by Kathleen Sindell, PhD Investing Online FOR DUMmIES ‰ 5TH EDITION 01_584561 ffirs.qxd 3/10/05 7:13 PM Page i Investing Online For Dummies ® , 5th Edition Published by Wiley Publishing, Inc. 111 River Street Hoboken, NJ 07030-5774 www.wiley.com Copyright © 2005 by Wiley Publishing, Inc., Indianapolis, Indiana Published by Wiley Publishing, Inc., Indianapolis, Indiana Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permit- ted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600. 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Library of Congress Control Number: 2005923224 ISBN-13: 978-0-7645-8456-5 ISBN-10: 0-7645-8456-1 Manufactured in the United States of America 10 9 8 7 6 5 4 3 2 1 5B/SZ/QT/QV/IN 01_584561 ffirs.qxd 3/10/05 7:13 PM Page ii About the Author Kathleen Sindell is the author of Managing Your Money Online For Dummies (Wiley, 2004), Safety Net: Protecting Your Business on the Internet (Wiley, 2002), Loyalty Marketing for the Internet Age (Dearborn, 2000), The Unofficial Guide to Buying a Home Online (Hungry Minds, 2000), and A Hands-On Guide to Mortgage Banking Internet Sites, a separate directory published by Mortgage Banking Magazine (2000, 1999, 1998, 1997). Dr. Sindell is a contributing author to the Encyclopedia of Computer Science (Groves Dictionaries Inc., 2000) and the online investing columnist for Investor Direct magazine (1999). She is the author of The Handbook of Real Estate Lending (McGraw-Hill Professional Publishing, 1996). Dr. Sindell is an expert on electronic commerce and is an adjunct faculty member at the Johns Hopkins University MBA program. She is the former Associate Director of the Financial Management and Commercial Real Estate Programs for the University of Maryland, University College Graduate School of Management & Technology. Dr. Sindell provides consulting and publications about management, finance, security, and real estate in the e-commerce environment. Her goal is to improve the quality of life and economic well-being of people and business organizations by providing information that they might not otherwise have or understand. She received her B.A. in Business from Antioch University, an MBA in Finance from the California State University at San Jose, and a PhD in Administration and Management from Walden University, Institute for Advanced Studies. 01_584561 ffirs.qxd 3/10/05 7:13 PM Page iii Dedication This book is dedicated to my dear friends Arlene Meilich and Gail Pasternack. Author’s Acknowledgments Investing Online for Dummies, 5th Edition, illustrates the latest trends in online investing and represents my desire to help people take control of their finances by accessing high-quality Web-based investing information. My grati- tude and thanks to Bob Woerner, senior acquisitions editor, for his guidance. Development editor Mark Enochs made working on this book a joy. My appre- ciation to Andy Hollandbeck and Teresa Artman for their excellent copy edit- ing. It was a pleasure to work with technical editor Dan Chesler. I am also grateful to the many folks who work behind the scenes at Wiley Publishing. It was a delight to work with my literary agent, Carole McClendon, and all the folks at Waterside Productions on this fifth edition of Investing Online For Dummies. A very special thank you to my brother-in-law, Gerald Sindell, for his pro- found counsel on everything relating to the business of publishing. 01_584561 ffirs.qxd 3/10/05 7:13 PM Page v Publisher’s Acknowledgments We’re proud of this book; please send us your comments through our online registration form located at www.dummies.com/register/. Some of the people who helped bring this book to market include the following: Acquisitions, Editorial, and Media Development Project Editor: Mark Enochs Senior Acquisitions Editor: Bob Woerner Copy Editor: Andy Hollandbeck Technical Editor: Dan Chesler Editorial Manager: Kevin Kirschner Media Development Manager: Laura VanWinkle Media Development Supervisor: Richard Graves Editorial Assistant: Amanda Foxworth Cartoons: Rich Tennant ( www.the5thwave.com) Composition Services Project Coordinators: Emily Wichlinski, Nancee Reeves Layout and Graphics: Carl Byers, Andrea Dahl, Lauren Goddard, Denny Hager, Joyce Haughey, Barry Offringa, Lynsey Osborn, Melanee Prendergast, Heather Ryan Proofreader: Kelly Ewing, Leeann Harney, Jessica Kramer, Carl Pierce Indexer: TECHBOOKS Production Services Special Help: Teresa Artman Publishing and Editorial for Technology Dummies Richard Swadley, Vice President and Executive Group Publisher Andy Cummings, Vice President and Publisher Mary Bednarek, Executive Acquisitions Director Mary C. Corder, Editorial Director Publishing for Consumer Dummies Diane Graves Steele, Vice President and Publisher Joyce Pepple, Acquisitions Director Composition Services Gerry Fahey, Vice President of Production Services Debbie Stailey, Director of Composition Services 01_584561 ffirs.qxd 3/10/05 7:13 PM Page vi Contents at a Glance Introduction 1 Part I: Online Investing Fundamentals 9 Chapter 1: Finding Investor Stuff on the Net 11 Chapter 2: No Experience Required: Getting Started with Online Investing 31 Chapter 3: Making Your Money Work Harder 47 Chapter 4: Selecting an Online Broker That’s Right for You 63 Chapter 5: Getting Ahold of Trading Online 81 Part II: Finding the Right Investments 97 Chapter 6: The Keys to Successful Internet Mutual Fund Investing 99 Chapter 7: Online Analysis, Buying, and Selling of Mutual Funds 121 Chapter 8: The Basics of Stocks and Rates of Return 141 Chapter 9: Internet Stock Screening 159 Chapter 10: Using Company Information to Make Investment Decisions 175 Chapter 11: Digging Deeper: Advanced Stock Analysis 195 Chapter 12: Going with Fixed-Income Securities: Which Type of Bond Is for You? 221 Chapter 13: Valuing, Buying, and Selling Bonds Online 243 Part III: Expanding Your Investment Opportunities 263 Chapter 14: Going International Online 265 Chapter 15: Looking for the Next Big Thing: IPOs, DPOs, and DRIPs 281 Chapter 16: Taking the Option: Alternative Investing 301 Chapter 17: The Internet and Managing Your Portfolio 315 Part IV: The Part of Tens 337 Chapter 18: Ten Warnings About Cyberfraud 339 Chapter 19: Ten Important Selling Points 353 Chapter 20: Ten Green Flags for Buying 365 Index 373 02_584561 ftoc.qxd 3/10/05 5:52 PM Page vii Table of Contents Introduction 1 Who Are You? 1 About This Book 3 How to Use This Book 4 How This Book Is Organized 4 Part I: Online Investing Fundamentals 5 Part II: Finding the Right Investments 5 Part III: Expanding Your Investment Opportunities 5 Part IV: The Part of Tens 6 What’s New 6 Icons Used in This Book 7 Feedback, Please 7 Part I: Online Investing Fundamentals 9 Chapter 1: Finding Investor Stuff on the Net . . . . . . . . . . . . . . . . . . . . . .11 Building Your Own Online Information System 11 Identifying new investments 12 Analyzing investment prospects 13 Purchasing investments 14 Monitoring investments 15 Selling investments 15 Setting Up Your Basic Investment Search Strategy 16 Metasearch engines 16 Popular search engines 17 Selecting the best search engine 19 Understanding How Newsgroups Can Help You 20 Finding the perfect newsgroup 21 Finally, some investor news reading 21 Getting the Message from Investor Message Boards 22 Uncovering Investor Information from Mailing Lists 23 Using Free and Fee-Based Online Investor Databases 24 Totally free databases 24 When all else fails — fee-based databases 25 Getting Online Investor Information Geared to Your Needs 26 Investor Web sites for children 27 Web sites for young investors 27 Other investor special-interest sites 28 02_584561 ftoc.qxd 3/10/05 5:52 PM Page ix Chapter 2: No Experience Required: Getting Started with Online Investing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31 Getting Smart Online 32 Online investor tutorials 32 Web sites for new investors 34 Glossaries 34 Maximizing Your Internet Browser with Bookmarks 36 News You Can Use 37 Large news organizations 38 Newspapers 38 Magazines 39 Scholarly journals 40 Multimedia investment news 41 Electronic newsletters 41 Practicing with Your New Investment Information 43 Join the club! Become a member of an investment club 43 Getting into the game: Online investment simulations 44 Chapter 3: Making Your Money Work Harder . . . . . . . . . . . . . . . . . . . .47 Using the Internet to Make Financial Planning Easier 47 The joys of compound interest 48 Moving Some of Your Savings to Investments 50 Maximizing Your Investments with Tax-Deferred Accounts 51 Traditional IRAs 52 Roth IRAs 52 Online calculators for determining the best IRA account 53 Deciding How Much Risk You Can Take 54 Determining How Much You Can Invest 55 Investing in Securities That Meet Your Goals 55 Checking Out What the Experts Are Doing 56 Analyzing the analysts 56 Getting the