Forbes Guide to the Markets: Becoming a Savvy Investor, 2nd Edition

Acknowledgments xi

Note to the Reader xiii

About the Author xv

Introduction: Becoming a Savvy Investor xvii

Section I Establishing a Frame of Reference 1

Chapter One From “Dumb” Barter to Intelligent Agents 3

Chapter Two Point-Counterpoint 13

Stocks 14

Mutual Funds 14

Bonds 15

ETFs 15

Options 15

Futures 16

Summary 16

Chapter Three Confronting Information Overload 17

Investor Constraints 18

Investor Choices 19

Investor Safety 21

Section II Stocks and Equity Markets 23

Chapter Four Varieties of Stocks 27

Just What is a Security, Anyway? 27

Issuers and Underwriters: Why Does a Corporation Sell Stock to the Public? 29

Why Investors Buy Stock 34

Summing Up Total Return: Dividends and Capital Gains 35

A Letter to Our Shareholders: Annual and Quarterly Reports (and Filings) 41

Making Sense of Types, Classes, and Other Stock Categories: A Map of the World of Stock 41

Chapter Five Stock Markets 47

The Big Board 48

The Incredible Growth of Trading and Capital 58

National Association of Securities Dealers Automated Quotation System (NASDAQ) 61

Technology, Dark Pools, and the Evolution of a Unified Market 63

Chapter Six Three Views of the Numbers 65

Fundamental Analysis 66

Technical Analysis 70

Quantitative Analysis 80

Chapter Seven Where to Find Information on Stocks and Financial Markets 87

A Selection of Information Sources on the Financial Markets 91

Chapter Eight How to Buy and Sell Stock 99

Full-Service Brokers 100

Discount Brokers 102

Financial Intermediaries 103

Direct Purchase 104

If It Sounds Too Good to Be True . . . Protecting Yourself from Stock Scams 104

A Note on Financial Planners 106

Section III Mutual Funds and Investment Companies 109

Chapter Nine A History and Overview of the Mutual Fund Business 113

Open-End versus Closed-End Funds 117

Index Funds 118

Load versus No-Load Funds 119

Chapter Ten Advantages of Mutual Funds 121

Simplicity 121

Diversification 122

Access to New Issues 122

Economies of Scale 123

Professional Management 125

Indexing 125

Chapter Eleven Disadvantages of Mutual Funds 127

Impact of One-Time Charges and Recurring Fees on Fund Performance 127

Hidden Cost of Brokerage 130

Some Hidden Risks of Fund Ownership 132

Chapter Twelve Sources of Information on Mutual Funds 135

Investment Company Institute Classification of Types of Funds 136

Lipper Analytical Services 139

Forbes 140

Morningstar 140

Chapter Thirteen Alternative Investments 141

Hedge Funds 141

Funds of Hedge Funds 144

Other Alternatives 145

Section IV Bonds and Other Fixed-Income Securities 147

Chapter Fourteen Seven Characteristics of Bonds 151

The Lifespan of Bonds 152

Interest versus Discount 153

Relationship of Price to Yield 154

Four Important Yield Measures 154

Credit Quality, Ratings, and Insurance 155

Call and Related Features 155

Fixed versus Floating Rates and Foreign Currencies 156

Chapter Fifteen How the Other $30 Trillion is Invested 159

Treasuries 160

Corporates 170

Mortgage-Backed Securities and Other Asset-Backed Securities 171

Municipals 172

Money Market 174

Summary 175

Section V Options, Futures, and Other Derivatives 177

Chapter Sixteen Options 181

Exchange-Traded Options 183

Combination Strategies 185

Determining the Value of an Option 187

Chapter Seventeen Futures 193

A Seller’s Need to Hedge . . . 193

Some Buyers Need to Hedge, Too 194

Speculation or Insurance? Maybe a Little of Both 195

Actuals versus Cash-Settled Contracts 195

Margin and Collateral 196

Chapter Eighteen Other Derivatives 199

Section VI Summing Up Risk and Return 203

Chapter Nineteen How Well Are My Investments Doing? 207

The Basics of Return 208

Annualized Returns: Arithmetic (Simple) or Geometric (Compound)? 211

Time-Weighted Returns versus Money-Weighted Returns 216

Complicating Factors 220

Chapter Twenty Coming to Grips with the Many Dimensions of Risk 223

A Definition of Investment Risk 223

The Relativity of Risk 224

What is Market Risk? 226

“It Will Fluctuate” 227

Other Kinds of Investment Risk: From the Quantifiable to the Subjective 228

Balancing Risk and Return 232

Chapter Twenty-One A Crescendo of Change 235

Again, We Ask, What is a Market? 235

Glossary 239

Index 267