate and frequency of interest posting
periods.
2. What are typical Money Market Account (MMA) features?
d. All of the above: Higher interest rates, no maturity date, and a
minimum balance requirement with limited withdrawals.
Money Market Accounts (MMAs) are essentially hybrids that combine traditional
savings account features with certificates of deposit (CD) features.
The advantages are a higher interest rate and no maturity date. However,
individuals must maintain a minimum balance and have account withdrawal
limits. It is important to remember that bank MMAs are different
from investment firm MMAs. While bank MMAs are a type of savings
account backed by federal insurance, an investment MMA is a higher risk
short-term investment with no federal insurance protection.
3. What is a mutual fund?
a. An open-ended equity investment containing a group of stocks
or assets
A mutual fund is an equity investment consisting of a group of stocks or
other assets. An investment firm uses investor money to purchase assets
for the fund. The investors all share in the resulting gains, losses and
earnings, with the amounts based on the individuals investment size.
Because of the shared risk, mutual fund are great for investors “playing it
safe” while looking to diversify an investment portfolio.
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quiz answers
4. Which feature do Exchange-Trade Funds (ETFs) have in common with
mutual funds?
c. One investment purchases a group of assets.
Exchange-Trade Funds (ETFs) involve group-stock purchases just like
mutual funds. But there are differences. ETF shares can be traded at any
time the host market is open and each transaction typically involves a
broker fee. ETFs are also tied to an index and are considered less diversified
because they focus on a particular asset type, region or other index.
5. What are some basic features of bonds?
d. Both a and b: They are debt instruments and can be either secure
or risky, depending on the type.
All bonds are considered debt instruments because they have a stated
earnings rate and will provide a regular cash flow in the form of coupon
payments to bondholders. This cash flow contributes to the value and
price of the bond and affects the true yield (or earnings rate) bondholders
receive. There are three types of bonds— corporate, treasuries, and
municipal —each offering different levels of risk and earnings. While
bonds do form between good friends, the bonds in this course relate to
investing.
6. Which bond type carries the least amount of risk?
b. Treasuries.
U.S. Treasuries minimize risk more than all other types of bonds. This
is because they are backed by the full faith and credit of the federal
government. As with all types of investments, there is a lower return in
terms of an investor’s earning rate because of the low risk involved. While
nothing in the investment world is ever completely free of risk, treasuries
come the closest in terms of the security they offer an investor.
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7. Outside of buying coins and bars, which other ways can you invest in
precious metals?
d. All of the above: Certificates, mutual funds & mining corporation
stocks, and precious metal futures.
If you love silver and gold, there are many ways to invest in them.
Certificates are a convenient way to gain ownership of precious metals
in varied amounts. Like other types of mutual funds, those dedicated
to precious metals allow an investor to diversify their risk across several
types. Stock can be purchased directly from a mining corporation as a
third option. The last type of investment can be both exciting and risky. It
involves trying to predict precious metal prices in the future.
8. Which investments require a high level of due diligence and business
savvy?
c. Foreign exchange, currency speculation and hedging.
Foreign exchange, currency speculation and hedging are all variations
of the same basic investment strategy, but are considerably more
complicated and risky. So know your stuff before jumping in. Investing
in a foreign stock exchange involves the risk and return associated with
domestic stocks, but it also entails foreign currency, which is another
assortment of factors and problems. Since no one can see the future,
currency speculation is also best left to the experts.
9. Which statement about real estate investment is not true?
a. The strategy for real estate investment is the same as buying a
home or office building.
A real estate investment is not like buying your family home or purchasing
an office building for company headquarters. An investment strategy
involves complex calculations based on fair market value and rental
income potential. A real estate investor often has a diverse portfolio
with real estate mutual funds, REITs, mortgage-backed securities and
mortgage-backed obligations. During a down economy, property values
rapidly decrease while risks quickly increase.
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10. How can you enhance your investing experience?
d. All of the above: Familiarize yourself with traditional asset group
risk levels, identify your own level of risk comfort, and research
appropriate historical information.
You won’t enhance your investment experience by just jumping into
any type of investment channel. Research and knowledge is essential to
properly enjoying the exciting and potentially rewarding experience. The
biggest thing to consider is your personal comfort level when it comes to
risk. There is no need to transform yourself into a hot-shot investor overnight.
Due diligence, patience and perseverance is key, remember that.
Chapter 2 Quiz
1. What are stock exchanges?
a. A place for organizations to trade stocks and securities.
Stock exchanges allow people and organizations to buy, sell and trade
stocks and other types of securities around the world, including North
America, Asia, Africa and Europe. Think of a stock exchange as a cross
between a flea market and an auction. The price of stocks and securities
are based on what people are willing to pay for them. This is commonly
referred to as a “bid.” The price sellers are willing to sell for is known as
the “ask price.” Participating in stock exchanges has become even easier
thanks to the Internet and online trading accounts
2. What is involved in an Initial Public Offering (IPO) process?
d. All of the above: A good track record, assembling an IPO team and
finding a securities dealer or investment bank to underwrite the IPO.
IPOs involve strategy, planning and resources. The company must consider
the current market, the costs and benefits, and the involvement of
other owners that will now be investing in the company’s stock. The
company must also assemble a team of experienced talent, including
accountants and attorneys who are familiar with the IPO process. The last
step in the process is to secure an investment bank willing to sponsor, or
underwrite, the IPO to the investment market.
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3. What influences business cycles?
c. Multiple components
Timing is one of the most important factors for a successful investment
strategy. However, this means being able to predict business cycles. Even
the most seasoned investor can find business cycles difficult because
there are multiple components that complicate determining when a
cycle will peak or bottom out. No specific condition, industry or trend
will decide the length or depth of a business cycle.
4. What partially defines a bull market?
a. A positive outlook about the current business cycle.
A bull market is one in which investors feel positive based on the current
business cycle as well as the state of the stock market and business
conditions. This means that investors move from spectator status to
active participants; like a bull, they charge into the stock market. They are
more willing to invest in the market and buy a greater quantity of stocks
and other securities. The increased buying activity leads to higher stock
prices. This further spurs investors to greater activity in the stock market.
5. What defines a bear market?
c. Investors become spectators rather than players.
Think of a bear market as the opposite of a bull market. Investors are
skeptical about what the future will bring, especially if there is an
economic downturn that indicates the potential for a recessionary business
cycle. Other business factors affect investor confidence as well,
including high unemployment, low consumer confidence, and any type
of credit crisis. This fear and lack of confidence leads to a retreat by investors.
They sell their stocks and securities and return to a spectator status
to see what might happen before they venture back to buying. This
behavior tends to cause stock prices to fall.
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6. What are the challenges involved in market timing?
d. All of the above: Understanding whether you’re in a bear or bull
market, knowing when to buy and sell, and having a sense of when
trends that affect business cycles are changing.
No one can be constantly right about market timing. Many investors
are perplexed about when to buy and sell; it makes sense to buy low
and sell high, but knowing when those two criteria are at their optimal
points is difficult. Many investors prefer to hold their stocks for the long
term and ride out numerous business cycles, while others like to study
economic, political and social trends to see when and how these will
affect business cycles. Others focus on the battle between bear and bull
markets to determine when the time might be right for buying or selling.
7. How should you pick the right broker to use for your investment portfolio?
b. Strong recommendations from a trusted family member, friend
or colleague.
Use the same strategy to find the right broker as you would for locating a
good lawyer, doctor or accountant. This means doing your own research
and reading up on what others might have to say about a specific
brokerage firm or broker. Consider the specific experience that a broker
may have and see that it aligns with your strategy, such as day trading
or conservative growth strategies. Lastly, you will want to consult with
trusted family members, friends or colleagues that can provide you with
some referrals. It is best to interview each referral candidate to see which
broker will meet your objectives and comfort level.
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8. Which of the four investments has shown the highest returns historically?
c. Stocks
Although today’s headlines may show tragic losses in the stock market,
there are also incredible gains to be won. Over time, investment research
has proved that the return on investment (ROI) of stocks has been significantly
higher than bonds, cash, or other types of investments. This difference
can add up to hundreds of thousands of dollars over a person’s
lifetime. Despite displaying daily or hourly positive and negative fluctuations,
informed investors understand that stocks deliver long-term
higher returns.
9. What are the benefits of investing in mutual funds instead of stocks?
d. It offers a way to diversify your investment portfolio and
minimize risk.
Mutual funds allow an investor to invest in a range of stocks rather
than put all eggs in one basket with a specific company or industry. It
is an easy and effective way to diversify without spending a ton of time
researching a number of companies, all the while still reaping some
attractive returns. However, before investing in mutual funds, be sure to
check on the fees that are involved in trading and managing mutual fund
investments. No one likes having great returns eliminated to pay off high
fees.
10. Which statement is true about investing in the stock market?
b. Low fees and no expenses usually lead to the biggest returns on
your money.
The stock market can increase your wealth over time, but there is risk
involved. The first step is to increase your knowledge base before you
invest; this requires research and even the help of a broker to understand
the components that influence the stock market. Use an online practice
account first before using real money, to better understand the dynamics
of timing. Then, managing your account yourself through a discount
online brokerage, you can minimize the costs involved.
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Chapter 3 Quiz
1. What makes up a trading or ticker symbol?
a. One to five letters
All stocks have a trading symbol used to identify them in stock markets.
These stock ticker symbol names only contain between one and five
letters. Some of the largest corporations only have one-letter stock
symbols. For example, “F” is Ford. Make sure to look up symbols before
making any stock purchases to ensure the right information and pricing.
2. How is the term Beta used to understand stock data?
d. It measures the volatility of a stock.
Understanding the volatility of a stock is a very important aspect of
investing in the stock market. The higher the number within the Beta
measurement, the more quickly the stock moves up or down; a lower
Beta number means the stock is less volatile.
3. What is a limit order?
c. An order to buy or sell at no more or no less than a specified
amount that has been set.
A limit order enables a broker to know your limits on what you are willing
to spend or receive in regards to a particular stock. If you decide to buy
a stock, you can tell your broker that you are only willing to spend $x
per share or less. If the stock goes higher than that amount today, your
broker will not buy it. If the stock drops to the same price or lower than
what you specified, the broker will buy the stock for you. The same rule
applies when you sell stock with a limit order.
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4. What does it mean to buy on margin?
a. You purchase securities using some of your own money and
collateral from stocks already owned.
To buy on margin means that you must use your own cash and loan
dollars that come from stocks or cash already in your portfolio. You can
only borrow up to 50% of the value of the securities that you plan to
buy. Although margin buying can be convenient and cost effective, it is
important to maintain control over these complex and somewhat costly
activities in order to avoid any financial problems.
5. What are the dangers in choosing a short selling strategy?
c. You may have to come up with money if share prices increase.
Short-selling stocks means that you sell stocks that you don’t actually
own. The strategy is based on the premise that you are betting that
a specific stock will continue to drop in price during the shorter term.
Your broker will sell these shares that either they have or borrow them
from someone else. If the price continues dropping past this point, you
can purchase the shares at a lower rate and put back the shares you
borrowed, making a decent profit. However, you will have to make up
the difference if you’re incorrect and the price rises.
6. What are reasons why a person may buy securities?
d. All of the above: Appreciation, income, control over company
operations.
Everyone has their particular reasons for buying securities and investing
in the stock market. The most common reason is the prospect of seeing
the stocks rise in value beyond the cost. Generally, investors want to
receive additional income through interest, dividends or other types of
earnings. For a select group, purchasing 20%-25% of a firm’s securities is
a way to gain control over a company operations.
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7. How should you plan your investment strategy?
b. Create a specific target or goal for all investment activities
Success only comes from planning and setting goals. Look at your
investment strategy as you would your career and other aspects of your
personal life. First, set a desired objective that will then guide your investment
activity path. Find a way to set a comparison target once you select
your investment strategy so that you can measure your performance. If it
is not working, this will help you redirect your investment path to meet
your intended target.
8. How can you classify your stock purchases to record gains and losses?
d. All of the above: Hold to maturity, trading securities, available for
sale.
Use the Fair Market Value method for tracking gains and losses made
when buying for appreciation or income. Then, carefully select the other
options you plan to use for classifying your purchases. You can hold a
bond or similar investment until it matures; hold securities for less than
a year and even trade them daily; or hold securities for over one year but
not until maturity. Leave the accounting and tax issues related to these
gains and losses up to your broker, accountant and tax advisor.
9. How does the S&P 500 Index serve as a common stock market benchmark?
a. It averages the prices of 500 companies for a view of the overall
stock market direction.
The S&P 500 index gauges the overall direction of the stock market
based on the largest 500 U.S. companies and creates an average. This
serves as a benchmark for investors and brokers that can help them
decide how well their stock portfolios are doing. Other indices also help
to determine what investment decisions should be made in the shortterm.
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10. When preparing to make stock trades, what is the best advice?
b. Stay positive and focused and keep gathering solid knowledge.
Continually adding to your knowledge about the stock market is one
of the best ways to head out onto the investment playing field. Stay
focused on your game plan with a set of clear objectives and the path
you intend to take. Despite potential volatility and challenging economic
times, stay positive that trading stocks can fulfill appreciation and
income goals.
Chapter 4 Quiz
1. What are some diversification options?
d. All of the above: Precious metals, international and emerging
markets, and stocks across market caps.
To accomplish the goal of minimizing portfolio risk, there are a number
of ways to diversify the investments you make. Precious metals, international
and emerging markets, and a wide range of market caps are just
three ways to diversify a portfolio beyond just stocks. You can also opt
to diversify across industries and dividend yields. Do your homework
and consult with your broker before adopting any of these diversification
strategies.
2. What is the Sharpe Ratio Index?
a. A measure of risk that helps you select the right stocks.
The Sharpe Ratio was created forty years ago by Nobel prizewinning
economist William Sharpe. The index has helped investors find out if the
high returns they have received came from their investment strategy,
or if the results were related to higher risk and volatility. Using the index
may help to select the right stocks that work for you and your investment
plan.
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3. What can be learned from Warren Buffett’s approach to investing?
c. Use a buy-and-hold strategy.
As one of the most successful investors, Warren Buffett has relied on a
buy-and-hold strategy, rarely selling anything that he holds in his portfolio.
He is not interested in rumors or pure market price indicators. Instead,
he studies companies to determine their values, products made or sold,
management, profitability and future growth projections.
4. What is Peter Lynch’s primary investment theory?
a. Invest in what you know.
While some investors will tell you to spend your time reading books
and learning about complex investing strategies, Peter Lynch will tell
you to invest in what you know. Focus on your “local knowledge” and
use personal industry experience to purchase securities. While a broker
can give you advice, where you work and what you know can also pay
dividends.
5. How can you find under-valued stocks?
c. Find “non-losers” and invest in companies you know.
While many investors like to follow the crowd and copy what others are
investing in, this will not lead to the true bargains that will maximize your
investment dollars. Instead of researching at the library or waiting for an
economic downturn, focusing on your own industries and knowledge of
securities will help you find undervalued securities that are flying under
the radar.
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6. What can stock screeners do?
d. All of the above: Filter on results on expected returns and risks
along with projected results; offer suggestions for growth and
effective strategies; and find stocks of interest that match your
desires.
Stock screeners are a user-friendly way to save time. These software
programs accept your financial parameters and investment preferences
and offer a range of information on returns, risks, and results while also
offering stock suggestions that will yield growth and meet specific
strategies. While some stock screeners are free, others are offered on a
subscription basis.
7. What is a “ten-bagger?”
b. A stock that returns ten times your original purchase price.
A “ten-bagger” is a term coined by Peter Lynch for stock that can return
ten times your purchase price. It falls into the category of “non-losers”
that can yield true bargains. That’s not to say that you can’t maximize
your investment dollars with a few two-baggers or four-baggers that are
relatively unnoticed, under-valued stocks.
8. What is The Motley Fool?
c. An information website for financial news and investment
strategies.
The Motley Fool, aka Fool.com, is an informational website that mixes
humor and sarcasm with practical investment and financial advice. It also
features news and editorial information for the investment community.
The website has been around since 1993 and is considered one of the
foremost sources for full-service financial information.
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9. What other sources are valuable for investment information?
d. All of the above: MSN Money, Yahoo! Finance, and TV shows.
The volume of investment and financial information is increasingly daily
as more investors enter the stock market and seek ways to maximize
their earnings. MSN Money, Yahoo Finance, and AOL Finance all offer
stock quotes, blogs and strategies designed to expand investor knowledge.
Jim Cramer is a journalist, lawyer, and “infotainer” who provides
investors with edgy advice on hot investments. Numerous other television
shows and websites offer additional information.
10. What can the right tools help an investor achieve?
b. Better investment decisions.
Having the right tools will help an investor be more confident and
enhance their knowledge so that they can make better investment
decisions. These tools will also help an investor handle confusing and
complex issues related to investing in securities tied to risk, timing, and
economic uncertainty. The tools will help construct a thoughtful plan
and strategy that will create a successful investment portfolio.
Chapter 5 Quiz
1. What is the best course of action when faced with two stocks, one gaining
value, the other losing value?
a. Sell the losing stock and hold onto the winning stock.
It makes perfect sense to sell the winning stock and collect the profit.
However, this is not the strategy that an experienced investor would
choose. It’s better to cut your losses with the losing stock before the
losses increase. If your winning stock has fuelled a profit, then it is likely
that the market value will increase. As they say in Vegas, “Let it ride!”
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2. What does it take to re-coop your losses on a losing stock?
b. A percentage gain larger than the loss.
The more your losing stock goes down in value, the bigger the percentage
gain you will need to make up for that loss. If your stock has lost 15%
of its value, then you will need to achieve a gain of 18% on that stock
just to break even on what you invested. If you continue to hang onto
the losing stock, you may need a 100% gain in order to break even on a
loss in value of 50%. Waiting for that stock to double in price is often not
worth it. Time to dump the loser!
3. If you make a profit on a stock trade, this means that:
a. Someone else took a loss.
The stock market is a zero-sum game. When you make money, someone
else must lose money. The stocks exchanges make small fees in every
trade made, and your broker will also make a small fee. Taxes on your
trading profits, if any, won’t be due until later, depending on your tax
situation.
4. How should you view your stock purchases?
c. Stocks are a business, so sell without remorse and move on.
Stocks are not your children, friends, pets, or security blanket in retirement.
You are not there to rescue a company or feel sorry for an organization
that is failing. They are not a charity case. Purchasing stocks
should be viewed as a business only. If you are looking for a hobby, take
up something else. It may be hard to admit that a stock pick wasn’t right,
but accept it and move on. Your buyer’s remorse will only grow if you
don’t discard the losers!
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5. When is it advisable to disregard the “ride your winners, dump your losers”
strategy?
c. When you feel the stock market is at a top (sell!) or the stock is a
value investment (buy!)
Veteran investors often get a feel for when the market is about to top
off on a particular stock. At this point, it’s best to sell to attain maximum
value. Conversely, if you see long-term value in a “loser” stock based on
a company’s core value, management quality, product desirability, and
solid future projections of success, then consider buying the security as a
value investment.6. How can you identify market tops?
d. All of the above: Noticing market liquidation, tracking activity
and spotting a downturn, and paying attention to volume and
average of the Dow 30, Nasdaq Composite and S&P 500.