opinions of others: Stock-picking communities 57 Judging who’s the real deal 58 Tracking and Measuring Your Success 59 Building Your Personalized Investment Plan 60 Chapter 4: Selecting an Online Broker That’s Right for You . . . . . . . .63 Is a Traditional Broker Best for You? 64 Selecting a Premium Online Brokerage 65 Selecting the Right Discount Online Brokerage 66 Investigating a Brokerage Before You Invest 67 Matching Your Needs to the Right Online Brokerage 67 For beginners 68 For mainstream investors 68 For active investors 70 For affluent investors 70 Investing Online For Dummies, 5th Edition x 02_584561 ftoc.qxd 3/10/05 5:52 PM Page x Getting Online Trading Services for Less 72 Trading online for $15 or less 73 Finding online brokers with no or low initial account minimums 74 Rating Online Brokers 76 Checking Out Hybrid Online Banks and Brokerages 77 Opening Your Online Brokerage Account 79 Chapter 5: Getting Ahold of Trading Online . . . . . . . . . . . . . . . . . . . . . .81 Understanding the Tax Consequences of Trading Securities 81 Special rates for long-term capital gains 82 Measuring capital gains 83 What about capital losses? 83 Increasing Profits with Simple Order Specification Techniques 84 ECNs — It’s Not Your Grandfather’s Market Anymore 86 How ECNs work 86 Understanding inside spreads 87 Extended-Hours Trading 88 Sources for extended-hours stock information 89 Join the extended-hours club 89 Online Trading and the Active Investor 90 Active investor trading platforms 91 You might be a day trader if . . 93 Going from Hardwired to Wireless Trading 94 Part II: Finding the Right Investments 97 Chapter 6: The Keys to Successful Internet Mutual Fund Investing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .99 Mutual Fund Basics 99 Discovering the differences between open-end and closed-end mutual funds 102 Minimizing fees 103 A Fund for You, a Fund for Me 104 Finding Facts and Figures Online 106 Simplifying Your Investing with Mutual Funds 107 Discovering index funds 107 Becoming aware of exchange-traded funds 108 Mutual Funds and Your Risk Tolerance Level 110 How to Screen Mutual Funds Online 111 Locating and Reading the Prospectus 113 Checking the facts 114 Getting it right 115 Analyzing Mutual Funds 116 Comparing costs and returns 117 Understanding mutual fund risks 118 xi Table of Contents 02_584561 ftoc.qxd 3/10/05 5:52 PM Page xi Chapter 7: Online Analysis, Buying, and Selling of Mutual Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .121 Finding the Right Mix of Investments 121 Using the Internet to Help You Choose the Best Funds in Each Class 124 Following a mutual fund checklist 125 Reading an online mutual fund listing 126 Assessing mutual fund performance 127 Using Scoreboards and Ratings 128 The Ratings War 130 The Morningstar rating system 130 The Lipper Leader system 131 The Value Line rating system 131 Buying Mutual Funds Online: Using an Online Broker 132 Commission-Free Mutual Funds 133 Starting Your Mutual Fund Account with as Little as $50 135 Buying Mutual Funds Online: No Broker Needed 136 The Right Time to Sell Your Mutual Funds 137 Chapter 8: The Basics of Stocks and Rates of Return . . . . . . . . . . . . .141 Understanding Stocks 141 Participating in the Market 142 Common stocks 142 Preferred stocks 143 Picking the Right Stock for the Right Goal 143 What Does the S & P 500 Have to Do with Anything? 145 Paying the Right Price 147 Getting down to fundamentals 147 Using online tools to value stocks 148 Using the Net to calculate fair value 149 Valuation model input and results 151 Analysis for value shopping 153 Getting technical: Technical analysis 154 Technical analysis software 156 Market timing 157 Chapter 9: Internet Stock Screening . . . . . . . . . . . . . . . . . . . . . . . . . . .159 Finding the Best Stock Using the Net 159 Choosing the criteria for your first stock screen 160 Fine-tuning your stock screen 161 Using your stock screen results 161 Important ratios for screening stocks 161 Starting with Quick Online Stock Screens 165 Using Those Terrific Prebuilt Stock Screens 166 Locating Those Prebuilt Screens You Can Change Yourself 166 Investing Online For Dummies, 5th Edition xii 02_584561 ftoc.qxd 3/10/05 5:52 PM Page xii [...]