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The Forbes / CFA Institute Investment Course. Timeless Principles for Building Wealth

  • ID: 1830610
  • Book
  • March 2011
  • Region: Global
  • 288 Pages
  • John Wiley and Sons Ltd
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STOCKS ARE NOT just for the wealthy, and they never were. Investing in stocks has helped some investors with even modest sums of money amass sizable portfolios. Stock investments carry risks, however, especially for the uninformed. Regardless of your net worth, achieving success in financial markets requires, at the very least, a basic understanding of the ins and outs of investing, such as how to buy and sell stocks, the external factors that influence markets, and the inherent risks of investing. From two of the most highly respected names in the investment industry, The Forbes®/CFA Institute Investment Course: Timeless Principles for Building Wealth provides you with the basics and more! The course:

- Explains how stocks have historically outperformed cash and bonds - Examines the various investment asset classes, as well as offers expert insight on asset allocation - Describes the pros and cons of active versus passive investing - Reveals how to determine your current financial position - Details how to ascertain your unique risk profile and investment horizon and how to use both to help define your investment goals - Summarizes Wall Street maxims, and reveals why you should take each with a grain of salt - Provides essential information on selecting a broker, as well as must–ask questions, tax–favored investment strategies, how to read financial statements, sources for investment information, economic indicators, and both fundamental and technical analysis

And the book is just the beginning. At The Forbes®/CFA Institute Investment Course website, you will find exclusive access to a wealth of knowledge, including quizzes, interviews with top money managers, webcasts, and articles, such as how inflation affects investing, the difference between goals and dreams, and common investment mistakes.

Financial markets are complex. You already know that. But, it is what you don't know and doing nothing that can hurt you financially. The Forbes®/CFA Institute Investment Course increases your odds for building and sustaining wealth over the long term by providing you with the basics for developing and then adhering to a disciplined investment plan.
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Preface xiii

Acknowledgments xvii

Chapter 1 Building Capital 1

Role of the Stock Market in Building Wealth 2

Determining Your Financial Position 3

Your Financial Inventory Guide 4

Investment Margin 11

Defi ning Your Goals 12

Return Requirements 13

Risk Profi le 14

Life Cycle and the Risk/Return Mix 15

Other Considerations 16

Asset Classes 17

Asset Allocation 20

Active versus Passive Investing 22

Diversifi cation 23

Dollar Cost Averaging 24

Chapter Takeaways 31

Chapter 2 How Securities Markets Function 33

Role of Securities Markets 33

The Securities Exchanges 36

Over–the–Counter Markets 37


Electronic Communication Networks 39

Stock Quotes 39

The Third Market 40

Other Markets 40

How the New York Stock Exchange Operates 41

How the NASDAQ Operates 43

From SOES to SuperMontage 44

OTC Bulletin Board and Pink Sheets 45

How the ECNs Operate 45

Crossing Systems 46

Electronic versus Floor Trading 46

Preferencing 48

Internalization 49

Chapter Takeaways 49

Chapter 3 Selecting a Broker and Trading 51

Structure of a Brokerage Firm 52

Activities of a Brokerage Firm 53

Services Offered by All Brokers 54

Full–Service versus Discount Brokers 55

Online Brokers 58

Choosing a Brokerage Firm 58

Commissions 60

Direct Purchase of Securities 62

Placing Orders 63

Odd–Lot Trading 66

Margin 67

Transaction Example 68

Settlement 69

Stock Symbols and the Ticker Tape 70

Questions to Ask Your Broker 71

Chapter Takeaways 73

Chapter 4 Tax–Favored Investment Strategies 75

Capital Gains and Dividends 75

Traditional IRAs 77

Roth IRAs 79

401(k) Plans 80

Education Savings Accounts and 529 Plans 82

Other Pension Plans 83

Mutual Funds and Taxes 85

Using Tax–Advantaged Accounts 86

Chapter Takeaways 87

Chapter 5 Reading Financial Statements 89

Income Statements 91

Balance Sheet 95

Statement of Cash Flows 99

Making Sense of the Numbers 102

Profi tability Ratios 102

Asset Utilization Ratios 105

Leverage Ratios 108

Revisiting ROE 110

Liquidity Ratios 110

Market Multiples 112

Look Beyond the Numbers 114

Read the Footnotes 115

Can You Trust Financial Statements? 115

Chapter Takeaways 119

Chapter 6 Sources for Investment Information 121

Where to Obtain Information 123

Securities and Exchange Commission 124

Earnings Releases and Regulation Fair Disclosure 125

Investment Brokers and Dealers 127

Can You Trust Brokerage House Reports? 128

Investment Newsletters and Other Publications 129

Corporate Reports 130

Reading the Annual Report 130

Government Reports 131

Chapter Takeaways 131

Chapter 7 Common Stocks and Economic Indicators 133

Another Look at the Balance Sheet 133

Why Common Shares Have Value 136

Macroeconomic Factors 136

Industry–Specifi c Factors 140

Other Barometers 141

Evaluating Data 141

Chapter Takeaways 143

Chapter 8 Fundamental Analysis 145

Investing versus Trading 145

Passive Investing 146

Active Investing 147

Business Focus 153

Industry Outlook 154

Company Status 155

Major Trends 157

Earnings History and Outlook 158

Dividends 159

Price–Earnings and Price–Book Ratios Revisited 161

Discounted Cash Flow 163

Evaluating Management 164

Some Final Thoughts on Fundamental Analysis 165

Chapter Takeaways 165

Chapter 9 Technical Analysis 167

The Value of Charts 169

Reading Charts 171

Dow Theory 171

Head and Shoulders 175

Support and Resistance Levels 176

Trading Ranges 177

Breakaway Gaps 178

Importance of Volume 179

Other Technical Indicators 182

Time to Grow Bullish 184

Chapter Takeaways 187

Chapter 10 Fixed–Income Securities 189

Bonds 189

Understanding Bonds 190

Understanding Bond Prices 191

Bond Prices and Interest Rates 192

Call Feature 194

Credit Quality of Bonds 194

Other Issues Concerning Bonds 196

How to Buy Bonds 199

Money Market Securities 200

Preferred Stock 201

Understanding Preferred Stock 202

Tax Treatment 203

Trust Preferred Securities 204

Final Thoughts on Bonds and Preferred Stocks 204

Chapter Takeaways 205

Chapter 11 Derivatives 207

Defi ning Derivative Instruments 207

Futures 209

Spot Asset 209

The Futures Market 210

Delivery 211

Hedging 212

Stock Index Futures 212

Single–Stock Futures 214

Options 215

Defi nition of Options 216

Options Markets 216

Important Terms to Know 216

Listed Options 217

What an Option Is Worth 219

Commissions 221

To Sell or to Exercise 222

Some Popular Option Strategies 222

A Warning about Naked Option Writing 225

Chapter Takeaways 226

Chapter 12 Mutual Funds 229

An Investment Company 229

Closed–End or Open–End 230

A Short History of the Mutual Fund Industry 232

Categories of Mutual Funds 232

Advantages of Mutual Funds 237

Disadvantages of Mutual Funds 238

Mutual Fund Expenses 239

How to Choose a Fund 242

Some Final Thoughts about Mutual Funds 243

Hedge Funds 243

Chapter Takeaways 247

Chapter 13 Rules of Thumb and Key Phrases 249

Final Comments 254

Suggested Readings 255

About the Authors 257

Index 259

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Vahan Janjigian
Stephen M. Horan
Charles Trzcinka
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