Nebula/nebula.bin/Documents/FAQ/Investment/Investment.faq

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From: [e-mail] (Christopher Lott)
Subject: misc.invest FAQ on general investment topics (Table of Contents)
Message-ID: <[e-mail]>
Followup-To: misc.invest
Summary: Answers to frequently asked questions about investments.
         Should be read by anyone who wishes to post to misc.invest.
Originator: [e-mail]
Keywords: invest, stock, bond, money, faq
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Archive-name: investment-faq/general/toc
Version: $Id: faq-toc,v 1.4 1993/03/27 09:28:33 lott Exp lott $
Compiler: Christopher Lott, [e-mail]

This is the table of contents for the general misc.invest FAQ.

Articles in this FAQ discusses issues pertaining to money and
investment instruments, specifically stocks, bonds, and things
like options and life insurance.  For extensive information on
mutual funds, see the mutual fund FAQ, which is posted regularly
to misc.invest and maintained by [e-mail].  Subjects
more appropriate to misc.consumers are not included here.

Disclaimers:  This information is guaranteed to change over time
and is probably out of date already.  Mention of a product does
not constitute an endorsement.  Answers to questions closer to
the bottom of the list may rely on information given in prior
answers.  Readers outside the USA can reach US-800 telephone
numbers, for a charge, using a service such as MCI's Call USA.
All prices are listed in US dollars unless otherwise specified.

In addition to being posted monthly, the FAQ is available from
the news.answers archive on host rtfm.mit.edu.  Using FTP, fetch
the files "/pub/usenet/news.answers/investment-faq/general/*"
Or, send an e-mail request to "[e-mail]" with the
body  "send usenet/news.answers/investment-faq/general/*"
No other FTP archive is currently known to the compiler for
misc.invest information and programs.

Please send comments and new submissions to the compiler.


-----------------------------------------------------------------------------

TABLE OF CONTENTS

    Sources for Historical Stock Information
    Beginning Investor's Advice
    American Depository Receipts (ADR)
    Beta
    Bonds
    Books About Investing (especially stocks)
    Bull and Bear Lore
    Computing the Rate of Return on Monthly Investments
    Computing Compound Return
    Discount Brokers
    Dividends on Stock and Mutual Funds
    Dollar Cost and Value Averaging
    Direct Investing and DRIPS
    Future and Present Value of Money
    How Can I Get Rich Really Quickly?
    Hedging
    Investment Associations (AAII and NAIC)
    Investment Jargon
    Life Insurance
    Money-Supply Measures M1, M2, and M3
    One-Line Wisdom
    Options on Stocks
    P/E Ratio
    Renting vs. Buying a Home
    Retirement Plan - 401(k)
    Savings Bonds (from US Treasury)
    Shorting Stocks
    Stock Index Types
    Stock Index - The Dow
    Stock Indexes - Others
    Stock Splits
    Technical Analysis
    Ticker Tape Terminology
    Treasury Direct
    Uniform Gifts to Minors Act (UGMA)
    Warrants
    Wash Sale Rule (from U.S. IRS)
    Zero-Coupon Bonds

-----------------------------------------------------------------------------

Compiler's Acknowledgements:
My sincere thanks to the many submitters for their efforts.  Also thanks to
Jonathan I. Kamens for his guidance on FAQs and his post_faq perl script.

Compilation Copyright (c) 1993 by Christopher Lott, [e-mail]
--
Christopher Lott    [e-mail]   [phone], -3331 Fax
Post: FB Informatik - Bau 57, Universitaet KL, W-6750 Kaiserslautern, Germany

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From: [e-mail] (Christopher Lott)
Subject: misc.invest FAQ on general investment topics (part 1 of 3)
Message-ID: <[e-mail]>
Followup-To: misc.invest
Summary: Answers to frequently asked questions about investments.
         Should be read by anyone who wishes to post to misc.invest.
Originator: [e-mail]
Keywords: invest, stock, bond, money, faq
Sender: [e-mail] (Unix-News-System)
Supersedes: <[e-mail]>
Nntp-Posting-Host: bogner.informatik.uni-kl.de
Reply-To: [e-mail]
Organization: University of Kaiserslautern, Germany
References: <[e-mail]>
Date: Sat, 27 Mar 1993 09:29:51 GMT
Approved: [e-mail]
Expires: Sat, 8 May 1993 09:29:30 GMT
Lines: 946

Archive-name: investment-faq/general/part1
Version: $Id: faq-p1,v 1.4 1993/03/27 09:28:33 lott Exp lott $
Compiler: Christopher Lott, [e-mail]

This is the general FAQ for misc.invest, part 1 of 3.

-----------------------------------------------------------------------------

~Subject: Sources for Historical Stock Information
~From: [e-mail], [e-mail], [e-mail],
    [e-mail], [e-mail], [e-mail],
    [e-mail], [e-mail], [e-mail],
    [e-mail]

There are no free sources for historical stock information on the Internet.

Paid services include:
    + Prodigy.  US$15/month for basic service includes 15 minute delayed
      quotes on stocks at NO additional charge.  Additional US$15/month for
      historical data download service (flat fee).  Available via local
      dial-up all over the US.  Contact them at 800-PRO-DIGY.

    + Compuserve.  US$8.95/month for basic service includes 15-min delayed
      quotes on stocks and options and access to (mutual) Fund Watch Online.
      Historical quotes are available for about US$.05 each.  Available via
      local dial-up all over the US.  Contact them at 800-848-8990.

    + Genie.  US$4.95/month for today's closing quotes. Genie Professional
      service (price not given) gives historical quotes, stock reports,
      different investment s/w, access to Charles Schwab and online trading.
      Contact them at ............

    + Farpoint. ($4 or $8/week for an IBM-compatible diskette) provides
      daily high, low, close, and volume for for approximately 6000 stocks.
      They offer historical data from 1 July 89 to present.  Write to
      Farpoint, 3412 Milwaukee Avenue, Suite 477, Northbrook, Illinois 60062.
      Also see the listing for the Farpoint BBS below.

    + Xpress.  Broadcasts stock quotes and news via cable TV in the US.
      Decoder costs $125 and provides 9600-baud serial-line output.
      Tier 1 service is free and includes quotes 3x/day and news stories.
      Tier 2 service costs $22/month and adds 15-min delayed quotes and
      investment blurbs.  Ftp a UNIX Xpress-reader from ftp.acns.nwu.edu
      in directory pub/xpress.  Beware that your local cable rep. may not
      know that the cable co. offers it!  Contact Xpress at 800-7PC-NEWS.

    + Worden Brothers TeleChart 2000.  PC software costs $29.  Historical
      data costs 1/2-cent/day for minimum 300 days, 1/4-cent thereafter,
      and includes high, low, close, and volume.  Offers data from about 1988
      for every listed and OTC issue and many indexes.  Toll-free number for
      downloading data at 14.4K baud.  Contact them at 800-776-4940.

    + Dow Jones News Retrieval.  Stock, bond, mutual, index quotes as well
      as news articles on companies, and misc. analysis packages.  US $25
      per month flat rate for the after hours service (8pm-5am local time).
      Available via dailup over Tymnet and SprintNet; available via Internet.
      Contact them at ............

    + Standard & Poor's Compustat (most complete and most expensive).
      Contact them at ............

    + Disclosure's "Compact Disclosure" on CD (only $6,000 a year).
      Contact them at ............

    + Value Line's Database
      Contact them at ............

Bulletin Boards for historical stock information include:
    + The Farpoint BBS offers a free source of historical stock data
      (about 3 years worth).  They give you 120 minutes of free time
      daily and have historical data files on hundreds of stocks.
      Phone number is [phone].

    + The Business Center BBS in San Diego carries most issues on the
      NYSE, NASDAQ, and AMEX.  It is free but limits on-line time to
      20 minutes.  Phone number is [phone].

    + FinComm BBS.  "The Online Magazine Of Wall Street Computing."
      Individual daily quotes available for free.  US$50/year buys a premium
      account that offers unlimited access to historical stock data.
      Phone number is [phone].

-----------------------------------------------------------------------------

~Subject: Beginning Investor's Advice
~From: [e-mail], [e-mail]

Investing is just one aspect of personal finance.  People often seem to
have the itch to try their hand at investing before they get the rest
of their act together.  This is a big mistake.  For this reason, it's
a good idea for "new investors" to hit the library and read maybe read
three different overall guides to personal finance - three for different
perspectives, and because common themes will emerge (repetition implies
authority?).  Anyway, what I'm talking about are books like:

  Madigan and Kasoff, The First-Time Investor, ISBN 0-13-942376-1
  Andrew Tobias,
     [Still] the Only [Other] Investment Guide You Will Ever Need.
         (3 versions with slightly different titles, all very similar.)
  Sylvia Porter, New Money Book for the 80s
  Money Magazine, Money Guide
  and maybe Charles Givens, [More] Wealth without Risk (see ** below)

Another good source is the Mutual Fund Education Alliance (MFEA); write
them at MFEA, 1900 Erie Street, Suite 120, Kansas City, MO 64116.

What I am specifically NOT talking about is most anything that appears
on a list of investing/stock market books that are posted in misc.invest
from time to time.  You know, Market Logic, One Up on Wall Street,
Beating the Dow, Winning on Wall Street, The Intelligent Investor, etc.
These are not general enough. They are investment books, not personal
finance books.