To stay on the offensive, experts believe there are three key indicators
that will help you identify market tops so you can maximize profit
potential. When investors are selling off stocks over a one to three-week
period, it may indicate that the market has peaked. Also, look for this
type of activity over a four to five-day period as this signals that the
market mood has changed. The volume and averages on the Dow 30,
Nasdaq Composite, and S&P 500 are also good indicators.
7. What is the point of an exit strategy?
b. It’s a way to get out of investments before they kill your portfolio.
Experienced investors know that it pays to have an exit strategy in place
before they even enter into an investment. This plan will help you determine
what you are trying to accomplish with your investments, help set
limits on market values during the upside and downside, and provide
you with a roadmap on how to get out of investments so you don’t let
emotion or panic attacks get the best of you and your money.
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8. What actions will help you stick to your exit strategy?
b. Initiating Stop-Loss Orders.
Stop-Loss Orders are an excellent tactic for staying the course with your
exit strategy. Having these orders in place with your broker will direct
him or her to sell a security when it reaches a pre-determined price. You
most likely already built this into the quantitative considerations of your
exit strategy. The Stop-Loss Order will immediately become a market
order to execute when your price point is reached.
9. What are some considerations that should dictate your exit strategy?
d. All of the above: How long you plan to own the security, your
preferred level of risk, and your target exit price point.
To develop a thoughtful exit strategy based on fact rather than emotion,
it is important to ask yourself all of the above questions and think of
answers so that you will not be tempted to change direction after your
plan is in place. Time, risk, and price are the key factors that can all have
values assigned to them in order to protect the value of your portfolio.
Keep to the main idea to maximize profits and cut losses.
10. What are Trailing Stop Orders?
b. An order that sets a distance between the market price and a stop
order.
Considered a modified version of a Stop-Loss Order, the Trailing Stop
Order allows you to set a distance between the market price and your
stop order that helps on the upside. As long as the price on your security
continues to rise, your Trailing Stop Order will follow the rise in
value. If the stock begins to fall, your Trailing Stop Order will be there
to issue a market order to sell, helping you to protect the value on your
investment.
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Chapter 6 Quiz
1. Which attribute would one look at to determine a stock’s fundamental
value?
d. All of the above: Competitors, revenue and profit margin, and
company management.
To determine the value of a stock, there are certain attributes to consider,
including competitors, company management, products in the pipeline,
revenue and profit margins, and earnings estimates. These fundamental
aspects of a company will help you decide if you want to buy or sell a
stock.
2. Which “red flag” could deter a stock purchase?
a. Company earnings are average and cash flow is weak.
A company could have a number of positive fundamentals, such as innovative
products, great management, and minimal competition. But, if
these attributes are not delivering good earnings and a strong cash flow,
think twice about buying stock in that company.
3. What should determine an actual profit?
c. Total operating results and consistent net income.
Operating results should be separated from the overall profit-generating
information. Extraordinary events that deliver windfall profits should not
be the deciding factor. You can also not assume that one-time charges
against earnings are a sign not to invest. Focus on consistent net income
and the total operating results picture.
4. Which factor determines a company’s long-term viability?
d. Ensuring excellent cash flow.
Consistent profits are not the only way to achieve long-term viability.
Cash flow helps a company always meet its operating, marketing, and
debt obligations even in the face of tight profit margins. It’s what ensures
that a company can make it through all types of economic cycles.
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5. What do 10-Qs and 10-Ks do?
c. Display all pertinent information without the PR spin.
The SEC requires that public companies file three 10-Qs and one 10-K
each year. These documents must contain truthful data and straightforward
information on the company’s performance. Companies can then
save the spin factor for their annual reports.
6. What is revenue?
c. Sales-generated cash or cash equivalents.
Revenue is all the sales generated as cash or cash equivalents on products
or services. While income may seem like the same as revenue,
income actually includes revenue from non-sales related sources.
7. To the investor, what does a company’s earnings help to indicate?
d. All of the above: Long-term viability, profit available to
shareholders, and market value.
Earnings are computed by subtracting operating expenses and taxes
from the total company revenues. Tracking earnings over time will
enable an investor to gauge the company’s future performance based on
past measures of profitability, growth, capital increase, and market value.
8. How should one view revenue and earnings estimates?
c. Explore what criteria and assumptions led to those estimates.
While you should never invest strictly on an earnings estimate because
these tend to be more of a company’s performance wish list, don’t disregard
the information. Research why these estimates were made, consider
an expert’s opinion for more context, and weigh other attributes as part
of your decision.
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9. What should one do when making an investment decision?
d. Consider the competition’s product, marketing, tactics and
financial track record.
Companies must know their enemy (the competition) well in order to
make effective strategic decisions. Likewise, investors need to do their
homework on what a company’s competition is doing now or in the near
future in order to make the right strategic investments.
10. What are alpha and beta strategies?
b. Investment components that measure stock performance factors,
market risks, and stock behaviors.
Alpha and beta strategies are important and complex investment
components that often require computer software and modeling techniques.
These components measure stock performance factors (alpha) as
well as market risks and stock behaviors (beta). Remember to maximize
the alpha components while minimizing the beta factors.
Chapter 7 Quiz
1. What does technical analysis look at for investment purposes?
d. The price at which the stock trades.
While fundamental analysis looks at what a company produces, its
competition, and how much profit the company makes, technical analysis
is only concerned with the price at which the stock trades. This makes
technical analysis more objective, while fundamental analysis is more
subjective. To conduct a technical analysis, it’s important to look at the
history of stock trades for each company.
2. What should you consider when analyzing different stock charts?
a. Is the stock in an upward or downward trend.
When starting out, there are a minimum number of questions to ask as
you analyze stock charts, including whether the stock is in an upward
or downward trend. You will also need to consider the moving average,
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chart patterns, volume numbers and gaps in the buying or selling trends.
From this, you may also want to consider what might follow in the future
from what the stock charts show.chapter eight
3. What is the Cup-with-Handle pattern?
b. A price fall that bottoms out and rises again.
The Cup-with-Handle pattern is one of the most well known stock
patterns. It appears to look like an inverted semi-circle. The shape reflects
that the stock price has fallen, bottomed out, and then started to rise
again. The cup develops first followed by the handle. If the price goes
beyond the upper, right side of the cup, then the pattern is confirmed.
4. When should you buy a stock in the Cup-with-Handle pattern?
a. After the handle is formed and price begins to rise.
While the bottom of the cup formation would be ideal since the price
could be the lowest, there is risk to consider. That’s why experts suggest
buying after the handle begins to ascend as this is where the breakout
can occur, leading to greater potential profit from the investment. Pay
attention to the depth of the cup on the right side of the pattern as this is
a sign that a potential price increase will occur.
5. What is a Head and Shoulders pattern?
c. A bearish signal that prices will fall after the pattern formation is
done.
While all stock patterns may seem to follow this up and down pattern,
the real ones are tough to identify. The left shoulders come from high
volume numbers followed by a market reaction where price decreases
and the volume goes down. This continues until another head is
completed followed by another lower volume period to complete the
shoulders.
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6. What is a breakout?
b. When a stock price moves past and continues through former
high and low periods.
A breakout occurs when a stock price does something different from
what it has done in the past. It is able to surpass all past high or low price
points. The duration for which this has occurred will provide the basis for
determining the significance of this breakout period for the stock and
could be an indicator of future performance.
7. What are some common names for trendlines?
d. A and C, both Flags and Wedges.
As an important part of all stock chart analysis, trendlines come as different
types. A wedge is a triangular shape formed where two trendlines
intersect. A bearish or bullish wedge can also resemble a flag. A bearish
wedge slants upwards, indicating that prices are breaking below the
lower trendline. A bullish wedge slants downwards and occurs when
prices break above the upper trendline.
8. What are candlesticks?
d. A Japanese stock chart that is made up of vertical blocks rather
than trendlines.
The Japanese developed this type of stock chart to track stock price
movements over an extended period. This bar chart is considered easier
to understand and provides a better visual way to track immediate and
short-term market moves. Some of the patterns include Hanging Man,
Morning Star, Evening Star, and Kicker.
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9. What is a MACD?
c. A graph that shows the difference between the fast- or slowmoving
averages of a stock’s price.
While it may seem very confusing, this acronym for Moving Average
Convergence/Divergence is a graph that even a modest investor can use to
identify significant trend changes in stock prices. Using the MACD indicator
may even help you track the price path of a stock just like the big
investors.
10. What is the objective of Bollinger Bands?
c. Identify a relative definition of high and low stock prices over a
certain time period.
This technical analysis tool measures the highs and lows of a stock price
relative to previous trade data, providing a trading band where investors
can identify the bandwidth of highs and lows of a particular stock. These
trends can also help pinpoint and measure the volatility of a stock that
will help determine your investment decision about a particular stock.
Chapter 8 Quiz
1. What defines an investment bubble?
a. Prices go up too much, too fast and back down too quickly.
Investment bubbles always implode and are characterized by certain
non-sustainable price changes or cash flow patterns. During these
periods, prices increase quickly and eventually drop suddenly. Examples
include the Japanese stock market bubble of the 1980s and the dot.com
Internet stock bubble of the late 1990s.
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2. How can you recognize an investment craze?
d. All of the above: Study stock charts, be aware of news headlines,
listen to conversations.
Be careful about following what is popular in the stock market. Just
because the media has created splashy headlines about a stock or a
fellow partygoer raves about a great investment doesn’t mean that it’s
the right choice. Popular wisdom is not as reliable as studying stock
charts and conducting your own research.
3. Day trading involves buying and selling investments:
c. Within the same day
Day trading involves buying and selling all types of investments on a
daily basis and within the same day. This activity can be done one or
more times per day. Day trading can be an exciting way to make money
if you know what you are doing. New investors may want to avoid this
strategy since it can also be quite risky.
4. What is swing trading?
a. Buying when the price gets to the bottom of the channel
An investor needs to first identify channels or tunnels of price movements
on a stock chart. Then, it is important to wait to buy until the
price reaches the bottom boundary of the channel, selling it only
when it reaches the top. This type of trading also requires research and
experience.
5. What are penny stocks?
b. Stocks that sell for less than $5.00
Newer and smaller investors like these stocks because they are low-cost
and traded outside of the major stock exchanges. Despite their relative
affordability, penny stocks still carry high risk. Companies that offer these
stocks are often not covered in research reports and may not be required
to file financial information to the SEC, so they may be difficult to analyze.
These types of stocks can also be subject to “pump and dump” scams.
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6. What is a buy-and-hold philosophy?
c. Hang on to stocks to realize long-term gains and profit
As a popular long-term investment strategy, buy-and-hold maintains
that an investor should hold onto a stock for years, even if it experiences
wide price swings or a brief downturn. Unlike day traders or swing
traders who focus on shorter-term volatility for greater profits, worldrenowned
investors like Warren Buffett have proved that buy-and-hold
can build a sizable investment portfolio.
7. What is the result of the “growth at any price” philosophy?
d. All of the above: Big gains, big losses, unsustainable gains, and
an eventual shift back to a more conservative strategy.
The dot-com bubble illustrated that the “growth at any price” philosophy
made many millionaires, and just as quickly took that instant wealth
away. Stocks were not able to sustain their incredible growth over the
longer term, leading to serious losses. After that event, there was a shift
to more value investing, which is focused on the philosophy of “growth
at a reasonable price” or GARP.
8. What is insider trading?
c. A transaction that involves private knowledge about a company
and its stocks and securities.Insider trading is illegal and unethical
only when those within a company get confidential material information
about the company that they can use to make decisions about buying
and selling their own company’s securities. This creates an advantage
over those public investors that are not privy to the same information
to make their investment decisions. These illegal profits then violate an
employee’s fiduciary responsibility. However, insiders also make many
legal stock transactions as part of their compensation for employment
with the company.
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quiz answers
9. What is investor sentiment?
a. The stock market’s attitude towards specific stocks, industries, or
market conditions.
Investor sentiment, or market sentiments can be described as bullish,
bearish, or neutral. It can have a significant impact on day traders or
swing traders when they make their decisions because it provides a sign
about how securities, industries, or market conditions are viewed. Some
companies even create indexes that help investors track this sentiment,
thereby affecting market prices.10. What does arbitrage involve?
b. Price differences across two or more markets for the same
investment.
Arbitrage allows investors to take advantage of price differences in at
least two different markets for the same investment, which can help
create significant profits in an upside market. It can also work as a defensive
strategy that protects investors from major losses. Although somewhat
confusing for new investors, it is a strategy worth learning.
Chapter 9 Quiz
1. What are options?
a. Agreements between a buyer and seller that give the buyer the
right, but not the obligation, to buy or sell something in the future.
Used in the business and investment community, options are contracts
that provide a buyer and seller with the right to work together in which
they agree to buy or sell something in the future at a price that works for
both parties. There is no obligation to continue the contract in the future
for either the buyer or the seller. The buyer must pay a fee to the seller
for this arrangement.
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wall street survivor • investing 101
2. What are the most important factors to consider with options?
d. All of the above - the agreement, the strike price, the cost of the
option and conditions including the expiration date.
Whether it is a house, stock, bond, commodity or future, any options
arrangement must include such important factors as a formal agreement,
the strike price, the expiration date, the cost of the option and
any other specific conditions upon which both parties agree. The actual
option item becomes less important than the factors involved in the
agreement.
3. What are LEAPS?
a. A call option set to expire in one year or more.
LEAPS are call options that are set to expire in one year or more in the
future. These options are a cost-effective way to invest in your favorite
stocks. A call option provides the option to buy an agreed quantity of
securities for an agreed price at an agreed date in the future.
4. What are put options?
b. An option to sell at an agreed upon-price.
A put option means that you believe that the price of a security will
decrease in the future and you are buying the right to sell it at an agreed
upon strike price in the future. The benefit of put options is that it helps
you limit your losses without infringing on your ability to turn a profit.
5. What do writing covered calls enable an investor to do?
c. The buyer can perform the agreement without incurring further
risk.
Writing covered calls illustrates just how complicated the sell side can
be versus the buy side. The seller of the call owns an equal amount of
the securities. The buyer is covered because it is the seller that owns the
underlying security, so they have the ability to complete the transaction
without any other action.
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quiz answers
6. What does volatility mean for an investor?
c. A calculation that compares the current market price and
theoretical future value.
Implied volatility is a sound probability equation that compares the
current market price of a stock with the theoretical value of the market
price in the future. Both option buyers and sellers must realize that volatility
is different for each kind of security, especially when making decisions
about call or put options. This will impact the buy and sell price.
8. What is a common mistake new investors make?
b. Disregard option spreads.
While some new investors may not venture into the options world, those
that do can make the mistake of not considering option spreads, which
can impact the overall success of their investment strategy. As a strategic
building block, a spread position is a way to measure the strike prices
and/or performance data of various options to pick the best securities for
your investment portfolio.
9. What can the Black-Scholes calculations help you do?
c. Help protect your trading choices.
The Black-Scholes calculations and theories are primarily for people who
like to do math. However, when simply considering the calculations for
what they are instead of how they were developed, the information from
the calculations can help you protect your trading choices by providing
answers about your options activity.
10. What does the put-versus-call interest do?
a. Measure overall market sentiment.
The market reacts to put and call options for various securities in the
same way that it adopts a bull or bear mentality. This can be just as
important to consider alongside the available scientific data;. the interest
level of others in the options market impacts the “mood” of the market
and should be factored into your investment decisions.
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wall street survivor • investing 101
Chapter 10 Quiz
1. What is one of ten important investment keys to remember?
a. You can’t really beat the market.
While people will continue to try and beat the market, it is not worth
putting your energies into something that will never happen. Instead,
develop an investment strategy and action plan for a portfolio that suits
your comfort level, personality, and goals. Be sure to focus on protecting
yourself against certain potential risk factors while designing a diversification
strategy that provides investment growth.
2. What types of stocks should you invest in?
d. Stocks that you know.
Hot stocks tend to be the ones that you end up paying too much for
and that can quickly lose favor with investors as they scramble onto the
“next big thing.” Unless you have the inside track and get there before
the crowds, focus on the stocks that you know based on personal and
professional knowledge of the companies, their products, and their
services. Many people have made sizable fortunes following this strategy.
3. What is risk capable of doing?
a. Making a lot of money or losing it all.
Risk can generate a profit just as quickly as it can take one away. It is
important that an investor understand their total risk in terms of what
types of securities they opt to invest in, how much and for how long,
and whether or not they will have the cash flow to handle the significant
volatility that can be associated with some types of risky investment
strategies.
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quiz answers
4. What should you remember about investment advice?
d. All of the above: fees are negotiable, do your own homework,
control your own investment destiny instead of paying someone
else to do it.
Too many investors overpay for investment advice instead of being more
confident in their own abilities to research, understand, and make investment
decisions. With the help of the Internet, more information is available
to help you do your homework so that you can control your investment
destiny.
5. How should investment decisions be based?
c. On careful research.
Don’t make decisions to sell a stock because you are in a panic that a
stock dropped ten percent in one day. Start researching why there was a
decline and consider all the factors related to this decrease. Don’t make a
snap decision or be swayed by what others may be doing. Make a decision
based on your research about whether to hold or to sell.
6. What should you assume about the past and the future?
d. Assume nothing and do the research first.
Never assume that the past is an indication of the future of a how a
company and its stock will perform. There are always flukes and unforeseen
factors that can make the future better or worse than the past. It is
important to do the research rather than focusing on exciting, yet wild,
investing chances.
7. What happens when an investor over-diversifies?
a. They are spread too thin.
While it is a good strategy to diversify, an investor can go too far by
buying too many different stocks or securities. It can lead to confusion
and substantial trading fees. It is important to keep a balance to
your overall investment portfolio.
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wall street survivor • investing 101
8. What is a key trait of a successful investor?
b. Staying informed.
Stay on top of what’s going on with the securities you own, as well as
the mood of the overall market. You can do this by reading online investment
newsletters, news sites, blogs, forums, newspapers and magazines.
Enhance your money management techniques by adding new ideas
when you are ready to advance your knowledge. Don’t forget to read the
the latest news, opinions and advice at Survivor University!
9. What is central to investment performance success?
c. Practice.
There is the old adage that practice makes perfect, and so it goes with
investing. Good investors aren’t born that way, they must practice like
everyone else and continue their lifelong education. Take more investment
courses, learn from mistakes, and keep detailed notes on investment
activities. Accurate records allow you to review past decisions to
help chart a better investment course for the future. (This is where the
Trade Diary comes in handy!)
10. What should your overall action plan include?
a. A workable investment strategy.
Like a workout regimen, you need to develop a workable investment
strategy that feels comfortable for you so that you’ll be able to stick with
it. You must include strategies that relate to who you are, the state of
your financial health, and evaluations that relate to the current economic
situation. Other factors to take into account include your age, asset and
debt positions, income and cash flow, expenses, retirement and savings
plans.
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quiz answers
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Page 192 of 214

