Online Investing Fundamentals

The Internet has more than two billion Web pages and is still growing. Thisinformation overload has sent some timid investors to full-service brokers,where they pay high commission fees for brokerage services and investmentadvice. Smart online investors can avoid information overload by developingtheir own information systems.Now we will show how you can take maximum advantage of the Internet’smany investment tools, links, and resources. The chapter explains theInternet basics of using search engines, finding investor newsgroups,Subscribingto investor mailing lists, accessing online databases, and using Websites tailored to your specific needs to maximize your personal wealth.

Building Your Own OnlineInformation System

Investments provide opportunities to make money in both a bull market (thatis, an up market) and a bear (down) market. No one ever knows for certainwhether the market will go up or down, but investors can develop an informationsystem to watch indicators for potential price changes and investmentopportunities.

This chapter introduces the elements you can use for buildingan online investment information system that meets your specific needs.Investment indicators often signal future market trends. For example, changesin bond prices an

d interest rates often reflect trends that may affect stockprices. That is, if bond yields decline, investors often rush to purchase stocks,causing stock prices to increase.Investors need this information to decide whether they should buy, sell, or hold.Gathering, organizing, and saving this information can be time-consuming.

However, using your own online information system can make the process moreefficient.Successful investing involves five basic steps:

1. Identifying new investments

2. Analyzing investment candidates

3. Purchasing investments

4. Monitoring investments

5. Selling investments — and reaping your rewards

The following sections summarize online sources of the information you needfor each step. Knowing what type of information you need and where to get itonline can help you build your personalized online information system.

Identifying new investments

Before investing, you need to clearly state your financial objectives andknow your risk-tolerance level. This information can help you determineyour required rate of return. By doing this type of homework, you candetermine which categories of financial assets you may want to considerinvesting in.

For example, if you’re selecting investments for your IndividualRetirement Account (IRA), you don’t want to invest in tax-exempt municipalbonds (because being tax-exempt twice isn’t the best way to make use of taxexemptions).

Here are some examples of online sources for identifying investmentopportunities:

Company profiles describe a firm’s organization, products, financialposition, chief competitors, and executive management.

Direct purchase plans (DPPs) show how to purchase stock in a companywithout paying a broker’s commission.

Directories of investor sources provide hard-to-find information that’snecessary for investment decision-making.

Dividend reinvestment plans (DRIPs) describe how to join dividendreinvestment programs to purchase company stock at a discount andwithout a broker.

Initial public offerings (IPOs) are new opportunities for investorprofits.

Investing e-zines (electronic magazines) provide educational articlesand pertinent facts for beginning and experienced investors.

Mailing lists provide opinions and investors’ insights about investmentcandidates.

News reports on the Net can provide information about new investmentopportunities.

Newsgroups are informal, online groups of individuals who share theirideas about a common interest. You can find dozens of investment-relatednewsgroups with topics ranging from specific types of investments toinvestor strategies.

Online databases (free and fee-based repositories of information) providehistorical stock prices, economic forecasts, and more.

Search engines (specialized Internet programs that seek the data youdesire) provide you with links to the Web pages that have the investorinformation you want.

Stock recommendations from professionals enable you to find out whatbrokers and analysts are saying about your investment selections.

Mutual fund and stock screens for selecting specific securities enableyou to sort through thousands of investment candidates in seconds tofind not only the right investment but also the best investment available.

Analyzing investment prospects

The process of analyzing investment prospects includes examining groups ofinvestments or individual securities. For this task, you need information toforecast the timing and amount of future cash flows of investment candidates.That is, the price you pay today is based on the future income of the asset.Figuring out what the asset will be worth in the future requires some homework,analysis, and luck.

Here are a few examples of online sources for thistype of information:

Company profiles and annual reports often forecast the company’sfuture revenues and earnings. (For more information about findingannual reports online.

Databases (free and fee-based online sources) provide news, marketcommentary, historical stock prices, economic forecasts, industry standards,and competitor information. I introduce you to these databases inthe section “Using Free and Fee-Based Online Investor Databases.

Earnings estimates from brokers and analysts give you forecasts of acompany’s future earnings.

Industry or business-sector news can frequently indicate whether anindustry is in a downward cycle.

National economic data can point you toward a particular investmentstrategy. For example, if the country is going into a recession, youmay want to select stocks that provide you with some defense.News databases offer breaking news that can help you judge whetheryour stock purchase is a winner or a loser.

Securities and Exchange Commission (SEC) filings provide you withfinancial statements from publicly traded companies. These companiesare required to file financial statements every 90 days and more often ifbig events are happening within the firm. More than 7,000 publiclytraded firms are now filing online.

Purchasing investments

After you decide which investments you want to purchase, you have to decidehow you want to purchase them. For example, you must decide whether youwant a full-service broker or, for online investing, either a premium discountbroker who offers online trades and advice or a discount broker that onlyexecutes your trades and doesn’t offer any recommendations.

You may participate in an automatic investment plan (AIP). With yourapproval, this type of plan deducts a certain amount from your checkingaccount to purchase mutual funds, savings bonds, or other investments.

Monitoring investments

If you have more than one investment, you likely want to monitor and comparetheir performances to the market and to similar investments.

Here are afew examples of the information and the software you need to accomplishthis objective:

Market-monitoring tools send alerts that you determine. For example, ifyour stock increases by 25 percent, you may want to consider selling it.You can set up an alert that sends you an e-mail message notifying youthat your stock has reached this target.

The Internet provides many portfolio management programs that let youknow when your investments are in the news.

Online portfolio management tools can automatically send you an e-mailmessage at the end of the day to let you know whether your investmentsgained or lost value.

PC-based portfolio management tools are downloadable software programsthat assist you in tracking your investments and record keeping.

Your online broker may track your portfolio for you and keep records ofyour profits and losses.

Selling investments

You need to decide what proportion of your personal wealth you want toinvest in specific assets, how long you want to hold those assets, andwhether now is a good time to sell those assets to harvest your rewards.

To that end, you need information about the following topics:

Asset allocation methodologies: You need to determine what portion ofyour portfolio should be invested in mutual funds, stocks, and bonds.

Capital gains and tax issues: The Smart Money Capital Gains Guide(www.smartmoney.com/tax/capital) can assist you in understandingthe tax implications of investing activities.

Selling strategies: Determining when you should harvest your investmentsrequires using specific order execution strategies, mutual fundredemption plans, and analyses.