Many "beginning investors" have no business investing in stocks.  The
books recommended above give good overall money management, budgeting,
purchasing, insurance, taxes, estate issues, and investing backgrounds
from which to build a personal framework.  Only after that should one
explore particular investments.  If someone needs to unload some cash in
the meantime, they should put it in a money market fund, or yes, even a
bank account, until they complete their basic training.

While I sympathize with those who view this education as a daunting task,
I don't see any better answer.  People who know next to nothing and
always depend on "professional advisors" to hand-hold them through all
transactions are simply sheep asking to be fleeced (they may not actually
be fleeced, but }ost of them will at least get their tails bobbed).  In
the long run, you are the only person ultimately responsible for your
own financial situation.

** Caveats about Charles Givens: some of his ideas are on the aggressive
side (as opposed to conservativei.  For example, some of his suggestions
about insurance might be considered too risky for some folks, and he also
makes aggressive interpretations of tax law.  People have to find their
own comfort level on tvel on tvel on tvel on tvel on tormatik.uni-kl.de   [phone], -3331 Fax
Post: FB Informatik - Bau 57, Universitaet KL, W-6750 Kaiserslautern, Germany

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From: [e-mail] (Christopher Lott)
Subject: misc.invest FAQ on general investment topics (part 1 of 3)
Message-ID: <[e-mail]>
Followup-To: misc.invest
Summary: Answers to frequently asked questions about investments.
         Should be read by anyone who wishes to post to misc.invest.
Originator: [e-mail]
Keywords: invest, stock, bond, money, faq
Sender: [e-mail] (Unix-News-System)
Supersedes: <[e-mail]>
Nntp-Posting-Host: bogner.informatik.uni-kl.de
Reply-To: [e-mail]
Organization: University of Kaiserslautern, Germany
References: <[e-mail]>
Date: Sat, 27 Mar 1993 09:29:51 GMT
Approved: [e-mail]
Expires: Sat, 8 May 1993 09:29:30 GMT
Lines: 946

Archive-name: investment-faq/general/part1
Version: $Id: faq-p1,v 1.4 1993/03/27 09:28:33 lott Exp lott $
Compiler: Christopher Lott, [e-mail]

This is the general FAQ for misc.invest, part 1 of 3.

-----------------------------------------------------------------------------

~Subject: Sources for Historical Stock Information
~From: [e-mail], [e-mail], [e-mail],
    [e-mail], [e-mail], [e-mail],
    [e-mail], [e-mail], [e-mail],
    [e-mail]

There are no free sources for historical stock information on the Internet.

Paid services include:
    + Prodigy.  US$15/month for basic service includes 15 minute delayed
      quotes on stocks at NO additional charge.  Additional US$15/month for
      historical data download service (flat fee).  Available via local
      dial-up all over the US.  Contact them at 800-PRO-DIGY.

    + Compuserve.  US$8.95/month for basic service includes 15-min delayed
      quotes on stocks and options and access to (mutual) Fund Watch Online.
      Historical quotes are available for about US$.05 each.  Available via
      local dial-up all over the US.  Contact them at 800-848-8990.

    + Genie.  US$4.95/month for today's closing quotes. Genie Professional
      service (price not given) gives historical quotes, stock reports,
      different investment s/w, access to Charles Schwab and online trading.
      Contact them at ............

    + Farpoint. ($4 or $8/week for an IBM-compatible diskette) provides
      daily high, low, close, and volume for for approximately 6000 stocks.
      They offer historical data from 1 July 89 to present.  Write to
      Farpoint, 3412 Milwaukee Avenue, Suite 477, Northbrook, Illinois 60062.
      Also see the listing for the Farpoint BBS below.

    + Xpress.  Broadcasts stock quotes and news via cable TV in the US.
      Decoder costs $125 and provides 9600-baud serial-line output.
      Tier 1 service is free and includes quotes 3x/day and news stories.
      Tier 2 service costs $22/month and adds 15-min delayed quotes and
      investment blurbs.  Ftp a UNIX Xpress-reader from ftp.acns.nwu.edu
      in directory pub/xpress.  Beware that your local cable rep. may 2 = ( p_2 - p_1 + d_2 ) / p_1

Here r denotes return, p denotes price, and d denotes dividend.  The
following table of monthly data may help in visualizing the process.
Monthly data is preferred in the profession because investors' horizons
are said to be monthly.
    ===========================================
      #     Date   Price   Dividend(*)   Return
    ===========================================
      0  12/31/86  45.20         0.00        --
      1  01/31/87  47.00         0.00    0.0398
      2  02/28/87  46.75         0.30    0.0011
      .       ...    ...          ...       ...
     59  11/30/91  46.75         0.30    0.0011
     60  12/31/91  48.00         0.00    0.0267
    ===========================================
(*) Dividend refers to the dividend paid during the period.  They are
    assumed to be paid on the date.  For example, the dividend of 0.30
    could have been paid between 02/01/87 and 02/28/87, but is assumed
    to be paid on 02/28/87.

So now we'll have a series of 60 returns on the stock and the index
(1...61).  Plot the returns on a graph and fit the best-fit line
(visually or using some least squares process):

                      |         *   /
               stock  |  *    *  */ *
               returns|    *  * /      *
                      |   *   /    *
                      | *   /*  *     *
                      |   /  *  *
                      | /    *
                      |
                      |
                      +------------------------- index returns

The slope of the line is Beta.  Merrill Lynch, Wells Fargo, and others
use a very similar process (they differ in which index they use and in
some econometric nuances).

Now what does Beta mean?  A lot of disservice has been done to Beta in
the popular press because of trying to simplify the concept.  A beta of
1.5 does *not* mean that is the market goes up by 10 points, the stock
will go up by 15 points.  It even *doesn't* mean that if the market has
a return (over some period, say a month) of 2%, the stock will have a
return of 3%.  To understand Beta, look at the equation of the line we
just fitted:

     stock return = alpha + beta * index return

Technically speaking, alpha is the intercept in the estimation model.
It is expected to be equal to risk-free rate times (1 - beta).  But it
is best ignored by most people.  In another (very similar equation) the
intercept, which is also called alpha, is a measure of superior performance.

Therefore, by computing the derivative, we can write:
     Change in stock return = beta * change in index return

So, truly and technically speaking, if the market return is 2% above its
mean, the stock return would be 3% above its mean, if the stock beta is 1.5.

One shot at interpreting beta is the following.  On a day the (S&P-type)
market index goes up by 1%, a stock with beta of 1.5 will go up by 1.5% +
epsilon. Thus it won't go up by exactly 1.5%, but by something different.

The good thing is that the epsilon values for different stocks are
guaranteed to be uncorrelated with each other.  Hence in a diversified
portfolio, you can expect all the epsilons (of different stocks) to
cancel out.  Thus if you hold a diversified portfolio, the beta of a
stock characterizes that stock's response to fluctuations in the market
portfolio.

So in a diversified portfolio, the beta of stock X is a good summary of
its risk properties with respect to the "systematic risk", which is
fluctuations in the market index.  A stock with high beta responds
strongly to variations in the market, and a stock with low beta is
relatively insensitive to variations in the market.

E.g. if you had a portfolio of beta 1.2, and decided to add a stock
with beta 1.5, then you know that you are slightly increasing the
riskiness (and average return) of your portfolio.  This conclusion is
reached by merely comparing two numbers (1.2 and 1.5).  That parsimony
of computation is the major contribution of the notion of "beta".
Conversely if you got cold feet about the variability of your beta = 1.2
portfolio, you could augment it with a few companies with beta less than 1.

If you had wished to figure such conclusions without the notion of
beta, you would have had to deal with large covariance matrices and
nontrivial computations.

Finally, a reference.  See Malkiel, _A Random Walk Down Wall Street_, for
more information on beta as an estimate of risk.

-----------------------------------------------------------------------------

~Subject: Bonds
~From: [e-mail]

Bonds are debt instruments.   Let's say a corporation needs to build
a new office building, or needs to purchase manufacturing equipment,
or needs to purchase aircraft, they will have to raise money.

One way is to arrange for banks or others to lend them money. But a
generally less expensive way is to issue (sell) bonds.  The corporation
will agree to pay dividends on these bonds and at some time in the
future to redeem these bonds.

In the U.S., corporate bonds are often issued in units of $1,000.
When municipalities issue bonds, they are usually in units of $5,000.
Dividends are usually paid every 6 months.

Bondholders are not owners of the corporation.  But if the corporation
gets in financial trouble and ndAgs to dissolve, bondholders must be
paid off in full before stockholders get anything.

If the corporation defaults on any bond payment, any bondholder can
go into bankruptcy court and request the corporation be placed in
bankruptcy.

The price of a bond is a function of prevailing interest rates (as
rates go up, the price of the bond goes down, and vice versa) as
well as
well as
well as
well as
well.de
Organization: University of Kaiserslautern, Germany
References: <[e-mail]>
Date: Sat, 27 Mar 1993 09:29:51 GMT
Approved: [e-mail]
Expires: Sat, 8 May 1993 09:29:30 GMT
Lines: 946

Archive-name: investment-faq/general/part1
Version: $Id: faq-p1,v 1.4 1993/03/27 09:28:33 lott Exp lott $
Compiler: Christopher Lott, [e-mail]

This is the general FAQ for misc.invest, part 1 of 3.