Attachment C
Analysis of Stock Market
Investment Strategies
Page 193 of 214

ProjectNumber:0903
AnalysisofStockMarketInvestmentStrategies
AnInteractiveQualifyingProjectReportSubmittedtothe
Facultyof
WORCESTERPOLYTECHNICINSTITUTE
inpartialfulfillmentoftherequirementsforthe
DegreeofBachelorofScience
by
GrahamPentheny
ComputerScience
InteractiveMediaandGameDevelopment
August2009
ApprovedbyProfessorDalinTang,ProjectAdvisor
______________________________________

TableofContents
I.Acknowledgements………………………………………………………………………………………4
II.Abstract………………………………………………………………………………………………………5
III.ListofFigures.……………………………………………………………………………………………6
IV.ListofTables……………………………………………………………………………………………...8
1.Introduction……………………………………………………………………………………………..10
1.1Goals………………………………………………………………………………………………….10
1.2HistoryoftheStockMarket………………………………………………………………...10
1.3ProsandConsofFinancialInvestment………………………………………………..11
2.FinancialInvestmentOpportunities…………………………………………………………13
2.1Stocks………………………………………………………………………………………………..13
2.2Bonds………………………………………………………………………………………………..14
2.3CertificatesofDeposit………………………………………………………………………..15
2.4MutualFunds…………………………………………………………………………………….16
3.StockMarketTradingStrategies……………………………………………………………….17
3.1DayTrading…………………………………………………………………………….………….17
3.2SwingTrading……………………………………………………………………………………18
4.SimulatedInvestmentsandTheirResults………………………………………………...19
4.1GoalsandStrategies…………………………………………………………………………...19
4.2CompanyProfiles…………………………………………………………………………….…19
4.2.1AppleInc.…………………………………………………………………………….19
4.2.2MicrosoftCorp.…………………………………………………………………….20
4.2.3RaytheonCompany……………………………………………………………….22
4.2.4GoogleInc.…………………………………………………………………………...23
4.2.5ElectronicArtsInc.……………………………………………………………….24
4.2.6NVIDIACorp.……………………………………………………………………….25
2

4.2.7IntelCorp.……………………………………………………………………………26
4.2.8AdvancedMicroDevices,Inc.………………………………………………..27
4.2.9Yahoo!Inc.…………………………………………………………………………...28
4.3Simulation1:SwingTrading……………………………………………………………….29
4.3.1Week1…………………………………………………………………………………29
4.3.2Week2…………………………………………………………………………………35
4.3.3Week3…………………………………………………………………………………37
4.3.4Week4…………………………………………………………………………………39
4.3.5Summary……………………………………………………………………………...41
4.4Simulation2:DayTrading…………………………………………………………………..42
4.4.1Week1…………………………………………………………………………………42
4.4.2Week2…………………………………………………………………………………45
4.4.3Week3………………………………………………………………………………....48
4.4.4Week4…………………………………………………………………………………50
4.4.5Summary……………………………………………………………………………....53
5.Conclusion………………………………………………………………………………………………..55
References…………………………………………………………………………………………………….57
Appendix:CompleteTransactionRecord……………………………………………….........59
3

I.Acknowledgements
IwouldliketothankDr.DalinTang,ProfessorofMathematicalSciencesand
Biomedical Engineering, Worcester Polytechnic Institute, for his advisement over
thisproject.Iwouldalsoliketothankmyfriendsandfamilyfortheirsupport.
4

II.Abstract
Thisinvestigationfocusedonwhatmakesaninvestorprofitableinthestock
market.A3‐weekinvestmentsimulationwasconducted,utilizingdaytradingand
swingtradingstrategies.Thefactorsthatattributedtothesuccessofthesimulation
were analyzed, and used to increase investing power and ability. The knowledge
gained through this experiment will be used to make intelligent and informed
investmentdecisionsinthefuture.
5

III.ListofFigures
Figure1:AppleInc.(NASDAQ:AAPL)Year‐To‐DatePriceChart…………………………....20
Figure2:MicrosoftCorp.(NASDAQ:MSFT)Year‐To‐DatePriceChart…………………...21
Figure3:RaytheonCompany(NYSE:RTN)Year‐To‐DatePriceChart……………………22
Figure4:GoogleInc.(NASDAQ:GOOG)Year‐To‐DatePriceChart………………………….24
Figure5:ElectronicArtsInc(NASDAQ:ERTS)Year‐To‐DatePriceChart……………….25
Figure6:NVIDIACorp.(NASDAQ:NVDA)Year‐To‐DatePriceChart……………………...26
Figure7:IntelCorp.(NASDAQ:INTC)Year‐To‐DatePriceChart……………………………27
Figure8:AdvancedMicroDevices,Inc.(NYSE:AMD)Year‐To‐DatePriceChart…….28
Figure9:Yahoo!Inc.(NASDAQ:YHOO)Year‐To‐DatePriceChart…………………………29
Figure10:AppleInc.(NASDAQ:AAPL)PriceChart(June9th‐June19th,2009)…....30
Figure11:GoogleInc.(NASDAQ:GOOG)PriceChart(June9th‐June19th,2009)….32
Figure12:RatheyonCorp.(NYSE:RTN)PriceChart(June9th‐June19th,2009)…..33
Figure13:GoogleInc.(NASDAQ:GOOG)PriceChart(June30th‐July10th,2009)…38
Figure14:FordMotorCo.(NYSE:F)PriceChart(June17th‐June27th2009)………44
Figure15:RockwellMedicalTechnologies(NASDAQ:RMTI)PriceChart
(June23rd–July3rd,2009)………………………..…………………………………………...46
6