... been added to this edition that make using Investing Online For Dummies an even more exciting and beneficial reference book Changes throughout Investing Online For Dummies, 5th Edition, include new investor-related Web sites and updated information about Web sites that now require user registration This revised edition shows how some Web sites now charge fees for access and provides alternative Web sites... sindell.com 7 8 Investing Online For Dummies, 5th Edition Part I Online Investing Fundamentals T In this part he chapters in this part help you discover why the Internet should be your starting point for researching investments You find out how to develop your own online investment information system that is geared to your specific requirements These chapters point you to a variety of online investor... monitoring of investments can be time-consuming Online investing really is work ߜ Partner with the Internet in making your money work harder for you Introduction About This Book This book has no hidden agenda It focuses on common-sense ways to create and build wealth with the Internet I’ve designed Investing Online For Dummies, 5th Edition, for beginning online investors, but experienced investors can... rewards The following sections summarize online sources of the information you need for each step Knowing what type of information you need and where to get it online can help you build your personalized online information system Identifying new investments Before investing, you need to clearly state your financial objectives and know your risk-tolerance level This information can help you determine your... you become an online investor for as little as $25 a month ߜ Uncovering how stock options work and determining the value of your employee stock option plan ߜ Finding out how to take advantage of international opportunities online Additionally, I offer warnings to help you avoid dangerous or costly traps, and I point out excellent online investment resources Investing Online For Dummies, 5th Edition,... that a mistake may cost you money), try practicing at the Investing Online Resource Center, located at www.investingonline.org The Investing Online Resource Center includes a free stock market simulation center You can testdrive online investing or try out a new investment strategy without losing a dime or having to register If you’re new to investing on the Internet, check out the first three chapters... information about stock options, and how to evaluate the value of your employee stock option plan This part of the book also covers online portfolio management and explores some of the latest tools available online 5 6 Investing Online For Dummies, 5th Edition Part IV: The Part of Tens No more guessing about what to hold and when to fold Part IV provides handy top-ten lists packed full of ready online. .. investor or an experienced trader, this book can guide you to the Internet-based resources that can help you make better, more informed investing decisions than ever before The Internet offers an astounding amount of financial information, and Investing Online For Dummies, 5th Edition, provides clear instructions and ample illustrations so that you don’t get lost in cyberspace With the assistance of... survey goes on to state that 2 Investing Online For Dummies, 5th Edition ߜ On a typical day, between 1 and 3 percent of all Internet users buy or sell stocks, bonds, or mutual funds online Additionally, online investing grew by 40 percent from March 2000 (10 million Americans) to September 2002 (14 million Americans) ߜ More men than women are likely to buy or sell stock online As a matter of fact, the... xvii xviii Investing Online For Dummies, 5th Edition Chapter 20: Ten Green Flags for Buying 365 Digging Out of a Recession with Dollar-Cost Averaging 366 Buy If the Stock Is at Its Lowest Price .367 Invest in Companies with Beautiful Balance Sheets 367 Check Out the Earnings Forecast .368 Watch for Stocks That Are Trading under Book Value 368 Look for Strong . by Kathleen Sindell, PhD Investing Online FOR DUMmIES ‰ 5TH EDITION 01_584561 ffirs.qxd 3/10/05 7:13 PM Page i Investing Online For Dummies ® , 5th Edition Published by Wiley Publishing,. Before You Invest 67 Matching Your Needs to the Right Online Brokerage 67 For beginners 68 For mainstream investors 68 For active investors 70 For affluent investors 70 Investing Online For Dummies, . you make better, more informed investing decisions than ever before. The Internet offers an astounding amount of financial infor- mation, and Investing Online For Dummies, 5th Edition, provides