-----------------------------------------------------------------------------

~Subject: Sources for Historical Stock Information
~From: [e-mail], [e-mail], [e-mail],
    [e-mail], [e-mail], [e-mail],
    [e-mail], [e-mail], [e-mail],
    [e-mail]

There are no free sources for historical stock information on the Internet.

Paid services include:
    + Prodigy.  US$15/month for basic service includes 15 minute delayed
      quotes on stocks at NO additional charge.  Additional US$15/month for
      historical data download service (flat fee).  Available via local
      dial-up all over the US.  Contact them at 800-PRO-DIGY.

    + Compuserve.  US$8.95/month for basic service includes 15-min delayed
      quotes on stocks and options and access to (mutual) Fund Watch Online.
      Historical quotes are available for about US$.05 each.  Available via
      local dial-up all over the US.  Contact them at 800-848-8990.

    + Genie.  US$4.95/month for today's closing quotes. Genie Professional
      service (price not given) gives historical quotes, stock reports,
      different investment s/w, access to Charles Schwab and online trading.
      Contact them at ............

    + Farpoint. ($4 or $8/week for an IBM-compatible diskette) provides
      daily high, low, close, and volume for for approximately 6000 stocks.
      They offer historical data from 1 July 89 to present.  Write to
      Farpoint, 3412 Milwaukee Avenue, Suite 477, Northbrook, Illinois 60062.
      Also see the listing for the Farpoint BBS below.

    + Xpress.  Broadcasts stock quotes and news via cable TV in the US.
      Decoder costs $125 and provides 9600-baud serial-line output.
      Tier 1 service is free and includes quotes 3x/day and news stories.
      Tier 2 service costs $22/month and adds 15-min delayed quotes and
      investment blurbs.  Ftp a UNIX Xpress-reader from ftp.acns.nwu.edu
      in directory pub/xpress.  Beware that your local cable rep. may inning of the year into some mutual
   fund or like account, with $Y added to the account every month.
   Now, down the road, if the value at any given month "i" is Vi, what
   conclusions can be drawn from it ?

The relevant formula is F = P(1+i)**n - p((1+i)**n - 1)/i
where F is the future value of your investment (i.e., the value after
n periods), P is the present value of your investment (i.e., the amount
of money you invest initially), p is the payment each period (p is
negative if you are adding money to your account and positive if you
are taking money out of your account), n is the number of periods you
are interested in, and i is the interest rate per period.
You cannot manipulate this formula to get a formula for i; you have
to use some sort of iterative method or buy a financial calculator.

One thing to keep in mind is that i is the interest rate *per period*.
You may need to compound the rate to obtain a number you can compare
apples-to-apples with other rates.  For instance, a 1 year CD paying
12% interest is not as good an investment as an investment paying 1%
per month for a year.  If you put $1000 into each, you'll have $1120
in the CD at the end of the year but $1000*(1.01)**12 = $1126.82 in
the other investment due to compounding.  I always convert interest
rates of any kind into a "simple 1-year CD equivalent" for the purposes
of comparison.

See also the 'irr' program which has been posted to misc.invest several times.

-----------------------------------------------------------------------------

~Subject: Computing Compound Return
~From: [e-mail], [e-mail]

To calculate the compounded return, just figure out the factor by which
the investment multiplied.  Say $1000 went to $3200 in 10 years.
Take the 10th root of 3.2 (the multiplying factor) and you get a
compounded return of 1.1233498 (12.3% per year).  To see that this works,
note that 1.1233498**10 = 3.2.

Another way of saying the same thing:  In my calculation, I assume all
the gains are reinvested so following formula applies:
    TR = (1 + AR) ** YR
where TR is total return, AR is annualized return, and YR is year. To
calculate annualized return otherwise, following formula applies:
    AR = (10 ** (Log TR/ YR)) - 1
Thus a total return of 950% in 20 years would be equivalent of 11.914454%
annualized return.

-----------------------------------------------------------------------------

~Subject: Discount Brokers
~From: [e-mail], [e-mail], [e-mail]

A discount broker is merely a way to save money for people who are looking
out for themselves.

According to Charles Schwab, the big difference between them and "the other
guys" is that there is no analyst sitting in the back that will call you up
and encourage you to purchase a stock.  They have people there that can
provide good financial advice--but only if you ask.  If you walk in the door
and say "I want to buy XXX", that's what they'll do.

All transactions with E-Trade are apparently initiated through either touch-
tone phone or computer.  They are particularly cheap ($0.015/share, min $35).

List of US discount brokers and phone numbers:

Accutrade First National   800 762 5555
K. Aufhauser & Co.         800 368 3668
Brown & Co.                800 343 4300
Fidelity Brokerage         800 544 7272
Kennedy, Cabot, & Co.      800 252 0090  213 550 0711
Lombard                    800 688 3462
Barry Murphy & Co.         800 221 2111
Norstar Brokerage          800 221 8210
Olde Discount              800 USA OLDE
Pacific Brokerage Service  800 421 8395  213 939 1100
Andrew Peck Associates     800 221 5873  212 363 3770
Quick & Reilly             800 456 4049
Charles Schwab & Co.       800 442 5111
Scottsdale Securities      800 727 1995  818 440 9957
Stock Cross                800 225 6196  617 367 5700
Vanguard Discount          800 662 SHIP
Waterhouse Securities      800 765 5185
Jack White & Co.           800 233 3411
E-Trade                    800 786 2573  415 326 2700

Here is a table to compare commissions at various discount brokers.  This is
based on commission schedules gotten at various times in 1991 and 1992.
These tables are for stocks only, not bonds or other investments.

                                           $2000 trades
                     Firm    400@ 5  200@ 10  100@ 20   50@ 40   25@ 80
             K. Aufhauser  $  43.49 $  27.49 $  25.49 $  25.49 $  25.49
        Pacific Brokerage  $  29.00 $  29.00 $  29.00 $  29.00 $  29.00
         Jack White & Co.  $  45.00 $  39.00 $  36.00 $  34.50 $  33.75
    Kennedy, Cabot, & Co.  $  38.00 $  38.00 $  38.00 $  23.00 $  23.00
            Bidwell & Co.  $  41.25 $  31.25 $  27.25 $  25.75 $  23.50
           Quick & Reilly  $  50.00 $  50.00 $  49.00 $  49.00 $  49.00
            Olde Discount  $  35.00 $  50.00 $  40.00 $  40.00 $  40.00
        Vanguard Discount  $  57.00 $  57.00 $  48.00 $  40.00 $  40.00
       Fidelity Brokerage  $  63.50 $  63.50 $  54.00 $  54.00 $  54.00
           Charles Schwab  $  64.00 $  64.00 $  55.00 $  55.00 $  55.00
                  E-Trade  $  35.00 $  35.00 $  35.00 $  35.00 $  35.00

                                           $8000 trades
                     Firm   1600@ 5  800@ 10  400@ 20  200@ 40  100@ 80
             K. Aufhauser  $  90.50 $  61.50 $  43.49 $  27.49 $  25.49
        Pacific Brokerage  $  36.00 $  44.00 $  29.00 $  29.00 $  29.00
         Jack White & Co.  $  81.00 $  57.00 $  45.00 $  39.00 $  36.00
    Kennedy, Cabot, & Co.  $ 123.00 $  63.00 $  38.00 $  38.00 $  38.00
            Bidwell & Co.  $  84.75 $  56.75 $  45.25 $  39.25 $  30.25
           Quick & Reilly  $  79.00 $  79.00 $  79.00 $  79.00 $  49.00
            Olde Discount  $  67.50 $  95.00 $  70.00 $  60.00 $  40.00
        Vanguard Discount  $  82.00 $  82.00 $  82.00 $  82.00 $  48.00
       Fidelity Brokerage  $ 109.00 $ 102.70 $ 102.70 $ 102.70 $  54.00
           Charles Schwab  $ 120.00 $ 103.20 $ 103.20 $ 103.20 $  55.00
                  E-Trade  $  35.00 $  35.00 $  35.00 $  35.00 $  35.00

                                          $32000 trades
                     Firm   6400@ 5 3200@ 10 1600@ 20  800@ 40  400@ 80
             K. Aufhausdr  $ 194.50 $ 138.50 $  90.50 $  72.50 $  67.50
        Pacific Brokerage  $ 132.00 $  68.00 $  36.00 $  44.00 $  29.00
         Jack White & Co.  $ 161.00 $  97.00 $  81.00 $  57.00 $  45.00
    Kennedy, Cabot, & Co.  $ 195.00 $  99.00 $ 123.00 $  63.00 $  38.00
            Bidwell & Co. $ 252.75 $ 140.74$ 100.75 $  88.75 $  57.25
           Quick & Reilly  $ 222.00 $ 131.40 $ 131.40 $ 131.40 $131.40 $131.40 $131.40 $131.40 $Additional US$15/month for
      historical data download service (flat fee).  Available via local
      dial-up all over the US.  Contact them at 800-PRO-DIGY.

    + Compuserve.  US$8.95/month for basic service includes 15-min delayed
      quotes on stocks and options and access to (mutual) Fund Watch Online.
      Historical quotes are available for about US$.05 each.  Available via
      local dial-up all over the US.  Contact them at 800-848-8990.

    + Genie.  US$4.95/month for today's closing quotes. Genie Professional
      service (price not given) gives historical quotes, stock reports,
      different investment s/w, access to Charles Schwab and online trading.
      Contact them at ............