Figure16:AppleInc.(NASDAQ:AAPL)PriceChart(June30th‐July10th,2009)…...49
Figure17:NovellInc.(NASDAQ:NOVL)PriceChart(June30th‐July10th,2009)….50
Figure18:GoogleInc.(NASDAQ:GOOG)PriceChart(July7th‐July17th,2009)……52
7

IV.ListofTables
Table1:AAPLTransactions(June17–June26,2009)…………………………...………….…30
Table2:MSFTTransactions(June17–June26,2009)………………………………………..31
Table3:GOOGTransactions(June17‐June24,2009)…………………………………………32
Table4:INTC,NVDA,ERTS,YHOO,AMDTransactions(June17th–
June26th,2009)……………………………………………………………………………………...34
Table5:GOOGTransactions(June24‐June26,2009)………………………………………….35
Table6:RTN,GOOG,AAPLTransactions(June29th‐July3rd,2009)…………………...36
Table7:AAPL,GOOG,MSFTTransactions(July7th,2009)…………………………………..37
Table8:AAPL,GOOG,MSFTTransactions(July9th,2009)…………………………………..38
Table9:AAPL,NOVLTransactions(July15th,2009)……………………………………….......39
Table10:NOVL,AAPLTransactions(July16th,2009)…………………………………………40
Table11:GOOGTransactions(July17th,2009)…………………………………………………...40
Table12:CTV,CSXTransactions(June23rd,2009)……………………………………………..42
Table13:FTransactions(June23rd,2009)…………………………………………………………43
Table14:RHT,TCKTransactions(June25th,2009)…………………………………………….44
Table15:GOOG,YHOO,MSFTTransactions(June26th,2009)……………………………..45
8

Table16:RMTITransactions(June29th,2009)…………………………………………………..46
Table17:GOOGTransactions(July1st,2009)……………………………………………………..47
Table18:GOOG,AAPLTransactions(July6th,2009)…………………………………………...48
Table19:NOVLTransactions(July10 th ,2009)…………………………………………………….49
Table20:ORCL,AAPLTransactions(July14th,2009)………………………………………….51
Table21:INTC,GOOGTransactions(July16th,2009)………………………………………….51
Table22:FTransactions(July17th,2009)………………………………………………………….52
9

1.Introduction
1.1Goals
The main goals of this project were to investigate possible investment
opportunities, logically weigh their respective risks and benefits, and make educated
investment decisions. A detailed understanding of the risks and opportunities for high
return presented in each investment opportunity were obtained through extensive research
and analysis. This knowledge will aid in the future selection and execution of intelligent
investments.
A 3-week, $100,000 simulated stock market investment was made.
This
simulated investment tested the strategies researched, and helped in the understanding of
the stock market in general. This experience facilitated the identification and anticipation
of market trends, and thusly influenced future investment decisions.
1.2HistoryoftheStockMarket
A stock market is “a place where stocks, bonds, or other securities are bought and
sold [1].” A share of stock, informally referred to as “stock,” is a share in the ownership
of a corporation. Stocks entitle the owner to voting rights in major company decisions.
Stocks can be bought and sold at a price determined by the financial success of the
corporation and the overall demand for the corporation’s stock. A bond is essentially a
loan from the investor to an individual or organization, often the government, which
promises to repay the debt with interest at a later date.
10

The New York Stock Exchange (NYSE) was the first stock market to be
established in the United States, tracing its roots back to 1792. The NYSE is also the
largest stock exchange in the world in terms of capital invested.
The combined
capitalization of all companies listed in the NYSE as of May 2009 is $10.4 trillion [2].
Over 419 billion stocks are traded each year, at an average price of $24.87 per share [2].
The financial well being of the United States is often judged by the performance of stocks
in the New York Stock Exchange.
A stock market crash is a sudden decline in the average price of stock. Panicked
investors withdrawing their money, as well as underlying economic instability drive stock
market crashes. The great 1929 crash of the NYSE was a primary cause of the Great
Depression, the worst economic crisis the United States has ever seen. More recently, the
NYSE crash of 2008 was caused primarily by securities on defaulted loansgiven to
under-qualified individuals. Many large banks and loan-issuing organizations collapsed
because of these defaulted, “sub-prime” loans. The crash of the NYSE affected the
economies of many other countries as well, leading to the world financial crisis of 2008.
1.3ProsandConsofFinancialInvestment
Investing money into unpredictable, unstable, and uncontrollable facets can be
extremely risky. Like the lottery, the success of stock market trading is partly attributed
to luck.
Many people have lost vast amounts of money through poor investment
decisions that they’ve made. Recently, investors with shares in loan-giving companies
and American car manufacturers, which were previously a fairly stable investment, have
11

suffered severe losses due to the economic crisis. Investors must understand and accept
this risk as an intrinsic part of investing.
There are, however, attractive benefits to successful financial investments. With
intelligent decisions, investing can yield significant capital gains, stability, and security.
By analyzing the trends of the stock market, the companies one is invested in, and by
followingan investment strategy, one can be successful in the stock market. There has
been much research into various ways of analyzing the stock market as a means of
facilitating intelligent investment decisions. These “intelligent decisions” are paramount
to the success of an investment, and will be examined in this experiment.
12

2.FinancialInvestmentOpportunities
2.1SharesofStock
The most well-known investment opportunity is shares of stock in a company.
The general public is not allowed to trade stock in the New York Stock Exchange;
instead the public trades through stockbrokers. Stockbrokers will buy or sell stock on
behalf of an individual for a commission, and often distinguish themselves by the
investment advice they give their customers. The popularity of the Internet has facilitated
websites offering a means for customers to trade stock for a minimal fee (usually around
$10 per trade). The Internet has also broadened the trading power of the stock exchange,
allowing for millions of shares to be bought and sold each day.
Investment in stocks can be risky. The return on investment (ROI) of stock can
be hard to predict, as the price of stock is determined by the financial success of the
company, the demand for that company’s stock by investors, and the overall confidence
investors have in the market at a given moment. Investment in the stock market depends
as much upon factual, logical decisions as well as “gut-feeling” emotional ones. For this
reason, there are many stock market investment strategies that help investors make tough
decisions. Investors may choose to have their stock “portfolio” (the investor’s collection
of stocks) managed by their stockbroker, thereby removing the burden and responsibility
from the investor. Many stockbrokers advertise a guaranteed yearly return percentage as
an incentive to invest money with them. The investor trusts their stockbroker to make
successful investment decisions on their behalf, forfeiting a portion of the return as
commission.
13

Because of its relative unpredictability and therefore inherent possibility for huge
returns, the stock market is one of the most popular investment decisions among private
investors. The stock market’s constant fluctuation empowers investors with a multitude
of opportunities for substantial profits.
This possibility of high returns and the
unpredictability of the market are enticing to excitable investors, however with wise
decision-making, the stock market can be a stable, long-term investment opportunity as
well.
2.2Bonds
Bonds are a loan, granted by the investor (“the holder”), to a corporation or
individual (“the issuer”, usually the government).
The loan agreement includes a
specified amount of time, after which the bond is said to “mature.” A specified amount
of interest is aggregated semi-annuallyduring the time before the bond matures, after
which no further interest is accrued. Once the bond has matured, the holder can cash the
bond and regain the principle plus accrued interest. The holder usually cannot “cash” the
bond before the time it matures without facing a penalty, often resulting in an overall loss
for the investor.
Due to their guaranteed ROI, bonds are stable assets in an investor’s portfolio.
Investors may also choose to invest in “bond funds,” where a third party broker invests in
the bonds of many companies.
The private investor takes a stake in the principle
investments made by the broker, and receives a portion of the earnings along with their
principle. Bond funds can be a more profitable choice for private investors because a
14

okerage can often negotiate the interest of a bond to a higher rate than would be
available for a private investor.
Because of bonds’ stability, guaranteed ROI, and
because they are unaffected by the stock market,bonds are popular as long-term
investments, and during uncertain financial times.
2.3CertificatesofDeposit
Certificates of deposit (informally referred to as “CDs” or “CODs”) are
investments made in banks or credit unions in the form of a long-term savings account.
A COD works very much in the same way a bond does. The investor loans a bank a
principle amount, on which the bank pays interest. Like a bond, the investor collects the
principle and interest when the COD matures.
Certificates of deposit have traditionally been a virtually risk-free, guaranteed
(they are insured by the FDIC), long-term investment opportunity. CODs are, however,
susceptible to interest-rate fluctuations (in variable-interest rate CODs), and inflation.
Because many CODs are investments made over many years, the intrinsic value of the
principle plus interest may not exceed the value of the principal upon maturation due to
inflation and poor interest rates. Despite this, most certificates of deposit are a secure,
stable, long-term investment opportunity.
15

2.4MutualFunds
Mutual Funds are an investment in a fund, managed by a fund manager, which is
invested in many different small investments. The fund manager trades these small
investments regularly, generating a return for the fund principle. The investors are paid a
portion of this return.The value of a mutual fund is determined by it’s net asset value
(NAV), or the combined worth of the fund’s holdings (the fund’s investment portfolio).
Mutual Funds are usually a medium-risk, medium-return investment. Due to their
professional management, mutual funds are an easy opportunity for inexperienced
investors. The most common type of mutual fund is an “equity fund” which is comprised
entirely of stock investments. Because of their dependence on the stock market, mutual
funds are riskier than CODs, however they often lead to greater yield.
16

3.StockMarketTradingStrategies
3.1DayTrading
Daytradingisthestrategyofbuyingandtradingastockwithinthesameday.
Day trading is a very fast‐paced investment strategy, relying on quick, often
emotional,decisionsfromtheinvestor.Daytradingreliesonthedailyfluctuationof
stockvalues.Investorshopetoideallybuystockatitslowestvaluethatday,sellit
laterthatdayatitspeakvalue,andearnthedifference.Daytradersdonotcareas
muchaboutwhatcompanytheyarebuyingstockin,onlyonthatstock’spotential
forgrowththatday.Therearemanysubtlestrategiestodaytrading,alongwitha
keensenseforstocksthatareabouttogainvalue,thatmakeaninvestorsuccessful.
Because of the rapid pace of day trading, it has a notorious reputation for
hugereturns,aswellashugelosses.Manysingleinvestorsmakemillionsofdollars
peryearsolelywithadaytradingstrategy,thoughthiskindofreturnrequiresan
experiencedinvestorwillingtotakesignificantrisks.Daytradingcanbesorisky
that, with a series of poor decisions, an investor can loose their entire working
capitalinoneday.
With the popularity of the Internet, many investors can make day trading
transactions from their homes. These investors use websites that offer trading
servicesforasmallfee.Thishasledtoariseinpersonalinvestorsemployingaday
tradingstrategy.Daytradingwasfurtherinvestigatedintheinvestmentsimulation.
17

3.2SwingTrading
SwingTradingisthestrategyoftradingatthepeaksofpriceoscillationover
aperiodofafewdaysorweeks.ThisstrategyismoreinvolvedthanDayTrading,
requiring an investor with a watchfuleye and a thorough understanding of the
companytheyareinvestingin.Theinvestormustdeterminewhenthebesttimeto
sellandbuyastockis,basedonrecentfluctuationactivity,news,andtheinvestor’s
intuition. Swing trading involves research into different markets, and into what
makes investors excited about a company. In the case of Apple, investors are
excited by new product releases and tech‐related conferences that showcase new
Appletechnologies.Usuallytheseeventswillhaveadirectimpactonthepriceof
Applestock.Aninvestorcanutilizetheevents’impactstomakeaprofit.Aswing
tradermustbeabletoanticipatethechangesofupcomingandcurrenteventstothe
price of a stock, and employ that information to make educated purchasing
decisions.
Duetotheamountofresearchinvolved,swingtradingisusuallyalessrisky
strategythandaytrading.Daytradingfocusesoncurrentgrowthandfluctuation,
whereasswingtradingprofitsoffunderlyingtrendsinastocks’price.Swingtrading
caninvolveinvestmentslastingafewdays,weeksorevenmonths.Theflexibility
presentedwithaswingtradingsimulationmadeitidealforthisshortinvestment
simulation.
18

4.SimulatedInvestmentsandTheirResults
4.1GoalsandStrategies
The primary goal of this simulation was to gain a better understanding of
personal investment opportunities. The financial goal set for this simulated
$100,000investmentwasareturnofatleast$4,000overthespanof3weeks.This
requiredanaveragetotalgainofatleast$200perday.
Forthisinvestmentsimulationaswing‐tradingschemewaschosenbecause
ofitspotentialforgainwithinashorttimeperiod.ADayTradingschemewasalso
employedinordertobetterunderstandthesubtletiesthatmakeitprofitable.Other
tradingstrategieswereoutofthefinancialscopeandtimeframeofthissimulation.
Sevencompanieswerechosenfortheswingtradingsimulation.Theywere
chosenbasedonadeepunderstandingofthegoodsandservicestheyoffer,aswell
astheirreputationintheirrespectivedomains.Specificcompanieswerenotchosen
forthedaytradingsimulation.Insteadthefocuswasonlyontheshort‐termgrowth
ofthestock’svalue.
4.2CompanyProfiles
4.2.1AppleInc.(NASDAQ:AAPL)
AppleInc.designs,manufactures,andmarketspersonalcomputers,portable
musicplayers,andcellphones[3].Theyalsosellavarietyofsoftware,computer
accessories,andcomputertrainingservices.Sinceitsinceptionin1977,Applehas
19

een a leading maker of consumer electronics and personal computers. The
company struggled in the late 1990’s with diminished sales, though with the
introductionoftheiPodbrandmp3playerin2001,itwasre‐establishedasaleader
in the consumer electronics market. Since its introduction, there have been over
151,000,000[4]iPodssoldworldwide,dominatingthemp3playermarket.Apple
computers’ market share continues to climb, and record sales are consistently
recorded every quarter. Apple is notorious for having very avid fans of their
products.FanswilloftenlineupoutsideanApplestorehours,orevendays,before
itopenstobethefirsttopurchasethelatestApplegear.
Figure1:AppleInc.(NASDAQ:AAPL)Year­To­DatePriceChart
4.2.2MicrosoftCorp.(NASDAQ:MSFT)
Microsoft Corp. designs, produces, and markets the Windows operating system, a
libraryofconsumersoftwaretitles,video‐gameconsoles,consumerelectronics,and
a modest computer peripheral selection. Bill Gates, among others, founded
20

