Chapter 2: Be a Web Savvy Investor

Chapter 2: Be a Web Savvy Investor

Where do you turn to find out about stocks and mutual funds? Not long ago, your only sources would have been the reference library, information provided by your full service broker, or a subscription to Investor's Business Daily and Value Line. The Internet has changed all of that.

Financial information readily available on the Web gives you the ability to track your portfolio, get quotes, read earnings estimates or earnings reports, and more.

Virtually all the information you need to research a stock or mutual fund is available online. And once you've satisfied your investment criteria, you can trade over the Internet for just a few dollars a trade. It's no wonder that online investing has exploded.

Focus Your Efforts
While it's never been easier to access information on a prospective stock or mutual fund, the fundamentals of an attractive investment have not changed. For example, when deciding if a stock is a good buy, here are a few things you should consider:

• Earnings per share growth
• Price to earnings ratio
• Dividends
• Debt to equity ratio
• Return on equity
• Volatility

In addition, you should be fluent in the business or industries of the companies you own or want to buy. If you are interested in investing in a mutual fund, first research the industries or specialization of the fund.

If you do not have a grasp of such basic knowledge, then perhaps you should step back from investing until you become more informed. When it comes to investing, greater knowledge typically equals greater returns.

Exercise: How to Read a Stock Quote
There's more to tracking a stock than just looking at its most recent trading price. This glossary of terms will help:

• Last: The most recent price at which the security was traded (all quotes are updated every 15 to 20 minutes).
• Open: The price of the stock's first trade of the day.
• High: The highest price at which the stock traded during that day.
• Bid: The highest price the market is willing to pay for the stock. The investor will sell for this price.
• 52 Week High: The highest closing price for the stock over the past 52 weeks.
• Earnings Per Share: Measures the company's last four quarters' reported earnings relative to the number of common shares outstanding. It is an especially useful figure when compared with previous years' EPS to determine an EPS growth rate.
• Shares Outstanding: Total number of common stock shares held by shareholders.
• Price Earnings Ratio (P/E Ratio): Measures the relative value of a stock by dividing the stock's price by its earnings per share. The P/E ratio lets investors gauge how cheap, expensive, or fairly valued a stock price. Compare this number to historical performance, competitors, or the market in general. Typically, faster growing companies have higher P/Es.
• Change: The difference between the previous day's closing price and the most recent price of the stock.
• Percent Change: The percentage of change between the previous day's closing price and the last trade.
• Low: The lowest price at which the stock traded during the trading day.
• Ask: The lowest price at which the market is willing to sell the stock. The investor will buy for this price.
• 52 Week Low: The lowest closing price for the stock over the past 52 weeks.
• Volume: How many shares traded that day.
• Market Capitalization: The total value of a company's outstanding shares calculated by multiplying the number of shares outstanding by the price per share.
• Exchange: The stock exchange where the stock is traded.
  

Exercise: How to Read a Research Report
Found a stock you like? Find out if the pros agree with a research report created by highly regarded Zacks Investment Research.

1. Go to Zacks Investment Research and enter a stock ticker symbol in the "Quote" box and click on "Go."

2. On the results page, you will find valuable numbers that reveal where the stock stands in the eyes of the investment community, and perhaps forecast stock price movement.

• Number of Brokers Recommending: This chart will keep you abreast of analyst opinion on a stock. Analysts weigh in on the stock on a scale of 1 to 5, with 1 being the highest rank (strong buy) and 5 the lowest (strong sell). This chart is updated daily, so check in frequently to find out current sentiment on your stock. A large swing in the ratings could mean this is the time to buy or sell your holding.

   

• Earnings Estimates and Actuals: Earnings per share estimates quantify how analysts think a stock will perform based on exhaustive research of the company's management, anticipated revenue, demand, competition, and overall economic conditions. Earnings estimates are a measurement of a company's health and prosperity predicted down to the penny. Zacks Investment Research collects analysts' summaries from 240 brokerage houses and 3,000-plus analysts and creates a consensus estimate of all the analysts who follow a particular stock. Look at this area to detect trends: are next year's estimates higher than this year's?; are the current quarter's estimates higher than last quarter's?; did the stock record an upside earnings surprise? Positive trends point to a company experiencing healthy growth.

  Earnings estimates are a valuable indicator because changes in estimates often predict the rise or fall of a stock price. Typically, when analysts increase their estimates, investors' expectation of the stock's income increases, thus the value of the company and stock price rises.

  In addition, when a company reports earnings that vary from the consensus estimate, the stock typically reacts positively or negatively. While average investors usually miss out on capitalizing on earnings surprises, the results do affect analysts' ratings in future quarters.

You can also do more digging on a company by selecting the links to its income statement and balance sheet.

Exercise: Top Online Brokers
With more than 100 online brokers to choose from, how do you select the right one? Choosing an online broker depends on your financial goals and investment habits. Survey the following list of top sites to find one that best suits your needs. Each was selected based on cost per trade, minimum investment requirements, services, and dependability.

American Express: Here's a solid model with a wide variety of products from mutual funds to insurance. What's more, there's no minimum investment to open an account. Each trade costs $14.95, but if you deposit $100,000 in an account, you can trade for free.

Ameritrade: Trade for as little as $8 a transaction, and choose from a large list of top-performing mutual funds. The site boasts more than 4,000 funds in all. The minimum investment is $2,000, and you can also buy stocks listed on the Canadian exchange.

Charles Schwab: Schwab is still considered the leader of the online broker pack. And for good reason: its easy-to-use site is loaded with money tutorials, screening tools, and investments from bonds to life insurance. In addition, there's terrific customer service: for example, Schwab will send you an email when your trade is completed. While the basic $29.95 per trade cost and $5,000 minimum balance is higher than others on our list, many investors think the price is well worth it.

DLJ Direct: A great full-service site, you can access real-time news and research from DLJ's stable of analysts. Also download free software to speed up your online transactions. There's no minimum investment and trades cost $20.

E*Trade: This site offers great resources for the novice investor, including message boards and chat rooms where you can discuss your questions. Some complain that E*Trade has been prone to outages, but signs indicate their problems are behind them. Minimum investment is $1,000 and trades are $14.95. Take advantage of promotions where you may receive anything from frequent flier miles to cash for opening an account.

Morgan Stanley Online: Morgan Stanley's expert stock analysis is only a click away, along with easy-to-use tools for buying a home or figuring taxes. Minimum investment is $2,000 for $29.95 trades. Once you become comfortable with online investing, consider upgrading to a full service Morgan Stanley Choice account. With a minimum investment of $50,000 and a fee of 0.3 percent to 2.25 percent of your assets, you will have your own personal investment advisor and other perks such as free trades and bill paying.

My Discount Broker: My Discount Broker touts speedy trades, which may come in handy if you use their new IPO center. No minimum investment required and trades are only $12.

National Discount Brokers: This easily navigable site offers no-load, no-transaction fee mutual funds along with no minimum balance. Account status screens spit out information in greater detail than most sites. What's more, you'll pay only $14.75 per trade.

Quick & Reilly: For $14.95 a trade and no minimum balance, you can access a long list of stock and fund screeners. Banking services are also available.

TD Waterhouse: This site packs in extras such as check-writing privileges, wire services, and IRA accounts -- all at a lower cost than most broker sites. Consider: $12 per trade and $1,000 minimum balance.