    + Farpoint. ($4 or $8/week for an IBM-compatible diskette) provides
      daily high, low, close, and volume for for approximately 6000 stocks.
      They offer historical data from 1 July 89 to present.  Write to
      Farpoint, 3412 Milwaukee Avenue, Suite 477, Northbrook, Illinois 60062.
      Also see the listing for the Farpoint BBS below.

    + Xpress.  Broadcasts stock quotes and news via cable TV in the US.
      Decoder costs $125 and provides 9600-baud serial-line output.
      Tier 1 service is free and includes quotes 3x/day and news stories.
      Tier 2 service costs $22/month and adds 15-min delayed quotes and
      investment blurbs.  Ftp a UNIX Xpress-reader from ftp.acns.nwu.edu
      in directory pub/xpress.  Beware that your local cable rep. may ORD DATE you must
own the shares on that date (when the books close for that day).
Since virtually all stock trades by brokers on exchanges are
settled in 5 (business) days, you must buy the shares at least
5 days before the RECORD DATE in order to be the shareholder of
record on the RECORD DATE.  So the (RECORD DATE - 5 days) is the
day that the shareholder of record needs to own the stock to
collect the dividend.  He can sell it the very next day and still
get the dividend.

If you bought it at least 5 business days before the RECORD date
and still owned it at the end of the RECORD DATE, you get the
dividend.  (Even if you ask your broker to sell it the day after
the (RECORD DATE - 5 days), it will not have settled until after
the RECORD DATE so you will own it on the RECORD DATE.)

So someone who buys the stock on the (RECORD DATE - 4 days) does
not get the dividend. A stock paying a 50c quarterly dividend might
well be expected to trade for 50c less on that date, all things
being equal.  In other words, it trades for its previous price,
EXcept for the DIVidend.  So the (RECORD DATE - 4 days) is often
called the EX-DIV date.  In the financial listings, that is
indicated by an x.

How can you try to predict what the dividend will be before it is
declared?

Many companies declare regular dividends every quarter, so if you
look at the last dividend paid, you can guess the next dividend
will be the same.  Exception: when the Board of IBM, for example,
announces it can no longer guarantee to maintain the dividend, you
might well expect the dividend to drop, drastically, next quarter.
The financial listings in the newspapers show the expected annual
dividend, and other listings show the dividends declared by Boards
of directors the previous day, along with their dates.

Other companies declare less regular dividends,  so try to look at
how well the company seems to be doing.   Companies whose shares
trade as ADRs (American Depository Receipts -- see article elsewhere
in this FAQ) are very dependent on currency market fluctuations, so
will pay differing amounts from time to time.

Some companies may be temporarily prohibited from paying dividends
on their common stock, usually because they have missed payments on
their bonds and/or preferred stock.

On the DISTRIBUTION DATE shareholders of record on the RECORD date
will get the dividend.  If you own the shares yourself, the company
will mail you a check.  If you participate in a DRIP (Dividend
ReInvestment Plan, see article on DRIPs elsewhere in this FAQ) and
elect to reinvest the dividend, you will have the dividend credited
to your DRIP account and purchase shares, and if your stock is held
by your broker for you, the broker will receive the dividend from
the company and credit it to your account.

Dividends on preferred stock work very much like common stock,
except they are much more predictable.

Tax implications:

Some Mutual Funds may delay paying their year-end dividend until
early January.  However, the IRS requires that those dividends be
constructively paid at the end of the previous year.  So in these
cases, you might find that a dividend paid in January was included
in the previous year's 1099-DIV.

Sometime before January 31 of the next year, whoever paid the
dividend will send you and the IRS a Form 1099-DIV to help you
report this dividend income to the IRS.

Sometimes -- often with Mutual Funds -- a portion of the dividend
might be treated as a non-taxable distribution or as a capital gains
distribution.  The 1099-DIV will list the Gross Dividends (in line 1a)
and will also list any non-taxable and capital gains distributions.
Enter the Gross Dividends (line 1a) on Schedule B.

Subtract the non-taxable distributions as shown on Schedule B
and decrease your cost basis in that stock by the amount of
non-taxable distributions (but not below a cost basis of zero --
you can deduct non-taxable distributions only while the running
cost basis is positive.)     Deduct the capital gains distributions
as shown on Schedule B, and then add them back in on Schedule D if
you file Schedule D, else on the front of Form 1040.

-----------------------------------------------------------------------------

~Subject: Dollar Cost and Value Averaging
~From: [e-mail]

Dollar Cost Averaging purchases a fixed dollar amount each transaction
(usually monthly via a mutual fund).  When the fund declines, you
purchase slightly more shares, and slightly less on increases.  It
turns out that you lower your average cost slightly, assuming the
fund fluctuates up and down.

Value Averaging adjusts the amount invested, up or down, to meet a
prescribed target.  An example should clarify:  Suppose you are going
to invest $200 per month and at the end of the first month, your $200
has shrunk to $190.  Then you add in $210 the next month, bringing the
value to $400 (2*$200). Similarly, if the fund is worth $430 at the
end of the second month, you only put in $170 to bring it up to the
$600 target. What happens is that compared to dollar cost averaging,
you put in more when prices are down, and less when prices are up.

Dollar Cost Averaging takes advantage of the non-linearity of the 1/x
curve (for those of you who are more mathematically inclined).  Value
Averaging just goes in a little deeper when the value is down (which
implies that prices are down) and in a little less when value is up.
An article in the American Association of Individual Investors showed
via computer simulation that value averaging would outperform dollar-
cost averaging about 95% of the time. "Outperform" is a rather vague
term.  As best as I remember, whatever the percentage gain of dollar-
cost averaging versus buying 100% initially, value averaging would
produce another 2 percent or so.

Warning: Neither approach will bail you out of a declining market nor
get you in on a bull market.

-----------------------------------------------------------------------------

~Subject: Direct Investing and DRIPS
~From: [e-mail], [e-mail],
    [e-mail], [e-mail]

DRIPS are an easy, low cost way of buying stocks.  Various companies
(lists are available through NAIC and some brokerages) allow you to
purchase shares directly from the company.  By buying directly, you
avoid brokerage fees.  However, you must nearly always purchase the
first share through a broker or other conventional means; successive
shares can then be bought directly. Shares can be purchased either
through dividends or directly by sending in a check.  Thus the two
names for DRIP: Dividend/Direct Re-Investment Plan.  The periodic
purchase also allows you to automatically dollar-cost-average the
purchase of the stock.

Money Magazine from Nov (or Dec) 92 reports that the brokerage house
A.G. Edwards has a special commission rate for purchases of single
shares.  They charge a flat 16% of the share price.  However,
contributors to this FAQ report that some (all?) of their offices
only provide this service for current account holders.

Published material on DRIPS:
 + _Guide to Dividend Reinvestment Plans_
   Lists over a one hundred companies that offer DRIP's.  The number
   given for the company is 800-443-6900; the cost is $9.00 (charge to CC)
   and they will send you the DRIPs booklet and a copy of a newsletter
   called the Money Paper.

 + _Low cost/No cost investing_ (author forgotten)
   Lists about 300-400 companies that offer DRIPs.

 + _Buying Stocks Without a Broker_ by Charles B. Carlson.
   Lists 900 companies/closed end funds that offer DRIPS.  Included is a
   profile of the company and some plan specifics.  These are: if partial
   reinvestment of dividends are allowed, discounts on stock purchased
   with dividends, optional cash payment amount and frequency, fees,
   approximate number of shareholders in the plan.

 [ Compiler's note:  It seems to me that a listing of the hundreds or
   more companies that offer DRIPS belongs in its own FAQ, and I will not
   reprint other people's copyrighted lists.  Please don't send me lists
   of companies that offer DRIPS. ]

-----------------------------------------------------------------------------

~Subject: Future and Present Value of Money
~From: [e-mail]

This note explains briefly two concepts concerning the time-value-of-money,
namely future and present value.

* Future value is simply the sum to which a dollar amount invested today
will grow given some appreciation rate.  The formula for future value
is the formula from Case 1 of present value (below), but solved for the
future-sum rather than the present value.

    To compute the future value of a sum invested today, the formula for
    interest that is compounded monthly is:
    fv = principal * (1 + rrate/12) ** (12 * termy)
    where
        principal = dollar value you have now
        termy     = term, in years
        rrate     = annual rate of return in decimal (i.e., use .05 for 5%)

    For interest that is compounded annually, use the formula:
    fv = principal * (1 + rrate) ** (termy)

    Example:
    I invest 1,000 today at 10% for 10 years compounded monthly.
    The future value of this amount is 2707.04.

* Present value is the value in today's dollars assigned to an amount of
money in the future, based on some estimate rate-of-return over the long-term.
In this analysis, rate-of-return is calculated based on monthly compounding.

Two cases of present value are discussed next.  Case 1 involves a single
sum that stays invested over time.  Case 2 involves a cash stream that is
paid regularly over time (e.g., rent payments), and requires that you also
calculate the effects of inflation.

Case 1a: Present value of money invested over time.  This tells you what a
         future sum is worth today, given some rate of return over the time
         between now and the future.  Another way to read this is that you
         must invest the present value today at the rate-of-return to have
         some future sum in some years from now (but this only considers the
         raw dollars, not the purchasing power).