Microsoft in 1975 with the intent of creating a consumer‐oriented computer
operatingsystem.MicrosoftWindowsiscurrentlyusedbyover85%ofpersonal
computers worldwide, [6] however the rise in popularity of Apple computers is
causing a steady decline in Windows market share. Microsoft looks to their new
Windows 7 operating system to entice consumers to switch back to Windows.
Microsofthasalsorunaspecificallyanti‐Appleadcampaign,lookingtoexposesome
ofthebenefitsofusingWindowsoverApple’sMacintoshcomputers.
Figure19:MicrosoftCorp.(NASDAQ:MSFT)Year­To­DatePriceChart
Microsoft’sXbox360continuestobeastrongcompetitorinthevideo‐game
consolemarket.TheXbox360holdsasteadysecondplaceinoverallsalesintheUS
(behindNintendo’sWiiconsole)[5],andastrongreputationasasignificantgaming
platform. Microsoft Office, a suite of business software, has been extremely
profitable,contributingtothecompany’sconsistentgrowth.
21

4.2.3RaytheonCompany(NYSE:RTN)
RaytheonisamajorAmericanmilitarycontractorthatmanufacturesdefense
systems and defense electronics. Raytheon was established in Cambridge,
Massachusettsin1922andiscurrentlyheadquarteredinWaltham,Massachusetts.
Itiscurrentlytheworld’slargestproducerofguidedmissiles,[7]includingtheMIM‐
104Patriotcruisemissile,whichplayedasignificantroleinthePersianGulfWar.
Raytheonalsomanufacturesairtrafficcontrolsystems,radarsystems,satelliteand
communicationssystems,radioactivematerialsdetectionsystems,semiconductors,
missiledefensesystems,andhi‐techtrainingsimulators.Raytheon’sbroadscopeof
productsandtheirwideusethroughoutthemilitarygeneratebillionsofdollarsin
revenueforthisdefensegiant.
Figure3:RaytheonCompany(NYSE:RTN)Year­To­DatePriceChart
22

4.2.4GoogleInc.(NASDAQ:GOOG)
GoogleInc.istheprovideroftheleadingInternetsearchserviceofthesame
name. It also provides email, mapping, office productivity, and video sharing
services.GoogleInc.wasfoundedbytwostudentsatStanfordUniversityin1998,
withthegoal“toorganizetheworldsinformationandmakeituniversallyaccessible
anduseful.[9]”Ithasbeenlistedasthe#1placetoworkbyFortuneMagazine[8]
and is notorious for pursuing unique approaches to productivity and workplace
atmosphere.Googlecontinuestobealeaderinweb‐applicationresearchandweb
searchresearch.Googlehasconsistentlygrownandexpandedtobecomeoneofthe
country’slargestandmostprofitablebusinesses.
23

Figure4:GoogleInc.(NASDAQ:GOOG)Year­To­DatePriceChart
4.2.5ElectronicArtsInc.(NASDAQ:ERTS)
Electronic Arts is a leading producer, designer, and distributor of video
games.ElectronicArts(informally“EA”)wasstartedin1982andwasapioneerin
theconsumercomputergamemarket.EAhascreatedsomeofthemostwell‐known
andlongest‐runninggamefranchises,suchasNeedforSpeed,MedalofHonor,The
Sims,andBattlefield.TheMaddenNFLfootballgameserieshasconsistentlybeenthe
best‐sellingvideogameofthepastfewyears,andretainsanexclusivelicenseforall
NFLteamnames,logos,andplayers.Despitetheirfairlydismalsaleslastyear,EAis
24

ouncingbackwithmoreblockbustertitles,suchasRockBand,furthercontributing
toEA’smulti‐billiondollaryearlyrevenue.
Figure5:ElectronicArtsInc(NASDAQ:ERTS)Year­To­DatePriceChart
4.2.6NVIDIACorp.(NASDAQ:NVDA)
NVIDIA Corp. designs graphics processing units for personal computers,
workstations, and video‐game consoles. NVIDIA was founded in 1993 as a
competitortothepopular3dfxbrandgraphicscardsthatdominatedthecomputer
graphics market of the mid‐to‐late 1990’s. In 2000, NVIDIA acquired 3dfx and
becameoneofthetopgraphicscardmanufacturersalongwithrivalATI.NVIDIA’s
GeForcechipsetlinehasbeenverysuccessfulintheconsumergraphicscardmarket,
outselling competitive ATI models. NVIDIA’s Quadro series is popular with
computeraideddesign(CAD)workstationsandprofessionalgraphicsapplications.
NVIDIA continues to push the boundaries of computer graphics, creating some of
themostadvancedgraphicsprocessorsintheworld.Theirbleeding‐edgeconsumer
25

products have driven NVIDIA’s success, generating consistently escalating multibilliondollarannualrevenue.
Figure6:NVIDIACorp.(NASDAQ:NVDA)Year­To­DatePriceChart
4.2.7IntelCorp.(NASDAQ:INTC)
Intelistheworld’smostprofitablecomputerprocessormanufacturer.Intel
was founded in 1968, and has been a leading pioneer in computer hardware
development.Their“IntelInside”marketingcampaigninthe1990’shasmadethem
a household name. Intel’s Pentium brand processors continue to be some of the
mostpowerfulconsumerprocessorsavailable.Applecomputerstransitionedfrom
the in‐house developed “PowerPC” processor to Intel’s “Core 2 Duo” line of
processorsin2005,addingtoIntel’salreadystronglaptopprocessormarketshare.
Intel also manufactures flash memory used in USB thumb drives and computer
solid‐state disk drives. Despite declined sales due to the recent economic crisis,
26

Intel continues to outsell rival AMD and support their reputation as a significant
computerhardwaremanufacturer.
Figure7:IntelCorp.(NASDAQ:INTC)Year­To­DatePriceChart
4.2.8AdvancedMicroDevices,Inc.(NYSE:AMD)
Advanced Micro Devices (AMD) is a manufacturer of computer processors.
AMDisthesecond‐largestglobalsupplierofconsumercomputerprocessors,after
Intel. AMD was founded in 1969 with a reverse‐engineered clone of the popular
Intel8080microprocessor.Sincethen,AMD’sprocessorshavegrowninpopularity.
AMD’s recent developments have mainly been oriented towards the mobilecomputing
market. AMD’s Turionprocessors have been especially popular in the
mobile‐computingmarket.In2006,AMDacquiredATI,thesecondlargestgraphics
processorcompanyinthehopesofunitingtheGPUandCPUintoonechip.AMDisa
significantcompetitorinthemobile‐processingmarket,andcontinuestogrow.
27

Figure8:AdvancedMicroDevices,Inc.(NYSE:AMD)Year­To­DatePriceChart
4.2.9Yahoo!Inc.(NASDAQ:YHOO)
Yahoo! Inc. is a web‐based company known for its search engine, email,
news, web‐portal, and other services. Yahoo! Inc. was incorporated in 1995 and
quicklybecameahouseholdinternetbrandname.Yahoo!providesmanyconsumer
servicesincludingemail,IMandSMSmessaging.Yahoo!isalsoamajoraggregator
of news and finance information, and a pioneer in web‐application research.
Yahoo!’s search feature was recently bought out by Microsoft, and is said to be
replaced with Microsoft’s new Bing search service in the near future. Yahoo!’s
websitereceivesover1.575billionvisitorsannually,with3.4billionpageviewsper
day,makingitthesecondmostvisitedwebsiteintheworld[10].
28

Figure9:Yahoo!Inc.(NASDAQ:YHOO)Year­To­DatePriceChart
4.3Simulation1:SwingTrading
4.3.1Week1:June17–June26,2009
ThisfirstweekbeginsonWednesday,June17 th andendsonFriday,June26 th .
I combined the first half a week with the first full week, because I didnot have
sufficientdatatocommentonforthefirsthalfweek.
My initial investment consisted of stock in nine companies. I purchased
Applestockinanticipationofthecompany’snewiPhone3G‐Slaunch,at$135.58per
share. Apple stock has always been considered a good investment because of its
moderate fluctuation and general growth trend. Despite these benefits, it is very
expensivestockandthereforequiteinaccessiblewithoutasignificantinvestment.I
29

soldmy100sharesofApplestocklateFriday,June19 th ,afterthelaunchofthenew
iPhonecausedaspikeinthestockprice,foryieldof$288.
Table1:AAPLTransactions(June17–June26,2009)
Net
Total
Total
Date Symbol buy/sell Price Shares
Cost/Proceeds
Profit/Loss
Cash
Profit
06/17/09 AAPL buy $135.58 100 $13,568.00 86,432.00
06/19/09 AAPL sell $138.66 100 $13,856.00 288.00 25,278.50 288.00
Figure20:AppleInc.(NASDAQ:AAPL)PriceChart(June9­June19,2009)
IpurchasedMicrosoftstockonWednesday,June17 th becauseofthelaunchof
Microsoft’s new Bing search service. News of this new launch has instilled
confidenceininvestorsandthereforecausedajumpinthestockvalue.Microsoft
stockhasshownsomewhatstagnantgrowth,possiblyduetothelackofconsumer
interest in their new Vista operating system. Despite this, Microsoft stock price
oscillatesquiteabit,presentingthepossibilityofsteadyprofit.Ibought200shares
30

of Microsoft stock at $23.68. Despite the launch of their new search service, the
valueofMicrosoftstockdeclined.Iwaitedforarelativespikeinpriceandsoldhalf
ofmyMicrosoftstockonTuesdaythe24 th foralossof$20.00.
Table2:MSFTTransactions(June17–June26,2009)
Date Symbol buy/sell Price Shares
Net
Cost/Proceeds
Profit/Loss
Total
Cash
Total
Profit
06/17/09 MSFT buy $23.68 200 $4,746.00 81,686.00
06/23/09 MSFT sell $23.63 100 $2,353.00 (20.00) 48,258.50 160.00
06/25/09 MSFT sell $23.67 100 $2,357.00 (16.00) 101,779.20 1,742.20
IboughtGooglestockbecauseofmyconfidenceintheGooglebrandandthe
stock’srecentfluctuation.Googlestockisextremelyexpensive,andlikeApple,quite
inaccessible to personal investors. I bought 75 shares on Wednesday the 17 th for
$415.16pershare,andsolditearlyFridaythe19 th for$418.28pershare,foragain
of$214.00.Ibought75moresharesMonday,June22 nd becauseofmysuccesswith
Google stock, and its momentary dip in price that day. I sold all 75 shares on
Wednesdaythe24th
31

Table3:GOOGTransactions(June17­June24,2009)
Net
Total
Total
Date Symbol buy/sell Price Shares
Cost/Proceeds
Profit/Loss
Cash
Profit
06/17/09 GOOG buy $415.16 75 $31,147.00 21,726.50
06/19/09 GOOG sell $418.28 75 $31,361.00 214.00 56,639.50 502.00
06/22/09 GOOG buy $405.30 75 $30,407.50 42,353.50
06/24/09 GOOG sell $410.30 75 $30,762.50 355.00 83,809.00 1,127.00
Figure21:GoogleInc.(NASDAQ:GOOG)PriceChart(June14­June24,2009)
IboughtRaytheonstockWednesdaythe17 th duetothefactthattheUnited
States is entangled in two wars overseas. Raytheon has always been a strong
company, and I believed that because of the conflicts in the Middle East and
elsewhere, Raytheon would receive increased business. I bought 350 shares at
$45.31pershareonWednesday,andsoldittwodayslaterat$46.09foranetprofit
of$253.00.
32

Figure22:RaytheonCorp.(NYSE:RTN)PriceChart(June9­June19,2009)
I also purchased Yahoo!(NASDAQ:YHOO), Intel(NASDAQ:INTC),
NVIDIA(NASDAQ:NVDA), Electronic Arts(NASDAQ:ERTS), and AMD(NYSE:AMD)
stockonWednesdaythe17 th becauseofmyconfidenceinthesecompanies,however
thesestocksdidrelativelypoorlythisweek.Ideemedthesebadinvestments,and
afterthepricespikedsomewhatonWednesdaythe24th,Icutmylossesandsoldall
mystocksforthesecompanies,takingatotalnetlossof$916.
33

Table4:INTC,NVDA,ERTS,YHOO,AMDTransactions(June17–June26,2009)
Net
Total
Total
Date Symbol buy/sell Price Shares
Cost/Proceeds
Profit/Loss
Cash
Profit
06/17/09 INTC buy $16.14 400 $6,466.00 75,220.00
06/17/09 NVDA buy $11.28 200 $2,266.00 72,954.00
06/17/09 ERTS buy $20.83 200 $4,176.00 68,778.00
06/17/09 YHOO buy $15.60 400 $6,250.00 15,512.50
06/17/09 AMD buy $4.08 1,000 $4,090.00 11,422.50
06/23/09 AMD sell $3.52 1000 $3,510.00 (580.00) 45,863.50 175.00
06/23/09 ERTS sell $20.44 200 $4,078.00 (98.00) 53,046.50 772.00
06/24/09 INTC sell $16.19 400 $6,466.00 0.00 90,275.00 1,127.00
06/24/09 YHOO sell $15.28 400 $6,102.00 (148.00) 96,517.00 1,119.00
06/24/09 NVDA sell $10.93 200 $2,176.00 (90.00) 98,693.00 1,029.00
Ibought200sharesofGooglestockonWednesday,June24 th at$409.00and
40moreafterthepricedeclinedto$407.67.IpurchasedmoreGooglestockbecause
thestockpricehadbeentrendingupwardssinceIsoldmyinitialGoogleinvestment
onthe19th.AfterIpurchasedmyGooglestock,thepricecontinuedtodeclineandI
decidedtosellitallbeforeIlostmoremoney.AfewhoursafterIboughtthem,I
soldthelatter40sharesfor$408.05andtheother200for$408.57foracombined
netlossof$110.80.
34

