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Investing Basics - October 29th, 2004
http://www.investopedia.com
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Table of Contents:
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1. Term of the Week: Ghosting
2. Feature Article: Annual Percentage Rate (APR) vs. Annual
Percentage Yield (APY): How the Distinction Affects You
3. Q&A: What's the difference between "top-down" and "bottom-up"
investing?
4. Q&A: What exactly is insider trading?
5. Test Your Financial Knowledge
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Term of the Week: Ghosting
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An illegal practice whereby two or more market makers
collectively attempt to influence and change the price of a stock.
Investopedia Says:
This practice is illegal because market makers are required
by law to act in competition with each other. Ghosting is
termed as such because, like a false image or a ghost, collusion
and manipulation among market makers is difficult to detect.
For related terms and articles, please go to:
http://www.investopedia.com/terms/g/ghosting.asp
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Feature Article: Annual Percentage Rate (APR) vs. Annual
Percentage Yield (APY): How the Distinction Affects You
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It is often purported that Albert Einstein referred to compound
interest as the greatest force on earth. Strong words from one
of the smartest men to ever live. Although this article's
intention is not to ponder Einstein's most compelling views,
we do intend to demonstrate the importance of understanding the
difference between Annual Percentage Rate (APR) and Annual Percentage
Yield (APY) and how one takes compounding into account while the other
does not can affect the amount you pay on a loan or the amount you
receive as a lender.
Read this article, go to:
http://www.investopedia.com/articles/basics/04/102904.asp
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It's all in this exclusive Investment Guide. Get it absolutely
free - No strings attached. Over 30,000 investors have paid
$79 for these powerful strategies. But you can get it free.
Learn what the professional floor traders do to make killer
returns in just a matter of months.
Click here now to get your free Investment Guide:
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What's the difference between "top-down" and "bottom-up" investing?
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Before we look at the differences between top-down and
bottom-up investing, let's make clear that these are both
approaches for selecting great stocks. Despite the differences
in their methods they have the same goal - to ferret out
good stocks. Now, let's look at the different ways in which
a top-down vs. bottom-down investor approaches selecting
companies to invest in.
Top-down investing involves analyzing the "big picture".
Investors using this approach look at the economy and try to
forecast which industry will generate the best returns. These
investors then look for individual companies within the chosen
industry and add the stock to their portfolios. For example,
suppose you believe there will be a drop in interest rates.
Using the top-down approach, you might determine that the
home-building industry would benefit the most from the
macroeconomic changes and then limit your search to the top
companies in the industry.
Conversely, a bottom-up investor overlooks broad sector and
economic conditions and instead focuses on selecting a stock
based on the individual attributes of a company. Advocates of
the bottom-up approach simply seek strong companies with good
prospects regardless of industry or macroeconomic factors. What
constitutes "good prospects", however, is a matter of opinion.
Some investors look for earnings growth while others find companies
with low P/E ratios attractive. A bottom-up investor will compare
companies based on these fundamentals as long as the companies
are strong, the business cycle or broader industry conditions
are of no concern.
For more on the different methods of selecting stocks,
we encourage you to check out our "Stock Picking Tutorial":
http://www.investopedia.com/university/stockpicking/
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What exactly is insider trading?
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An "insider" is any person who possesses at least one of the
following:
1) access to valuable non-public information about a corporation
(this makes a company's directors and high-level executives insiders)
2) ownership of stock that equals more than 10% of a firm's equity
A common misconception is that all insider trading is illegal,
but there are actually two methods by which insider trading can
occur; one is legal, the other is not.
An insider is legally permitted to buy and sell shares of the
firm - and any subsidiaries - that employs him or her. These
transactions, however, must be properly registered with the
Securities and Exchange Commission (SEC) and are done with
advance filings. You can find details of this type of insider
trading on the SEC's EDGAR database.
The more infamous form of insider trading is the illegal
use of undisclosed material information for profit. It's
important to remember that this can be done by anyone, including
company executives, their friends and relatives or just a regular
person on the street, as long as the information is not publicly
known. For example, suppose that the CEO of a publicly-traded firm
inadvertently discloses his/her company's quarterly earnings while
getting a haircut. If the hairdresser takes this information
and trades on it, that is considered illegal insider trading
and the SEC may take action.
The SEC is able to monitor illegal insider trading by looking
at the trading volumes of any particular stock. Volumes
commonly increase after material news is issued to the public,
but when no such information is provided and volumes rise
dramatically, this can act as a warning flag. The SEC then
investigates to determine precisely who is responsible for
the unusual trading and whether or not it was illegal.
To learn more on insider trading check out:
"Uncovering Insider Trading"
http://www.investopedia.com/articles/02/061202.asp
"When Insiders Buy Should You Join Them?"
http://www.investopedia.com/articles/02/121002.asp
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Test Your Financial Knowledge
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Q. The Relative Strength Index indicates an overbought condition
when the index is above which one of the following numbers _____?
a) 20-30
b) 40-50
c) 50-60
d) 70-80
e) Relative strength doesn't indicate overbought conditions.
To answer this question, please visit the homepage:
http://www.investopedia.com/
Have a great week!
The Investopedia Staff
http://www.investopedia.com
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