         To compute the present value of an invested sum, the formula for
         interest that is compounded monthly is:
                  future-sum
     pv =  ----------------------------------
           (1 + rrate/12) ** (12 * termy)
     where
         future-sum = dollar value you want in termy years
         termy = term, in years
         rrate = annual rate of return that you can expect, in decimal

     Example:
         I need to have 10,000 in 5 years.  The present value of 10,000
         assuming an 8% monthly compounded rate-of-return is 6712.10.
         I.e., 6712 will grow to 10k in 5 years at 8%.

Case 1b: This formulation can also be used to estimate the effects of
     inflation; i.e., compute real purchasing power of present and
     future sums.  Simply use an estimated rate of inflation instead
     of a rate of return for the rrate variable in the equation.

     Example:
         In 30 years I will receive 1,000,000 (a gigabuck).  What is
         that amount of money worth today (what is the buying power),
         assuming a rate of inflation of 4.5%?  The answer is 259,895.65

Case 2:  Present value of a cash stream.  This tells you the cost in
     today's dollars of money that you pay over time.  Usually the
     payments that you make increase over the term.  Basically, the
     money you pay in 10 years is worth less than that which you pay
     tomorrow, and this equation lets you compute just how much.

     In this analysis, inflation is compounded yearly.  A reasonable
     estimate for long-term inflation is 4.5%, but inflation has
     historically varied tremendously by country and time period.

     To compute the present value of a cash stream, the formula is:
          month = 12*termy   paymt  * (1 + irate) ** int ((month - 1)/ 12)
     pv = SUM                ---------------------------------------------
          month = 1               (1 + rrate/12) ** (month - 1)
     where
         month = month number
         termy = term, in years
         paymt = monthly payment, in dollars
         irate = rate of inflation (increase in payment/year), in decimal
         rrate = rate of return on money that you can expect, in decimal
         int() function = keep integral part; compute yr nr from mo nr

     Example:
         You pay $500/month in rent over 10 years and estimate that
         inflation is 4.5% over the period (your payment increases with
         inflation.)  Present value is 49,530.57

I wrote two small C programs for computing future and present value; send
email to [e-mail] if you are interested.

-----------------------------------------------------------------------------

~Subject: How Can I Get Rich Really Quickly?
~From: [e-mail]

Take this with a lot of :-) 's.

Legal methods:
  1. Marry someone who is already rich.
  2. Have a rich person die and will you their money.
  3. Strike oil.
  4. Discover gold.
  5. Win the lottery.

Illegal methods:
  6. Rob a bank.
  7. Blackmail someone who is rich.
  8. Kidnap someone who is rich and get a big ransom.
  9. Become a drug dealer.

For completeness sakes:
 10. "If you really want to make a lot of money, start your own religion."
                - L. Ron Hubbard

Hubbard made that statement when he was just a science fiction writer in
either the '30s or '40s.  He later founded the Church of Scientology.
I believe he also wrote Dianetics.

-----------------------------------------------------------------------------

~Subject: Hedging
~From: [e-mail]

Hedging is a way of reducing some of the risk involved in holding
an investment.  There are many different risks against which one can
hedge and many different methods of hedging.  When someone mentions
hedging, think of insurance.  A hedge is just a way of insuring an
investment against risk.

Consider a simple (perhaps the simplest) case.  Much of the risk in
holding any particular stock is market risk; i.e. if the market falls
sharply, chances are that any particular stock will fall too.  So if
you own a stock with good prospects but you think the stock market in
general is overpriced, you may be well advised to hedge your position.

There are many ways of hedging against market risk.  The simplest,
but most expensive method, is to buy a put option for the stock you own.
(It's most expensive because you're buying insurance not only against
market risk but against the risk of the specific security as well.)
You can buy a put option on the market (like an OEX put) which will
cover general market declines.  You can hedge by selling financial
futures (e.g. the S&P 500 futures).

In my opinion, the best (and cheapest) hedge is to sell short the
stock of a competitor to the company whose stock you hold.  For example,
if you like Microsoft and think they will eat Borland's lunch, buy MSFT
and short BORL. No matter which way the market as a whole goes, the
offsetting positions hedge away the market risk.  You make money as
long as you're right about the relative competitive positions of the
two companies, and it doesn't matter whether the market zooms or crashes.

-----------------------------------------------------------------------------

~Subject: Investment Associations (AAII and NAIC)
~From: [e-mail], [e-mail]

AAII:    American Association of Individual Investors
    625 North Michigan Avenue
    Chicago, IL 60611-3110
    [phone]

A summary from their brochure: AAII believes that individuals would
do better if they invest in "shadow" stocks which are not followed
by institutional investor and avoid affects of program trading.
They admit that most of their members are experienced investors with
substantial amounts to invest, but they do have programs for newer
investors also.  Basically, they don't manage the member's money,
they just provide information.

Membership costs $49 per year for an individual; with Computerized
Investing newsletter, $79.  A lifetime membership (including
Computerized Investing) costs $490.

They offer the AAII Journal 10 times a year, Individual Investor's guide
to No-Load Mutual Funds annually, local chapter membership (about 50
chapters), a year-end tax strategy guide, investment seminars and study
programs at extra cost (reduced for members), and a computer user'
newsletter for an extra $30.  They also operate a free BBS.

NAIC:    National Association of Investors Corp.
    1515 East Eleven Mile Road
    Royal Oak, MI 48067
    [phone]

The NAIC is a nonprofit organization operated by and for the benefit
of member clubs.  The Association has been in existence since the 1950's
and has around 110,000 members.

Membership costs $32 per year for an individual, or $30 for a club and
$9.00 per each club member.  The membership provides the member with a
monthly newsletter, details of your membership and information on how to
start a investment club, how to analyze stocks, and how to keep records.

In addition to the information provided, NAIC operates "Low-Cost
Investment Plan", which allows members to invest in participating
companies such as Disney, Kellogg, McDonald's, Mobil and Quaker Oats...
Most don't incur a commission although some have a nominal fee ($3-$5).

Of the 500 clubs surveyed in 1989, the average club had a compound
annual growth rate of 10.8% compared with 10.6% for the S&P 500 stock
index...It's average portfolio was worth $66,755.

-----------------------------------------------------------------------------

~Subject: Investment Jargon
~From: [e-mail]

Some common jargon is explained here briefly.  See other articles
in the faq for more detailed explanations on most of these terms.

bottom fishing:        purchasing of stock declining in value
going long:        buying and holding stock
going short:        selling stock short

-----------------------------------------------------------------------------

Compilation Copyright (c) 1993 by Christopher Lott, [e-mail]
--
Christopher Lott    [e-mail]   [phone], -3331 Fax
Post: FB Informatik - Bau 57, Universitaet KL, W-6750 Kaiserslautern, Germany

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From: [e-mail] (Christopher Lott)
Subject: misc.invest FAQ on general investment topics (part 2 of 3)
Message-ID: <[e-mail]>
Followup-To: misc.invest
Summary: Answers to frequently asked questions about investments.
         Should be read by anyone who wishes to post to misc.invest.
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Archive-name: investment-faq/general/part2
Version: $Id: faq-p2,v 1.4 1993/03/27 09:28:33 lott Exp lott $
Compiler: Christopher Lott, [e-mail]

This is the general FAQ for misc.invest, part 2 of 3.

-----------------------------------------------------------------------------

~Subject: Life Insurance
~From: [e-mail]

This is my standard reply to life insurance queries.  And, I think many
insurance agents will disagree with these comments.

First of all, decide WHY you want insurance.  Think of insurance as
income-protection, i.e. if the insured passes away, the beneficiary
receives the proceeds to offset that lost income.  With that comment
behind us, I would never buy insurance on kids, after all, they don't
have income and they don't work.  An agent might say to buy it on your
kids while its cheap - run the numbers, the agent is usually wrong.
And I am strongly against this on two counts.  One, you are placing a
bet that you kid will die and you are actually paying that bet in
premiums.  I can't bet my child will die.  Two, it sounds plausible,
but factor inflation in - it doesn't look so good.  A policy of face
amount of $10,000, at 4.5% inflation and 30 years later is like having
$2,670 in today's dollars - it's NOT a lot of money.  So don't plan on
it being worth much in the future to your child as an investment.

I have some doubts about insurance as investments - it might be a good
idea but it certainly muddies the water.

So you have decided you want insurance, i.e. to protect your family against
your passing away prematurely, i.e. the loss of income you represent.

Next decide how LONG you want insurance for.  If you're around 60 years
old, I doubt you want to get any at all.  Your income stream is largely
over and hopefully you have accumulated the assets you need anyway by now.

If you are married and both work, its not clear you need insurance at
all if you pass on.  The spouse just keeps working UNLESS you need both
incomes to support your lifestyle.  Then you should have one policy on
each of you.

If you are single, its not clear you need it at all.  You are not sup-
porting anyone so no one cares if you pass on, at least financially.

If you are married and the spouse is not working, then the breadwinner
needs insurance UNLESS you are independently wealthy.

If you are independently wealthy, you don't need it because you already
have the money you need.  You might want it for tax shelters but that is
a very different topic.