Table5:GOOGTransactions(June24­June26,2009)
Net
Total
Total
Date Symbol buy/sell Price Shares
Cost/Proceeds
Profit/Loss
Cash
Profit
06/24/09 GOOG buy $409.00 200 $81,810.00 16,963.00
06/24/09 GOOG buy $407.67 40 $16,316.80 646.20
06/24/09 GOOG sell $408.05 40 $16,312.00 (4.80) 16,958.20 1,104.20
06/24/09 GOOG sell $408.57 200 $81,704.00 (106.00) 98,662.20 998.20
TowardstheendofthedayFridaythe26 th ,Ibought1000sharesofRaytheon
stock,onnewsofanewmulti‐billiondollarcontractfromtheUSmilitary.
4.3.2Week2:June29–July3,2009
The second week of the simulation, I was not nearly as aggressive, as the
markettookasteady,continueddecline.IsoldmyRaytheonstockMondaythe29 th
whenthepricebegantofalldramatically,sufferinga$70.00loss.Thursday,July2 nd
Ibecameslightlyoptimisticofalate‐weekrallysoIpurchasedfiftysharesofGoogle
stock at $409.66, as well as 300 shares of Apple at $140.35, and 500 shares of
Raytheonat$43.28.IchosethesestocksbecauseIwasconfidentthattheywoulddo
well.Themarketcontinuedtofall,albeitlessdramatically,forcingmetosellthese
stocksbeforetheyturnedintosignificantlosses.Imanagedtosellallmystocksfor
35

anetlossof$325.50beforewatchingtheirpricesdropsignificantlytowardstheend
ofthedayFriday.
Table6:RTN,GOOG,AAPLTransactions(June29­July3,2009)
Net
Total
Total
Date Symbol buy/sell Price Shares
Cost/Proceeds
Profit/Loss
Cash
Profit
06/29/09 RTN sell $44.56 1000 $44,550.00 (70.00) 46,704.20 2,177.20
07/02/09 GOOG buy $409.66 50 $20,493.00 82,183.20
07/02/09 AAPL buy $140.35 300 $42,115.00 40,068.20
07/02/09 RTN buy $43.28 500 $21,650.00 18,418.20
07/03/09 GOOG sell $408.49 50 $20,414.50 (78.50) 38,832.70 2,560.70
07/03/09 RTN sell $43.01 500 $21,495.00 (155.00) 60,327.70 2,405.70
07/03/09 AAPL sell $140.02 300 $41,996.00 (119.00) 102,323.70 2,286.70
ThisweekhastaughtmethatdespitewhatImaythink,therewillalwaysbe
weekswhereitisveryhardtomakeaprofit.Ithasalsoshownmethatsometimes
the best thing to do is realize that you’ve made a poor investment and cut your
losses.
36

4.3.3Week3:July6–July10,2009
Themarketroseearlyintheweek,anddeclinedtowardstheendoftheweek,
howeverGooglestockcontinuedtoriseconsistentlythroughouttheweek.Ibought
100 shares of it the morning of Tuesday, July 7th for $40,175.00 at $401.65 per
share. I also bought 300 shares of Apple stock at $136.99 per share, totaling
$41.107,and950sharesofMicrosoftstockat$22.54,totaling$21,689.00.
Table7:AAPL,GOOG,MSFTTransactions(July7,2009)
Net
Total
Total
Date Symbol buy/sell Price Shares
Cost/Proceeds
Profit/Loss
Cash
Profit
07/07/09 AAPL buy $136.99 300 $41,107.00 62,419.70
07/07/09 GOOG buy $401.65 100 $40,175.00 22,244.70
07/07/09 MSFT buy $22.82 950 $21,689.00 555.70
ThursdayIdecidedtosellallmystockasthemarketwasn’tshowingsignsof
recovery.Ilost$286.00inmyMicrosoftinvestment,sellingall950sharesat$22.54.
I sold my Apple stock for a meager $25 profit at $137.14 per share. My Google
investment, however, was significantly better. I sold all 100 shares Thursday for
$413.92pershare,foranetprofitof$1,207.00,thesecondmostsubstantialsingleinvestmentgainIhadduringthissimulation.
37

Table8:AAPL,GOOG,MSFTTransactions(July9,2009)
Net
Total
Total
Date Symbol buy/sell Price Shares
Cost/Proceeds
Profit/Loss
Cash
Profit
07/09/09 MSFT sell $22.54 950 $21,403.00 (286.00) 21,958.70 3,203.70
07/09/09 AAPL sell $137.14 300 $41,132.00 25.00 63,090.70 3,228.70
07/09/09 GOOG sell $413.92 100 $41,382.00 1,207.00 104,472.70 4,435.70
Figure23:GoogleInc.(NASDAQ:GOOG)PriceChart(June30­July10,2009)
Overallthisweekwasprofitableduetomyabilitytoanticipatethemarket’s
rise. Google stock continued to be a good investment for me, though Apple was
significantlylesspredictablethannormal.Thisweekhasshownmethathavinga
portfolioofamanycompaniesyieldsthebestchancesofsignificantprofit.
38

4.3.4Week4:July13–July20,2009
Overallthisweekprovidedaconsistentclimbingmarket,whichwasvery
profitableforme.IinvestedinAppleearlyWednesday,July15 th asI’vehad
generallygoodluckwithApplestockandinanticipationofarisingmarketfollowing
lastweek’sfairlydullmarket.Ibought300sharesofApplestockat$145.13per
share,totaling$43,549.00.IalsoboughtNovell(NASDAQ:NOVL)stockWednesday
becausetheirpricehaddippedunusuallylowduetoallegationsofsecurity
vulnerabilitiesintheirSUSEoperatingsystem.Icapitalizedonthissituationand
bought13000sharesat$4.37pershare,totalinga$56,820.00investment.
Table9:AAPL,NOVLTransactions(July15,2009)
Net
Total
Total
Date Symbol buy/sell Price Shares
Cost/Proceeds
Profit/Loss
Cash
Profit
07/15/09 AAPL buy $145.13 300 $43,549.00 62,250.70
07/15/09 NOVL buy $4.37 13000 $56,820.00 5,430.70
Thursdaythe16 th IsoldbothmyNovellstockandmyApplestock.Isoldall
300sharesofApplestockfor$146.54pershareforagainof$403.00.MyNovell
investment,however,wasvastlymoreprofitable.Isoldall13000sharesofNovell
stock at $4.55 per share, yielding a profit of $2,320.00. My Novell trade was the
highestsingle‐tradeprofitImadeinthissimulation.
39

Table10:NOVL,AAPLTransactions(July16,2009)
Net
Total
Total
Date Symbol buy/sell Price Shares
Cost/Proceeds
Profit/Loss
Cash
Profit
07/16/09 NOVL sell $4.55 13000 $59,140.00 2,320.00 64,570.70 8,082.70
07/16/09 AAPL sell $146.54 300 $43,952.00 403.00 72,232.70 8,485.70
Ibought100sharesofGooglestockonFridaythe17 th at$429.61foratotal
investment of $42,971.00. I decided to purchase Google stock because of my
profitable past investments in it and because it had temporarily fallen in price. I
solditthemorningofMondayJuly20 th at$431.96foranetprofitof$215.00.
Table11:GOOGTransactions(July17,2009)
Net
Total
Total
Date Symbol buy/sell Price Shares
Cost/Proceeds
Profit/Loss
Cash
Profit
07/17/09 GOOG buy $429.61 100 $42,971.00 65,135.70
07/20/09 GOOG sell $431.96 100 $43,186.00 215.00 109,001.70 8,964.70
Thishasbeenthemostprofitableweekyet,duelargelytotheprofitattained
through the Novell stock I purchased. I have learned to take advantage of
momentarydipsinstockprices,astheyareeasytoprofiton.
40

4.3.5Summary
Swingtradingwasdifficult,thoughitrequiredlessconstantattentiontothe
market’smovementthanotherstrategies,suchasdaytrading.Mymostprofitable
swing trading investments involved research into current events and
announcements regarding companies I was investing in. Knowing generally how
investors would react to different events helped me anticipate movement in the
market.
OneofmymoresuccessfulinvestmentswaswithGoogle.Ihadafairlygood
history investing in Google, and I was confident that the announcement of their
proposed operating system would instill confidence in investors. I purchased
approximately$40,000ofGooglestocksonJuly7 th astheannouncementsurfaced,
and watched the price jump up $4. I sold the stock at the height of the hype for
Google’snewoperatingsystem,andmadeover$1000.
Ifoundthatthekeytosuccessinswingtradingistoresearchthecompanies
you’re going to be investing in. Having a base of knowledge about the company,
alongwithareliablesourceofnewsregardingthatcompanyisextremelyimportant
when monitoring swing‐trading investments. Swing trading is slightly more
challenging,andmoreinvolvedthandaytrading,thoughitcanbelessrisky.Swing
trading is a good strategy for personal investors who don’t want to have to
constantly monitor small changes in the market, nor take large financial risks in
hugeinvestments.
41

4.4Simulation2:DayTrading
4.4.1Week1:June17–June26,2009
For the day trading aspect of my simulation, I relied on Google Finance to
trackchangesinthestockmarketandshowstocksthathavechangedsignificantly
duringthatday.Thesitefeaturesalistofstocksorderedbythehighestpercentage
fluctuation.Iusedthistofindstockswhosevalueswereacceleratingrapidlythat
day.IpaidlittleattentiontothecompaniesIwasinvestingin,focusingonnothing
other than the stock value’s movement. My strategy was strictly focused on
numbers.
ThefirstinvestmentImadewasinCommScopeInc(NYSE:CTV)onTuesday,
June23 rd .Ibought300sharesat$23.81becauseofCTV’srapidpriceacceleration.I
soldthe300sharesapproximately1hourlaterwhenIsawthepricestarttoleveloff
for$24.00ashare,makinganetprofitof$212.00.ThesecondinvestmentImade
wasinCSXCorporation(NYSE:CSX),alsoonTuesday.Ibought100sharesat$32.00
andsoldthemaboutanhourlaterbecauseIsawCSX’sacceleration.Isoldall100
sharesat$32.25foranetprofitof$5.00.
Table12:CTV,CSXTransactions(June23,2009)
Net
Total
Total
Date Symbol buy/sell Price Shares
Cost/Proceeds
Profit/Loss
Cash
Profit
06/23/09 CTV buy $23.81 300 $7,153.00 38,710.50
06/23/09 CSX buy $32.00 100 $3,210.00 35,500.50
06/23/09 CTV sell $24.00 300 $7,190.00 37.00 42,690.50 212.00
06/23/09 CSX sell $32.25 100 $3,215.00 5.00 45,905.50 180.00
42

Thatsameday,June23 rd ,IboughtandsoldFordMotorCompany(NYSE:F)
stock very aggressively. I chose to invest in Ford because of its low cost, and
somewhat regular price fluctuation. My first investment was a purchase of 1000
sharesat$5.49.Iquicklyrealizedthatthiswouldnotyieldasizeablereturn,soI
bought4000moresharesatthesameprice,bringingmyinvestmentto5000shares
totaling $27,470 (including trading fees). I closely monitored the stock price and
sold my 5000 shares a few minutes later when the price rose to $5.53. This
transactionyieldedanetprofitof$170.Afewminuteslater,whenthepricetooka
smalldip,Ibought8000moresharesat$5.52pershare.Isoldthemminuteslater
at$5.59,yieldinganetprofitof$540.00.Theseinvestmentsshowedmethevalueof
somewhat regular price fluctuation in profitable day trading. These two
investments also showed me that the dollar amount fluctuation wasn’t nearly as
importantasthepercentfluctuationindeterminingastock’sprofitability.
Table13:FTransactions(June23,2009)
Net
Total
Total
Date Symbol buy/sell Price Shares
Cost/Proceeds
Profit/Loss
Cash
Profit
06/23/09 F buy $5.49 1000 $5,500.00 42,758.50
06/23/09 F buy $5.49 4000 $21,970.00 20,788.50
06/23/09 F sell $5.53 5000 $27,640.00 170.00 48,428.50 330.00
06/23/09 F buy $5.52 8000 $44,170.00 4,258.50
06/23/09 F sell $5.59 8000 $44,710.00 540.00 48,968.50 870.00
43

Figure24:FordMotorCo.(NYSE:F)PriceChart(June17­June27,2009)
On Thursday the 25 th I bought Red Hat Inc. (NYSE:RHT) stock and Teck
ResourcesLimited(NYSE:TCK)stockbecauseoftheirmovementthatday.Ibought
2000 shares of Red Hat and 1000 shares of TCK totaling nearly $37,000.00 and a
little over $15,000.00 respectively. I sold these stocks a few hours later as their
pricespeakedforatotalprofitof$760.
Table14:RHT,TCKTransactions(June25,2009)
Net
Total
Total
Date Symbol buy/sell Price Shares
Cost/Proceeds
Profit/Loss
Cash
Profit
06/25/09 RHT buy $18.47 2000 $36,950.00 61,712.20
06/25/09 TCK buy $15.46 1000 $15,470.00 46,242.20
06/25/09 RHT sell $18.81 2000 $37,610.00 660.00 83,852.20 1,658.20
06/25/09 TCK sell $15.58 1000 $15,570.00 100.00 99,422.20 1,758.20
44

OnFridaythe26 th ,IwatchedthepriceofGooglestockrisedramatically.I
bought100sharesat$415.67andsolditseveralhourslaterfor$422.02foragainof
$615.00. I also bought Yahoo stock hoping that the price would continue to rise.
ThepriceofYahoostockleveledoutafterIboughtit,howeverImanagedtomakea
meagerprofitof$40.00.Ialsobought1000sharesofMicrosoftstock.Despitemy
expectations that it would rise, the price of Microsoft stock hovered around the
same price, with a slight downward trend. I cut my losses at $150.00, selling all
1000shares.
Table15:GOOG,YHOO,MSFTTransactions(June26,2009)
Net
Total
Total
Date Symbol buy/sell Price Shares
Cost/Proceeds
Profit/Loss
Cash
Profit
06/26/09 GOOG buy $415.67 100 $41,577.00 60,202.20
06/26/09 YHOO buy $15.62 1000 $15,630.00 44,572.20
06/26/09 MSFT buy $23.55 1000 $23,560.00 21,012.20
06/26/09 MSFT sell $23.42 1000 $23,410.00 (150.00) 44,422.20 1,592.20
06/26/09 GOOG sell $422.02 100 $42,192.00 615.00 86,614.20 2,207.20
06/26/09 YHOO sell $15.68 1000 $15,670.00 40.00 102,284.20 2,247.20
45

4.4.2Week2:June29–July3 , 2009
Theoveralltrendofthemarketthisweekwasdown,soitwasmore
importantthatImadegooddaytradingdecisions.Themeagerprospectsforswing
tradingthisweekforcedmetofindthefewstocksdoingrelativelywell,andutilize
theirgainstomakeaprofit.
Ibought7500sharesofRockwellMedicalTechnologiesInc.(NASDAQ:RMTI)
stock Monday, June 29 th for $7.40, after its price fell dramatically in overnight
trading.Isawthepricetrendrebounding,andIthoughtI’dtakemychances.Isold
it later in the day, after realizing that the rebound wasn’t as dramatic as I
anticipated.Isoldthestockfor$7.42pershare,makinganetprofitof$130.00.
Table16:RMTITransactions(June29,2009)
Net
Total
Total
Date Symbol buy/sell Price Shares
Cost/Proceeds
Profit/Loss
Cash
Profit
06/29/09 RMTI buy $7.40 7500 $55,510.00 2,154.20
06/29/09 RMTI sell $7.42 7500 $55,640.00 130.00 102,344.20 2,307.20
46