Suppose you have a 1 year old child, the wife stays home and the husband
works.  In that case, you might want 2 types of insurance: Whole life
for the long haul, i.e. age 65, 70, etc., and Term until your child is
off on his/her own. Once the child has left the stable, your need for
insurance goes down since your responsibilities have diminished, i.e.
fewer dependents, education finished, wedding expenses done, etc

Do you have a mortgage? Perhaps you want some sort of Term during the
duration of the mortgage - but remember that the mortgage balance
declines over time. But don't buy mortgage insurance itself - much too
expensive. Include it in the overall analysis of what insurance needs
you might have.

Now, how much insurance?  One rule of thumb is 5x your annual income.
What agents will ask you is 'Will your spouse go back to work if you
pass away?' Many of us will think nobly and say NO.  But its actually
likely that your spouse will go back to work and good thing - otherwise
your insurance needs would be much larger.  After all, if the spouse
stays home, your insurance must be large enough to be invested wisely to
throw off enough return to live on.  Assume you make $50,000 and the
spouse doesn't work.  You pass on.  The Spouse needs to replace a
portion of your income (not all of it since you won't be around to feed,
wear clothes, drive an insured car, etc.).  Lets assume the Spouse needs
$40,000 to live on.  Now that is BEFORE taxes.  Lets say its $30,000 net
to live on.  $30,000 is the annual interest generated on a $600,000
tax-free investment at 5% per year (i.e. munibonds).  So this means you
need $600,000 of face value insurance to protect your $50,000 current
income.

This is only one example of how to do it and income taxes, estate taxes
can complicate it.  But hopefully you get the idea.

Which kind of insurance IMHO is a function of how long you need it for.
I once did an analysis of TERM vs WHOLE LIFE and based on the assumptions
at the time, WHOLE LIFE made more sense if I held the insurance more than
about 20-23 years.  But TERM was cheaper if I held it for a shorter period
of time.  How do you do the analysis and why does the agent want to meet
you?  Well, he/she will bring their fancy charts, tables of numbers and
effectively snow you into thinking that the biggest, most expensive
policy is the best for you over the long term.  Translation: mucho
commissions to the agent.  Whole life is what agents make their money on
due to commissions.  The agents typically gets 1/2 of your first year's
commissions as his pay.  And he typically gets 10% of the next year's
commissions and likewise through year 5.  Ask him how he gets paid.  If
he won't tell you, ask him to leave.

What I did was to take their numbers, review their assumptions (and
corrected them when they were far-fetched) and did MY analysis.  They
hated that but they agreed my approach was correct.  They will show you
a 12% rate of return to predict the cash value flow.  Ignore that - it
makes them look too good and its not realistic.  Ask him/her exactly what
they plan to invest your premium money in to get 12%.  How has it done in
the last 5 years? 12? Use a number between 4.5% (for TBILL investments,
ultra- conservative) and 10% (for growth stocks, more risky), but not
definitely not 12%.  I would try 8% and insist it be done that way.

Ask each agent:
1)-what is the present value of the payment stream represented by my
premiums, using a discount rate of 4.5% per year (That is the inflation
average since 1940).  This is what the policy costs you, in today's
dollars. Its very much like paying that single number now instead of a
series of payments over time.
2)-what is the present value of the the cash value earned (increasing
at n more than 8% a year) and discounting it back to today at the same
4.5%. This is what you get for that money you just paid, in cash value,
expressed in today's dollars, i.e. as if you got it today in the mail.
3)-What is the present value of the life insurance in force over that
same period, discounted back to today by 4.5%, for inflation.  That is
the coverage in effect in today's dollars.
4)-Pick an end date for comparing these - I use age 60 and age 65.

With the above in hand from various agents, younts, younts, younts, younts, you---------

Compilation Copyright (c) 1993 by Christopher Lott, [e-mail]
--
Christopher Lott    [e-mail]   [phone], -3331 Fax
Post: FB Informatik - Bau 57, Universitaet KL, W-6750 Kaiserslautern, Germany

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From: [e-mail] (Christopher Lott)
Subject: misc.invest FAQ on general investment topics (part 2 of 3)
Message-ID: <[e-mail]>
Followup-To: misc.invest
Summary: Answers to frequently asked questions about investments.
         Should be read by anyone who wishes to post to misc.invest.
Originator: [e-mail]
Keywords: invest, stock, bond, money, faq
Sender: [e-mail] (Unix-News-System)
Supersedes: <[e-mail]>
Nntp-Posting-Host: bogner.informatik.uni-kl.de
Reply-To: [e-mail]
Organization: University of Kaiserslautern, Germany
References: <[e-mail]>
Date: Sat, 27 Mar 1993 09:30:11 GMT
Approved: [e-mail]
Expires: Sat, 8 May 1993 09:29:30 GMT
Lines: 848

Archive-name: investment-faq/general/part2
Version: $Id: faq-p2,v 1.4 1993/03/27 09:28:33 lott Exp lott $
Compiler: Christopher Lott, [e-mail]

This is the general FAQ for misc.invest, part 2 of 3.

-----------------------------------------------------------------------------

~Subject: Life Insurance
~From: [e-mail]

This is my standard reply to life insurance queries.  And, I think many
insurance agents will disagree with these comments.

First of all, decide WHY you want insurance.  Think of insurance as
income-protection, i.e. if the insured passes away, the beneficiary
receives the proceeds to offset that lost income.  With that comment
behind us, I would never buy insurance on kids, after all, they don't
have income and they don't work.  An agent might say to buy it on your
kids while its cheap - run the numbers, the agent is usually wrong.
And I am strongly against this on two counts.  One, you are placing a
bet that you kid will die and you are actually paying that bet in
premiums.  I can't bet my child will die.  Two, it sounds plausible,
but factor inflation in - it doesn't look so good.  A policy of face
amount of $10,000, at 4.5% inflation and 30 years later is like having
$2,670 in today's dollars - it's NOT a lot of money.  So don't plan on
it being worth much in the future to your child as an investment.

I have some doubts about insurance as investments - it might be a good
idea but it certainly muddies the water.

So you have decided you want insurance, i.e. to protect your family against
your passing away prematurely, i.e. the loss of income you represent.

Next decide how LONG you want insurance for.  If you're around 60 years
old, I doubt you want to get any at all.  Your income stream is largely
over and hopefully you have accumulated the assets you need anyway by now.

If you are married and both work, its not clear you need insurance at
all if you pass on.  The spouse just keeps working UNLESS you need both
incomes to support your lifestyle.  Then you should have one policy on
each of you.

If you are single, its not clear you need it at all.  You are not sup-
porting anyone so no one cares if you pass on, ------------------------------------------------------------------

~Subject: Money-Supply Measures M1, M2, and M3
~From: [e-mail]

M1: Money that can be spent immediately.  Includes cash, checking accounts,
    and NOW accounts.

M2: M1 + assets invested for the short term.  These assets include money-
    market accounts and money-market mutual funds.

M3: M2 + big deposits.  Big deposits include institutional money-market
    funds and agreements among banks.

"Modern Money Mechanics," which explains M1, M2, and M3 in gory detail,
is available free from:
        Public Information Center
        Federal Reserve Bank of Chicago
        P.O. Box 834
        Chicago, Illinois 60690

-----------------------------------------------------------------------------

~Subject: One-Line Wisdom
~From: [e-mail]

This is a collection of one-line pieces of investment wisdom, with brief
explanations.  Use and apply at your own risk or discretion.  They are
not in any particular order.

1.  Hang up on cold calls.

    While it is theoretically possible that someone is going to offer
    you the opportunity of a lifetime, it is more likely that it is some
    sort of scam.  Even if it is legitimate, the caller cannot know your
    financial position, goals, risk tolerance, or any other parameters
    which should be considered when selecting investments.  If you can't
    bear the thought of hanging up, ask for material to be sent by mail.

2.  Don't invest in anything you don't understand.

    There were horror stories of people who had lost fortunes by being
    short puts during the 87 crash.  I imagine that they had no idea of
    the risks they were taking.  Also, all the complaints about penny
    stocks, whether fraudulent or not, are partially a result of not
    understanding the risks and mechanisms.

3.  If it sounds too good to be true, it probably isn't.
3a. There's no such thing as a free lunch (TNSTAAFL).

    Remember, every investment opportunity competes with every other
    investment opportunity.  If one seems wildly better than the others,
    there are probably hidden risks or you don't understand something.

4.  If your only tool is a hammer, every problem looks like a nail.

    Someone (possibly a financial planner) with a very limited selection
    of products will naturally try to jam you into those which s/he sells.
    These may be less suitable than other products not carried.

5.  Don't rush into an investment.

    If someone tells you that the opportunity is closing, filling up fast,
    or in any other way suggests a time pressure, be *very* leery.

6.  Very low priced stocks require special treatment.

    Risks are substantial, bid/asked spreads are large, prices are
    volatile, and commissions are relatively high.  You need a broker
    who knows how to purchase these stocks and dicker for a good price.

-----------------------------------------------------------------------------

~Subject: Options on Stocks
~From: [e-mail]

An option is a contract between a buyer and a seller.  The option
is connected to something, such as a listed stock, an exchange index,
futures contracts, or real estate.  For simplicity, I will discuss
only options connected to listed stocks.

The option is designated by:
    - Name of the associated stock
    - Strike price
    - Expiration date
    - The premium paid for the option, plus brokers commission.

The two most popular types of options are Calls and Puts.

    Example:  The Wall Street Journal might list an
                IBM Oct 90 Call @ $2.00

    Translation:  This is a Call Option

    The company associated with it is IBM.
    (See also the price of IBM stock on the NYSE.)

    The strike price is $90.00  If you own this option,
    you can buy IBM @ $90.00, even if it is then trading on
    the NYSE @ $100.00 (I should be so lucky!)

    The option expires on the third Saturday following
    the third Friday of October, 1992.
    (an option is worthless and useless once it expires)

    If you want to buy the option, it will cost you $2.00
    plus brokers commissions.   If you want to sell the option,
    you will get $2.00 less commissions.

In general, options are written on blocks of 100s of shares.  So when
you buy "1" IBM Oct 90 Call @ $2.00 you actually are buying a contract
to buy 100 shares of IBM @ $90 per share ($9,000) on or before the
expiration date in October.   You will pay $200 plus commission to buy
the call.

If you wish to exercise your option you call your broker and say you
want to exercise your option.  Your broker will arrange for the person
who sold you your option (a financial fiction:  A computer matches up
buyers with sellers in a magical way) to sell you 100 shares of IBM for
$9,000 plus commission.

If you instead wish to sell (sell=write) that option you instruct your
broker that you wish to write 1 Call IBM Oct 90s, and the very next day
your account will be credited with $200 less commission.

If IBM does not reach $90 before the call expires, the option writer
gets to keep that $200 (less commission)   If the stock does reach above
$90, you will probably be "called."

If you are called you must deliver the stock.  Your broker will sell
your IBM stock for $9000 (and charge commission).  If you owned the
stock, that's OK. If you did not own the stock your broker will buy
the stock at market price and immediately sell it at $9000.  You pay
colmisskons each way.

If you write a Call option and own the stock that's called "Covered
Call Writing."  If you don't own the stock it's called "Naked Call
Writing."   It is quite risky t risky t risky t risky t risky tk.Uni-KL.DE>
Nntp-Posting-Host: bogner.informatik.uni-kl.de
Reply-To: [e-mail]
Organization: University of Kaiserslautern, Germany
References: <[e-mail]>
Date: Sat, 27 Mar 1993 09:30:11 GMT
Approved: [e-mail]
Expires: Sat, 8 May 1993 09:29:30 GMT
Lines: 848

Archive-name: investment-faq/general/part2
Version: $Id: faq-p2,v 1.4 1993/03/27 09:28:33 lott Exp lott $
Compiler: Christopher Lott, [e-mail]

This is the general FAQ for misc.invest, part 2 of 3.

-----------------------------------------------------------------------------

~Subject: Life Insurance
~From: [e-mail]

This is my standard reply to life insurance queries.  And, I think many
insurance agents will disagree with these comments.

First of all, decide WHY you want insurance.  Think of insurance as
income-protection, i.e. if the insured passes away, the beneficiary
receives the proceeds to offset that lost income.  With that comment
behind us, I would never buy insurance on kids, after all, they don't
have income and they don't work.  An agent might say to buy it on your
kids while its cheap - run the numbers, the agent is usually wrong.
And I am strongly against this on two counts.  One, you are placing a
bet that you kid will die and you are actually paying that bet in
premiums.  I can't bet my child will die.  Two, it sounds plausible,
but factor inflation in - it doesn't look so good.  A policy of face
amount of $10,000, at 4.5% inflation and 30 years later is like having
$2,670 in today's dollars - it's NOT a lot of money.  So don't plan on
it being worth much in the future to your child as an investment.

I have some doubts about insurance as investments - it might be a good
idea but it certainly muddies the water.

So you have decided you want insurance, i.e. to protect your family against
your passing away prematurely, i.e. the loss of income you represent.

Next decide how LONG you want insurance for.  If you're around 60 years
old, I doubt you want to get any at all.  Your income stream is largely
over and hopefully you have accumulated the assets you need anyway by now.

If you are married and both work, its not clear you need insurance at
all if you pass on.  The spouse just keeps working UNLESS you need both
incomes to support your lifestyle.  Then you should have one policy on
each of you.

If you are single, its not clear you need it at all.  You are not sup-
porting anyone so no one cares if you pass on, ------------------------------------------------------------------

~Subject: Money-Supply Measures M1, M2, and M3
~From: [e-mail]

M1: Money that can be spent immediately.  Includes cash, checking accounts,
    and NOW accounts.

M2: M1 + assets invested for the short term.  These assets include money-
    market accounts and money-market mutual funds.

M3: M2 + big deposits.  Big deposits include institutional money-market
    funds and agreements among banks.

"Modern Money Mechanics," which explains M1, M2, and M3 in gory detail,
is available free from:
        Public Information Center
        Federal Reserve Bank of Chicago
        P.O. Box 834
        Chicago, Illinois 60690

-----------------------------------------------------------------------------

~Subject: One-Line Wisdom
~From: [e-mail]

This is a collection of one-line pieces of investment wisdom, with brief
explanations.  Use and apply at your own risk or discretion.  They are
not in any particular order.

1.  Han expenses
    2) Length of term
    3) Rate of appreciation

The approach used here is to determine the present value of the money
you will pay over the term for the home. In the case of buying, the
appreciation rate and thereby the future value of the home is estimated.
This analysis neglects utility costs because they can easily be the
same whether you rent or buy.  However, adding them to the analysis
is simple; treat them the same as the costs for insurance in both cases.

Computation of present value is reasonably straightforward and is explained
elsewhere. Programs to compute present and future value as well as for loan
amortization (pv, fv, loan) are also available from Lott.

Opportunity costs of buying are effectively captured by the present value.
For example, pretend that you are able to buy a house without having to
have a mortgage.  Now the question is, is it better to buy the house with
your hoard of cash or is it better to invest the cash and continue to rent.
To answer this question you have to have estimates for rental costs and
house costs (see below), and you have a projected growth rate for the cash
investment and projected growth rate for the house.  If you project a 4%
growth rate for the house and a 15% growth rate for the cash then holding
the cash would be a much better investment.


Renting a Home.

* Step 1: Gather data. You will need:
    - monthly rent
    - renter's insurance     (usually inexpensive)
    - term             (period of time over which you will rent)
    - estimated inflation rate to compute present value (historically 4.5%)
    - estimated annual rate of increase in the rent (can use inflation rate)

* Step 2: Compute the present value of the cash stream that you will pay over
the term, which is the cost of renting over that term.  This analysis assumes
that there are no tax consequences (benefits) associated with paying rent.
(The 'pv' program can help here.)

Long-term example:
    Rent          =  990 / month
    Insurance         =  10 / month
    Term        =  30 years
    Rent increases    =  4.5% annually
    Inflation         =  4.5% annually
    For this cash stream, present value = 348,137.17.

Short-term example:
    Same numbers, but just 2 years.  Present value = 23,502.38


Buying a Home.

* Step 1: Gather data. You need a lot to do a fairly thorough analysis:
    - purchase price
    - down payment & closing costs
    - other regular expenses, such as condo fees
    - amount of mortgage
    - mortgage rate
    - mortgage term
    - mortgage payments (this is tricky for a variable-rate mortgage)
    - property taxes
    - homeowner's insurance
    - your tax bracket
    - the current standard deduction you get
  Other values have to be estimated, and they affect the analysis critically:
    - continuing maintenance costs (I estimate 1/2 of PP over 30 years.)
    - estimated inflation rate to compute present value (historically 4.5%)
    - rate of increase of property taxes, maintenance costs, etc. (infl. rate)
    - appreciation rate of the home (THE most important number of all)

* Step 2: compute the monthly expense.  This includes the mortgage payment,
fees, property tax, insurance, and maintenance.  The mortgage payment is
fixed, but you have to figure inflation into the rest.  Then compute the
present value of the cash stream.  (The 'pv' program can help.)

* Step 3: compute your tax savings.  This is different in every case, but
roughly you multiply your tax bracket times the amount by which your interest
plus other deductible expenses (e.g., property tax, state income tax) exceeds
your standard deduction.  No fair using the whole amount because everyone
gets the standard deduction for free.  Must be summed over the term because
the standard deduction will increase annually, as will your expenses.  Note
that late in the mortgage your interest payments will be be well below the
standard deduction.  I compute savings of about 5%.  (The 'loan' program
can help.)

* Step 4: compute the future value of the home based on the purchase
price, estimated appreciation rate, and the term.  Once you have the
future value, compute the present value of that sum based on the
inflation rate you estimated earlier and the term you used to compute
future value.   If appreciation > inflation, you win.  Else you lose.
(The 'pv' and 'fv' programs can help.)