Figure25:RockwellMedicalTechnologies(NASDAQ:RMTI)PriceChart(June23­July3,2009)
There weren’t many good options for day trading this week. Only a few
sparsestockswereprofitable,andfindingthemwasdifficult.Ibought100sharesof
Google stock Thursday, July 1 st for $421.50, hoping to profit off the normal
oscillationofitsprice.Isoldabout25minuteslaterat$425.02,asmyconfidencein
itgoingmuchhigherwasveryslim.Myconservativedecisionspaidoff,makingme
anetprofitof$332.00asthepriceofGoogletumbled.
Table17:GOOGTransactions(July1,2009)
Net
Total
Total
Date Symbol buy/sell Price Shares
Cost/Proceeds
Profit/Loss
Cash
Profit
07/01/09 GOOG buy $421.50 100 $42,160.00 60,184.20
07/01/09 GOOG sell $425.02 100 $42,492.00 332.00 102,676.20 2,639.20
This week has shown me that day trading is one of the only options in a
downward‐trendingmarket,andthatfindingaprofitablestockisdifficult.Iforced
47

myself to back out of any investment that lost me more than $100 or gained me
morethan$200,asIhadlittleroomforexperimentation.Ifoundstocksthatwere
significantlylowerthanusual,andanticipatedtheirrebounds.Iwasforcedtoplay
itsmart,andnotgettoogreedy.
4.4.3Week3:July6–July10,2009
Ibought100sharesofGoogleand300sharesofApplestockthemorningof
Monday, July 6 th , after prices took a momentary dip. My investment in Google
totaled $40,391.00 at $403.81 per share, while my Apple investment totaled
$40,930.00at$136.40pershare.Iwatchedthepriceofbothstocksconsistentlyrise
allday.Inotedaslightplateautendencyintheearlyafternoonandsoldallofmy
sharesinbothcompanies.IsoldmyApplestockfor$138.61pershare,forayieldof
$643.00.IsoldmyGooglestockfor$409.61pershare,forayieldof$560.00.In
totalImade$1,203.00Tuesday.
48

Table18:GOOG,AAPLTransactions(July6,2009)
Net
Total
Total
Date Symbol buy/sell Price Shares
Cost/Proceeds
Profit/Loss
Cash
Profit
07/06/09 GOOG buy $403.81 100 $40,391.00 61,932.70
07/06/09 AAPL buy $136.40 300 $40,930.00 21,002.70
07/06/09 AAPL sell $138.61 300 $41,573.00 643.00 62,575.70 2,929.70
07/06/09 GOOG sell $409.61 100 $40,951.00 560.00 103,526.70 3,489.70
Figure26:AppleInc.(NASDAQ:AAPL)PriceChart(June30­July10,2009)
After Tuesday’s jump, the market fell fairly consistently until about noon
Thursday, July 9th. I bought 20,000 shares of Novell stock early afternoon on
Friday.IhadnoticedthattowardstheendofthedayonFridays,themarkettends
to take a little skip upwards as many investors do not like to keep stocks over a
weekend.Anticipatingtheusuallate‐Fridayrally,Iinvested$84,210.00at$4.21per
49

share.Mypredictionofalate‐Fridayrallywascorrect,andIsoldmyNovellstock
rightbeforeclosingFridayfor$4.26pershare,earningmeaprofitof$980.00.
Table19:NOVLTransactions(July10,2009)
Net
Total
Total
Date Symbol buy/sell Price Shares
Cost/Proceeds
Profit/Loss
Cash
Profit
07/10/09 NOVL buy $4.21 20000 $84,210.00 20,262.70
07/10/09 NOVL sell $4.26 20000 $85,190.00 980.00 105,452.70 5,415.70
Figure27:NovellInc.(NASDAQ:NOVL)PriceChart(June30­July10,2009)
4.4.4Week4:July13–July20,2009
IbeganbuyingthisweekonTuesday,July14 th with300sharesofAppleand
3000 shares of Oracle(NASDAQ:ORCL). I invested the $42,490.00 in Apple at
$141.60pershare,whilemyOracleinvestmenttotaled$61,540at$20.51pershare.
50

I watched the market rise Tuesday, and noticed a slight peaking tendency in the
pricesofbothAppleandOracletowardtheendoftheday.Iwasunsureastohow
consistentthemarket’srisewouldbesoIdecidedtosellbothmyAppleandOracle
stocks.
Table20:ORCL,AAPLTransactions(July14,2009)
Net
Total
Total
Date Symbol buy/sell Price Shares
Cost/Proceeds
Profit/Loss
Cash
Profit
07/14/09 ORCL buy $20.51 3000 $61,540.00 43,912.70
07/14/09 AAPL buy $141.60 300 $42,490.00 1,422.70
07/14/09 ORCL sell $20.58 3000 $61,730.00 190.00 63,152.70 5,605.70
07/14/09 AAPL sell $142.19 300 $42,647.00 157.00 105,799.70 5,762.70
On Thursday, July 16 th I bought Intel and Google stock in hopes that the
upwardmarkettrendwouldcontinue.Unfortunately,thevalueofIntelandGoogle
stocksdeclinedandIwasforcedtosettlewithacombinedlossof$416.00.Buying
at a poor time caused my loss. I bought both stocks while their price was at a
plateau,astrategythathasseldomworkedformeinthepast.Ishouldhavewaited
untiltheirvaluesdeclinedsteadilyandwerebeginningtorise.
51

Table21:INTC,GOOGTransactions(July16,2009)
Net
Total
Total
Date Symbol buy/sell Price Shares
Cost/Proceeds
Profit/Loss
Cash
Profit
07/16/09 INTC buy $18.14 2000 $36,290.00 28,280.70
07/16/09 GOOG buy $438.63 100 $43,873.00 28,359.70
07/16/09 INTC sell $18.03 2000 $36,050.00 (240.00) 64,409.70 8,245.70
07/16/09 GOOG sell $437.07 100 $43,697.00 (176.00) 108,106.70 8,069.70
Figure28:GoogleInc.(NASDAQ:GOOG)PriceChart(July7­July17,2009)
Finally,Ibought10000sharesofFordstockat$6.06pershareonFriday,the
17 th .Thisinvestmenttotaled$60,610.00.IchosetomakethisinvestmentinFord
becausethepricefluctuatesfrequently,anditseemedtobeonanupwardtrend.I
soldthestocklaterthatdayfor$6.13pershare,bringingmeanetprofitof$680.00.
52

Withacareful,patienteyeontheprice,Inoticedanupwardtrend,andwasableto
correctlyanticipateapricejumpforFordstockandprofitfromit.
Table22:FTransactions(July17,2009)
Net
Total
Total
Date Symbol buy/sell Price Shares
Cost/Proceeds
Profit/Loss
Cash
Profit
07/17/09 F buy $6.06 10000 $60,610.00 4,525.70
07/17/09 F sell $6.13 10000 $61,290.00 680.00 65,815.70 8,749.70
4.4.5Summary
Overall,mydaytradingexperiencewasespeciallyprofitable.High‐risk,highcostinvestmentswerethemostprofitable.Iusedanumbers‐onlyapproachtoday
trading. I focused only on significant fluctuations in price, and anticipated future
changes by observing the overall trend of the stock that day in the context of the
stock’srecenthistory.
My most successful day trading investments were towards the afternoon,
involving significant investments that relied on small fluctuations in price
(sometimesonlyafewcentsinchange).Ibegantheexperimentwithatendencyto
holdontostocksastheirpricewentup,hopingforahugeprofit.Thisdidnotwork
aswellasIanticipated,asmanystockswouldrisebriefly,andthenfalllowerthan
thepriceIpaidforthem,resultinginaloss.Iabandonedthisideaandbeganselling
stocksassoonasIcouldmakeasizeableprofit,usuallyanythingover$200,orwhen
thepricebegantoshowthesmallesthintoffallingagain.IfthestockIwasinvesting
53

infelltothepointwhereIwouldloosemorethan$100,Isolditwiththeintentionof
minimizing potential losses. This more conservative method was much more
reliableandsustainable,thoughIdidnotmakethemaximumpossibleprofitfrom
myinvestments.Ifindthatthisstrategyismostapplicabletopersonalinvestments,
andcausesminimalstressontheinvestor.
Havingaclearsetofrulesandgoalsaboutwhatandhowtoinvestwasthe
keytomysuccessindaytrading.Daytradinginvolvesmanyquick,oftenemotional
decisions. Having a clear set of investing rules unburdens the investor of this
emotional attachment to trading and helps maintain consistent profitability.
Despiteitsvolatility,daytradingcanbeaveryexcitingandrewardinginvestment
opportunity.
54

5.Conclusion
Myinvestmentsimulationwassuccessfulbothfinanciallyandinexposingthe
most important aspects of both swing trading and day trading. I began this
experimentwithlittleknowledgeofhowtosuccessfullyinvestinthestockmarket,
norwhatfactorsinfluencethemarket’sconstantchange.Iexceededmyfinancial
goalof$4,000,making$9,001.70innetprofit.Throughafewmistakesandsome
experimentation,Iwasabletodefinethefundamentalsofsuccessfulinvesting.
Ifoundthatdaytradingwastheeasieststrategyforsomeonenewtotrading
stocks.Mydaytradingrulesweresimple,yetfollowingthemyieldedaconsistent
profit. I discovered that successful day trading involves making relatively
conservativedecisions,andnotbeingoverlygreedy.Myworstinvestmentsinday
tradingweretheresultofmyattemptsatsellingforamaximumprofit.Isetafew
rulestohelpmedecidewhentobuyandsellstocks,andnotfollowingthemledme
toavoidablelosses.Isoldstocksthateithermadememorethan$200orlostme
morethan$100,andlookedonlyatthepricechange,andthepotentialforgrowth
thatday.WhenIfollowedthesesimplerules,Iwasconsistentlyprofitable.
Swingtradingwaslessprofitableduringmy4‐weeksimulation,howeveritis
a viable opportunity for personal investors. Researching the companies I was
investing in helped tremendously in anticipating the future value of stocks.
Knowingwhatcausesotherinvestorstobuyorsellastock,andanticipatingtheir
actions is also pivotal to success in swing trading. When I was able to anticipate
55

events that caused the value of the stock to fluctuate significantly, I was able to
makeaprofitableinvestment.
Ihavefoundthatthestockmarketcanbeverylucrative.Byfollowingaclear
setofrules,aninvestorcanproduceaconsistentgainthroughdaytrading.Abasic
understanding of the psyche of investors, along with diligent research can make
swing trading an effective investing strategy. Through my research and
experimentation,Ihavegainedamoreprofoundunderstandingofthestockmarket,
investor psyche, and the foundation of theUS financial system. I hope to employ
what I’ve learned through this simulation in my own stock investments in the
future.
56

References
1. "Stock Market." The American Heritage® Dictionary of the English
Language, Fourth Edition. Houghton Mifflin Company, 2004. 07 Jun. 2009.
.
2. NYSE Group Shares Outstanding and Market Capitalization of Companies
Listed, 2009. June 7, 2009.
3. Full Description: Apple Inc. (Nasdaq). June 7, 2009
4. iPod Sales, Quarterly and Total. June 7, 2009
5. Nintendo’s Wii takes console lead, June 7, 2009
6. Operating System Market Share. June 7, 2009
7. Missile maker hopes to diversify, create technology for Peacetime. June 7,
2009.
57

8. 100 Best Companies to Work For 2007. June 7, 2009
9. Google.com Corporate Information. June 7, 2009
10. Alexa.com Site Info: Yahoo.com. June 7, 2009
58

Appendix:CompleteTransactionRecord
(Daytradingtransactionsarehighlightedinyellow)
Net
Total
Total
Date Symbol buy/sell Price Shares
Cost/Proceeds
Profit/Loss
Cash
Profit
06/17/09 AAPL buy $135.58 100 $13,568.00 86,432.00
06/17/09 MSFT buy $23.68 200 $4,746.00 81,686.00
06/17/09 INTC buy $16.14 400 $6,466.00 75,220.00
06/17/09 NVDA buy $11.28 200 $2,266.00 72,954.00
06/17/09 ERTS buy $20.83 200 $4,176.00 68,778.00
06/17/09 RTN buy $45.31 350 $15,868.50 52,909.50
06/17/09 GOOG buy $415.16 75 $31,147.00 21,726.50
06/17/09 YHOO buy $15.60 400 $6,250.00 15,512.50
06/17/09 AMD buy $4.08 1,000 $4,090.00 11,422.50
06/19/09 AAPL sell $138.66 100 $13,856.00 288.00 25,278.50 288.00
06/19/09 GOOG sell $418.28 75 $31,361.00 214.00 56,639.50 502.00
06/19/09 RTN sell $46.09 350 $16,121.50 253.00 72,761.00 755.00
06/22/09 GOOG buy $405.30 75 $30,407.50 42,353.50
06/23/09 AMD sell $3.52 1000 $3,510.00 (580.00) 45,863.50 175.00
06/23/09 CTV buy $23.81 300 $7,153.00 38,710.50
06/23/09 CSX buy $32.00 100 $3,210.00 35,500.50
06/23/09 CTV sell $24.00 300 $7,190.00 37.00 42,690.50 212.00
06/23/09 CSX sell $32.25 100 $3,215.00 5.00 45,905.50 180.00
06/23/09 MSFT sell $23.63 100 $2,353.00 (20.00) 48,258.50 160.00
06/23/09 F buy $5.49 1000 $5,500.00 42,758.50
06/23/09 F buy $5.49 4000 $21,970.00 20,788.50
06/23/09 F sell $5.53 5000 $27,640.00 170.00 48,428.50 330.00
06/23/09 F buy $5.52 8000 $44,170.00 4,258.50
59

06/23/09 F sell $5.59 8000 $44,710.00 540.00 48,968.50 870.00
06/23/09 ERTS sell $20.44 200 $4,078.00 (98.00) 53,046.50 772.00
06/24/09 GOOG sell $410.30 75 $30,762.50 355.00 83,809.00 1,127.00
06/24/09 INTC sell $16.19 400 $6,466.00 0.00 90,275.00 1,127.00
06/24/09 AM buy $8.94 1000 $8,950.00 81,325.00
06/24/09 MGM buy $6.71 1000 $6,720.00 74,605.00
06/24/09 MGM sell $6.69 1000 $6,680.00 (40.00) 81,285.00 1,087.00
06/24/09 AM sell $9.14 1000 $9,130.00 180.00 90,415.00 1,267.00
06/24/09 YHOO sell $15.28 400 $6,102.00 (148.00) 96,517.00 1,119.00
06/24/09 NVDA sell $10.93 200 $2,176.00 (90.00) 98,693.00 1,029.00
06/24/09 HLIT buy $5.59 10000 $55,910.00 42,783.00
06/24/09 HLIT sell $5.60 10000 $55,990.00 80.00 98,773.00 1,109.00
06/24/09 GOOG buy $409.00 200 $81,810.00 16,963.00
06/24/09 GOOG buy $407.67 40 $16,316.80 646.20
06/24/09 GOOG sell $408.05 40 $16,312.00 (4.80) 16,958.20 1,104.20
06/24/09 GOOG sell $408.57 200 $81,704.00 (106.00) 98,662.20 998.20
06/25/09 RHT buy $18.47 2000 $36,950.00 61,712.20
06/25/09 TCK buy $15.46 1000 $15,470.00 46,242.20
06/25/09 RHT sell $18.81 2000 $37,610.00 660.00 83,852.20 1,658.20
06/25/09 TCK sell $15.58 1000 $15,570.00 100.00 99,422.20 1,758.20
06/25/09 MSFT sell $23.67 100 $2,357.00 (16.00) 101,779.20 1,742.20
06/26/09 GOOG buy $415.67 100 $41,577.00 60,202.20
06/26/09 YHOO buy $15.62 1000 $15,630.00 44,572.20
06/26/09 MSFT buy $23.55 1000 $23,560.00 21,012.20
06/26/09 MSFT sell $23.42 1000 $23,410.00 (150.00) 44,422.20 1,592.20
06/26/09 GOOG sell $422.02 100 $42,192.00 615.00 86,614.20 2,207.20
60

06/26/09 YHOO sell $15.68 1000 $15,670.00 40.00 102,284.20 2,247.20
06/26/09 RTN buy $44.61 1000 $44,620.00 57,664.20
06/29/09 RMTI buy $7.40 7500 $55,510.00 2,154.20
06/29/09 RTN sell $44.56 1000 $44,550.00 (70.00) 46,704.20 2,177.20
06/29/09 RMTI sell $7.42 7500 $55,640.00 130.00 102,344.20 2,307.20
07/01/09 GOOG buy $421.50 100 $42,160.00 60,184.20
07/01/09 GOOG sell $425.02 100 $42,492.00 332.00 102,676.20 2,639.20
07/02/09 GOOG buy $409.66 50 $20,493.00 82,183.20
07/02/09 AAPL buy $140.35 300 $42,115.00 40,068.20
07/02/09 RTN buy $43.28 500 $21,650.00 18,418.20
07/03/09 GOOG sell $408.49 50 $20,414.50 (78.50) 38,832.70 2,560.70
07/03/09 RTN sell $43.01 500 $21,495.00 (155.00) 60,327.70 2,405.70
07/03/09 AAPL sell $140.02 300 $41,996.00 (119.00) 102,323.70 2,286.70
07/06/09 GOOG buy $403.81 100 $40,391.00 61,932.70
07/06/09 AAPL buy $136.40 300 $40,930.00 21,002.70
07/06/09 AAPL sell $138.61 300 $41,573.00 643.00 62,575.70 2,929.70
07/06/09 GOOG sell $409.61 100 $40,951.00 560.00 103,526.70 3,489.70
07/07/09 AAPL buy $136.99 300 $41,107.00 62,419.70
07/07/09 GOOG buy $401.65 100 $40,175.00 22,244.70
07/07/09 MSFT buy $22.82 950 $21,689.00 555.70
61

07/09/09 MSFT sell $22.54 950 $21,403.00 (286.00) 21,958.70 3,203.70
07/09/09 AAPL sell $137.14 300 $41,132.00 25.00 63,090.70 3,228.70
07/09/09 GOOG sell $413.92 100 $41,382.00 1,207.00 104,472.70 4,435.70
07/10/09 NOVL buy $4.21 20000 $84,210.00 20,262.70
07/10/09 NOVL sell $4.26 20000 $85,190.00 980.00 105,452.70 5,415.70
07/14/09 ORCL buy $20.51 3000 $61,540.00 43,912.70
07/14/09 AAPL buy $141.60 300 $42,490.00 1,422.70
07/14/09 ORCL sell $20.58 3000 $61,730.00 190.00 63,152.70 5,605.70
07/14/09 AAPL sell $142.19 300 $42,647.00 157.00 105,799.70 5,762.70
07/15/09 AAPL buy $145.13 300 $43,549.00 62,250.70
07/15/09 NOVL buy $4.37 13000 $56,820.00 5,430.70
07/16/09 NOVL sell $4.55 13000 $59,140.00 2,320.00 64,570.70 8,082.70
07/16/09 INTC buy $18.14 2000 $36,290.00 28,280.70
07/16/09 AAPL sell $146.54 300 $43,952.00 403.00 72,232.70 8,485.70
07/16/09 GOOG buy $438.63 100 $43,873.00 28,359.70
07/16/09 INTC sell $18.03 2000 $36,050.00 (240.00) 64,409.70 8,245.70
07/16/09 GOOG sell $437.07 100 $43,697.00 (176.00) 108,106.70 8,069.70
07/17/09 GOOG buy $429.61 100 $42,971.00 65,135.70
07/17/09 F buy $6.06 10000 $60,610.00 4,525.70
07/17/09 F sell $6.13 10000 $61,290.00 680.00 65,815.70 8,749.70
07/20/09 GOOG sell $431.96 100 $43,186.00 215.00 109,001.70 8,964.70
62

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LXVI
Part I – Strategic Housing
Revitalization
(The Twenty Percent Profit Margin)
Part II – Jobs Training, Educational
Redevelopment
and Economic Empowerment
Part III - Financial Literacy
and Sustainability
Q-1 2029
Q-2 2029
Q-3 2029
LXVII Part IV – Solutions for Homelessness Q-4 2029
LXVIII
The Strategic Home Mortgage
Initiative
Bonus
Vol. XVI 2030 Sustainability
LXVIII Social Program Sustainability Q-1 2030
LXIX
The Advocacy Foundation
Endowments Initiative
Q-2 2030
LXX Capital Gains Q-3 2030
LXXI Sustainability Investments Q-4 2030
Vol. XVII 2031 The Justice Series
LXXII Distributive Justice Q-1 2031
LXXIII Retributive Justice Q-2 2031
LXXIV Procedural Justice Q-3 2031
LXXV (75) Restorative Justice Q-4 2031
LXXVI Unjust Legal Reasoning Bonus
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Vol. XVIII 2032 Public Policy
LXXVII Public Interest Law Q-1 2032
LXXVIII Reforming Public Policy Q-2 2032
LXXVIX ... Q-3 2032
LXXVX ... Q-4 2032
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The e-Advocate Journal
of Theological Jurisprudence
Vol. I - 2017
The Theological Origins of Contemporary Judicial Process
Scriptural Application to The Model Criminal Code
Scriptural Application for Tort Reform
Scriptural Application to Juvenile Justice Reformation
Vol. II - 2018
Scriptural Application for The Canons of Ethics
Scriptural Application to Contracts Reform
& The Uniform Commercial Code
Scriptural Application to The Law of Property
Scriptural Application to The Law of Evidence
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Legal Missions International
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Issue Title Quarterly
Vol. I 2015
I
II
God’s Will and The 21 st Century
Democratic Process
The Community
Engagement Strategy
Q-1 2015
Q-2 2015
III Foreign Policy Q-3 2015
IV
Public Interest Law
in The New Millennium
Q-4 2015
Vol. II 2016
V Ethiopia Q-1 2016
VI Zimbabwe Q-2 2016
VII Jamaica Q-3 2016
VIII Brazil Q-4 2016
Vol. III 2017
IX India Q-1 2017
X Suriname Q-2 2017
XI The Caribbean Q-3 2017
XII United States/ Estados Unidos Q-4 2017
Vol. IV 2018
XIII Cuba Q-1 2018
XIV Guinea Q-2 2018
XV Indonesia Q-3 2018
XVI Sri Lanka Q-4 2018
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Vol. V 2019
XVII Russia Q-1 2019
XVIII Australia Q-2 2019
XIV South Korea Q-3 2019
XV Puerto Rico Q-4 2019
Issue Title Quarterly
Vol. VI 2020
XVI Trinidad & Tobago Q-1 2020
XVII Egypt Q-2 2020
XVIII Sierra Leone Q-3 2020
XIX South Africa Q-4 2020
XX Israel Bonus
Vol. VII 2021
XXI Haiti Q-1 2021
XXII Peru Q-2 2021
XXIII Costa Rica Q-3 2021
XXIV China Q-4 2021
XXV Japan Bonus
Vol VIII 2022
XXVI Chile Q-1 2022
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The e-Advocate Juvenile Justice Report
______
Vol. I – Juvenile Delinquency in The US
Vol. II. – The Prison Industrial Complex
Vol. III – Restorative/ Transformative Justice
Vol. IV – The Sixth Amendment Right to The Effective Assistance of Counsel
Vol. V – The Theological Foundations of Juvenile Justice
Vol. VI – Collaborating to Eradicate Juvenile Delinquency
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The e-Advocate Newsletter
Genesis of The Problem
Family Structure
Societal Influences
Evidence-Based Programming
Strengthening Assets v. Eliminating Deficits
2012 - Juvenile Delinquency in The US
Introduction/Ideology/Key Values
Philosophy/Application & Practice
Expungement & Pardons
Pardons & Clemency
Examples/Best Practices
2013 - Restorative Justice in The US
2014 - The Prison Industrial Complex
25% of the World's Inmates Are In the US
The Economics of Prison Enterprise
The Federal Bureau of Prisons
The After-Effects of Incarceration/Individual/Societal
The Fourth Amendment Project
The Sixth Amendment Project
The Eighth Amendment Project
The Adolescent Law Group
2015 - US Constitutional Issues In The New Millennium
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2018 - The Theological Law Firm Academy
The Theological Foundations of US Law & Government
The Economic Consequences of Legal Decision-Making
The Juvenile Justice Legislative Reform Initiative
The EB-5 International Investors Initiative
2017 - Organizational Development
The Board of Directors
The Inner Circle
Staff & Management
Succession Planning
Bonus #1 The Budget
Bonus #2 Data-Driven Resource Allocation
2018 - Sustainability
The Data-Driven Resource Allocation Process
The Quality Assurance Initiative
The Advocacy Foundation Endowments Initiative
The Community Engagement Strategy
2019 - Collaboration
Critical Thinking for Transformative Justice
International Labor Relations
Immigration
God's Will & The 21st Century Democratic Process
The Community Engagement Strategy
The 21st Century Charter Schools Initiative
2020 - Community Engagement
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Extras
The Nonprofit Advisors Group Newsletters
The 501(c)(3) Acquisition Process
The Board of Directors
The Gladiator Mentality
Strategic Planning
Fundraising
501(c)(3) Reinstatements
The Collaborative US/ International Newsletters
How You Think Is Everything
The Reciprocal Nature of Business Relationships
Accelerate Your Professional Development
The Competitive Nature of Grant Writing
Assessing The Risks
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About The Author
John C (Jack) Johnson III
Founder & CEO
Jack was educated at Temple University, in Philadelphia, Pennsylvania and Rutgers
Law School, in Camden, New Jersey. In 1999, he moved to Atlanta, Georgia to pursue
greater opportunities to provide Advocacy and Preventive Programmatic services for atrisk/
at-promise young persons, their families, and Justice Professionals embedded in the
Juvenile Justice process in order to help facilitate its transcendence into the 21 st Century.
There, along with a small group of community and faith-based professionals, “The Advocacy Foundation, Inc." was conceived
and developed over roughly a thirteen year period, originally chartered as a Juvenile Delinquency Prevention and Educational
Support Services organization consisting of Mentoring, Tutoring, Counseling, Character Development, Community Change
Management, Practitioner Re-Education & Training, and a host of related components.
The Foundation’s Overarching Mission is “To help Individuals, Organizations, & Communities Achieve Their Full Potential”, by
implementing a wide array of evidence-based proactive multi-disciplinary "Restorative & Transformative Justice" programs &
projects currently throughout the northeast, southeast, and western international-waters regions, providing prevention and support
services to at-risk/ at-promise youth, to young adults, to their families, and to Social Service, Justice and Mental
Health professionals” everywhere. The Foundation has since relocated its headquarters to Philadelphia, Pennsylvania, and been
expanded to include a three-tier mission.
In addition to his work with the Foundation, Jack also served as an Adjunct Professor of Law & Business at National-Louis
University of Atlanta (where he taught Political Science, Business & Legal Ethics, Labor & Employment Relations, and Critical
Thinking courses to undergraduate and graduate level students). Jack has also served as Board President for a host of wellestablished
and up & coming nonprofit organizations throughout the region, including “Visions Unlimited Community
Development Systems, Inc.”, a multi-million dollar, award-winning, Violence Prevention and Gang Intervention Social Service
organization in Atlanta, as well as Vice-Chair of the Georgia/ Metropolitan Atlanta Violence Prevention Partnership, a state-wide
300 organizational member, violence prevention group led by the Morehouse School of Medicine, Emory University and The
Original, Atlanta-Based, Martin Luther King Center.
Attorney Johnson’s prior accomplishments include a wide-array of Professional Legal practice areas, including Private Firm,
Corporate and Government postings, just about all of which yielded significant professional awards & accolades, the history and
chronology of which are available for review online. Throughout his career, Jack has served a wide variety of for-profit
corporations, law firms, and nonprofit organizations as Board Chairman, Secretary, Associate, and General Counsel since 1990.
www.TheAdvocacyFoundation.org
Clayton County Youth Services Partnership, Inc. – Chair; Georgia Violence Prevention Partnership, Inc – Vice Chair; Fayette
County NAACP - Legal Redress Committee Chairman; Clayton County Fatherhood Initiative Partnership – Principal
Investigator; Morehouse School of Medicine School of Community Health Feasibility Study - Steering Committee; Atlanta
Violence Prevention Capacity Building Project – Project Partner; Clayton County Minister’s Conference, President 2006-2007;
Liberty In Life Ministries, Inc. – Board Secretary; Young Adults Talk, Inc. – Board of Directors; ROYAL, Inc - Board of
Directors; Temple University Alumni Association; Rutgers Law School Alumni Association; Sertoma International; Our
Common Welfare Board of Directors – President)2003-2005; River’s Edge Elementary School PTA (Co-President); Summerhill
Community Ministries; Outstanding Young Men of America; Employee of the Year; Academic All-American - Basketball;
Church Trustee.
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www.TheAdvocacyFoundation.org
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