* Step 5: Compute final cost.  All numbers must be in present value.
    Final-cost = Down-payment + S2 (expenses) - S3 (tax sav) - S4 (prop value)

Long-term example #1:

* Step 1 - the data:
    Purchase price   =  145,000
    Down payment etc =  10,000
    Mortgage amount  =  140,000
    Mortgage rate    =  8.00%
    Mortgage term    =  30 years
    Mortgage payment =  1027.27 / mo
    Property taxes   =  about 1% of valuation; I'll use 1200/yr = 100/mo
            (which increases same as inflation, we'll say)
    Homeowner's ins  =  50 / mo
    Condo fees etc   =  0
    Tax bracket         =  33%
    Standard ded     =  5600
  Estimates:
    Maintenance      =  1/2 PP is 72,500, or 201/mo; I'll use 200/mo
    Inflation rate   =  4.5% annually
    Prop taxes incr  =  4.5% annuaLly
    Home appreciates =  6% annually (the NUMBER ONE critical factor)

* Step 2 - the monthly expense, both fixed and changing components:
Fixed component is the mortgage at 1027.27 monthly.  Present value = 203,503.48
Changing component is the rest at   350.00 monthly.  Present value = 121,848.01
Total from Step 2: 325,351.49

* Step 3 - the tax savings.
I use my loan program to compute this.  Based on the data given above,
I compute the savings: Present value = 14,686.22.  Not much at much at much at much at much atould never buy insurance on kids, after all, they don't
have income and they don't work.  An agent might say to buy it on your
kids while its cheap - run the numbers, the agent is usually wrong.
And I am strongly against this on two counts.  One, you are placing a
bet that you kid will die and you are actually paying that bet in
premiums.  I can't bet my child will die.  Two, it sounds plausible,
but factor inflation in - it doesn't look so good.  A policy of face
amount of $10,000, at 4.5% inflation and 30 years later is like having
$2,670 in today's dollars - it's NOT a lot of money.  So don't plan on
it being worth much in the future to your child as an investment.

I have some doubts about insurance as investments - it might be a good
idea but it certainly muddies the water.

So you have decided you want insurance, i.e. to protect your family against
your passing away prematurely, i.e. the loss of income you represent.

Next decide how LONG you want insurance for.  If you're around 60 years
old, I doubt you want to get any at all.  Your income stream is largely
over and hopefully you have accumulated the assets you need anyway by now.

If you are married and both work, its not clear you need insurance at
all if you pass on.  The spouse just keeps working UNLESS you need both
incomes to support your lifestyle.  Then you should have one policy on
each of you.

If you are single, its not clear you need it at all.  You are not sup-
porting anyone so no one cares if you pass on, ------------------------------------------------------------------

~Subject: Money-Supply Measures M1, M2, and M3
~From: [e-mail]

M1: Money that can be spent immediately.  Includes cash, checking accounts,
    and NOW accounts.

M2: M1 + assets invested for the short term.  These assets include money-
    market accounts and money-market mutual funds.

M3: M2 + big deposits.  Big deposits include institutional money-market
    funds and agreements among banks.

"Modern Money Mechanics," which explains M1, M2, and M3 in gory detail,
is available free from:
        Public Information Center
        Federal Reserve Bank of Chicago
        P.O. Box 834
        Chicago, Illinois 60690

-----------------------------------------------------------------------------

~Subject: One-Line Wisdom
~From: [e-mail]

This is a collection of one-line pieces of investment wisdom, with brief
explanations.  Use and apply at your own risk or discretion.  They are
not in any particular order.

1.  Han expenses
    2) Length of term
    3) Rate of appreciation

The approach used here is to determine the present value of the money
you will pay over the term for the home. In the case of buying, the
appreciation rate and thereby the future value of the home is estimated.
This analysis neglects utility costs because they can easily be the
same whether you rent or buy.  However, adding them to the analysis
is simple; treat them the same as the costs for insurance in both cases.

Computation of present value is reasonably straightforward and is explained
elsewhere. Programs to compute present and future value as well as for loan
amortization (pv, fv, loan) are also available from Lott.

Opportunity costs of buying are effectively captured by the present value.
For example, pretend that you are able to buy a house without having to
have a mortgage.  Now the question is, is it better to buy the house with
your hoard of cash or is it better to invest the cash and continue to rent.
To answer this question you haveally much more expensive
then it is usually better to rent, unless you get a good appreciation rate or
if you are going to own for a long period of time.  It depends on what you can
rent and what you can buy.  In other areas, where real estate is relatively
cheap, I would say it is probably better to own.

On the other hand, if you are currently at a market peak and the country is
about to go into a recession it is better to rent and let property values and
rent fall.  If you are currently at the bottom of the market and the economy
is getting better then it is better to own.

Answer 2:  When you rent from somebody, you are paying that person to assume
the risk of homeownership.  Landlords are renting out property with the long
term goal of making money.  They aren't renting out property because they want
to do their renters any special favors.  This suggests to me that it is
generally better to own.

-----------------------------------------------------------------------------

~Subject: Retirement Plan - 401(k)
~From: [e-mail]

A 401(k) plan is an employee-funded, retirement savings plan.  It
takes its name from the section of the Internal Revenue Code of
1986 which created these plans.  An employer will typically match
a certain percent of the amount contributed to the plan by the
employee, up to some maximum.

Example: the employee can contribute up to 7% of gross pay to the
     fund, and the company matches this money at 50%.  Total
     contribution to the plan is 10.5% of the employee's salary.

Pre-tax contributions: Employees have the option of making all or part
of their contributions from pre-tax (gross) income.  This has the added
benefit of reducing the amount of tax paid by the employee from each
check now and deferring it until you take this pre-tax money out of
the plan.  Both the employer contribution (if any) and any growth of
the fund compound tax-free until age 59-1/2, when the employee is
eligible to receive distributions from the plan.

Pre-tax note: Current law allows up to a maximum of 15% to be deducted
from your pay before federal income and (in most places) state or local
income taxes are calculated.  There are IRS rules which regulate
withdrawals of pre-tax contributions and which place limits on pre-tax
contributions; these affect how much you can save.

After-tax contributions: If you elect to save any of your contributions
on an after-tax basis, the contribution comes out of your pay after
taxes are deducted.  While it doesn't help your current tax situation,
these funds may be easier to withdraw since they are not subject to the
strict IRS rules which apply to pre-tax contributions.  Later, when
you receive a distribution from the 401(k), you pay no tax on the
portion of your distribution attributed to after-tax contributions.

Contribution limits: IRS rules won't allow contributions on pay over
a certain amount (limit was $228,860 in 1992, and is subject to change).
The IRS also limits how much total pre-tax pay you can contribute
(limit was $8,728 in pre-tax money in 1992, and is subject to change).
"Highly compensated" employees (salary over $60,535 in 1992 - again,
subject to change) may not be allowed to save at the maximum rates.
Your benefits department should notify you if you are affected.
Finally, the IRS limits the total amount contributed to your 401(k)
and pension plans each year to the lesser of some amount ($30,000 in
1992, and subject to change of course) or 25% of your annual compensation.
This is generally taken to mean the amount of taxable income reported
on your W-2 form(s).

Advantages: Since the employee is allowed to contribute to his/her
401(k) with pre-tax money, it reduces the amount of tax paid out of
each pay check.  All employer contributions and fund gains (or losses)
grow tax-free until age 59-1/2.  The employee can decide where to
direct future contributions and/or current savings.  If your company
matches your contributions, it's like getting extra money on top of
your salary.  The compounding effect of consistent periodic contributions
over the period of 20 or 30 years is quite dramatic.  Because the
program is a personal investment program for you, the benefits may
not be used as security for loans outside the program.  This includes
the additional protection of the funds from garnishment or attachment
by creditors or assigned to anyone else except in the case of domestic
relations court cases dealing with divorce decree or child support
orders.  While the 401(k) is similar in nature to an IRA, an IRA won't
enjoy any matching company contributions and personal IRA contributions
are only tax deductible if your gross income is under some limit (limit
phases in at $40,000 in 1992).

Disadvantages: It is "difficult" (or at least expensive) to access
your 401(k) savings before age 59-1/2 (see next section).  401(k) plans
don't have the luxury of being insured by the Pension Benefit Guaranty
Corporation (PBGC).  (But then again, some pensions don't enjoy this
luxury either.)

Investments: A 401(k) should have available different investment
optient
optient
optient
optient
opti0 years later is like having
$2,670 in today's dollars - it's NOT a lot of money.  So don't plan on
it being worth much in the future to your child as an investment.

I have some doubts about insurance as investments - it might be a good
idea but it certainly muddies the water.

So you have decided you want insurance, i.e. to protect your family against
your passing away prematurely, i.e. the loss of income you represent.

Next decide how LONG you want insurance for.  If you're around 60 years
old, I doubt you want to get any at all.  Your income stream is largely
over and hopefully you have accumulated the assets you need anyway by now.

If you are married and both work, its not clear you need insurance at
all if you pass on.  The spouse just keeps working UNLESS you need both
incomes to support your lifestyle.  Then you should have one policy on
each of you.

If you are single, its not clear you need it at all.  You are not sup-
porting anyone so no one cares if you pass on, ------------------------------------------------------------------

~Subject: Money-Supply Measures M1, M2, and M3
~From: [e-mail]

M1: Money that can be spent immediately.  Includes cash, checking accounts,
    and NOW accounts.

M2: M1 + assets invested for the short term.  These assets include money-
    market accounts and money-market mutual funds.

M3: M2 + big deposits.  Big deposits include institutional money-market
    funds and agreements among banks.

"Modern Money Mechanics," which explains M1, M2, and M3 in gory detail,
is available free from:
        Public Information Center
        Federal Reserve Bank of Chicago
        P.O. Box 834
        Chicago, Illinois 60690

-----------------------------------------------------------------------------

~Subject: One-Line Wisdom
~From: [e-mail]

This is a collection of one-line pieces of investment wisdom, with brief
explanations.  Use and apply at your own risk or discretion.  They are
not in any particular order.

1.  Han expenses
    2) Length of term
    3) Rate of appreciation

The approach used here is to determine the present value of the money
you will pay over the term for the home. In the case of buying, the
appreciation rate and thereby the future value of the home is estimated.
This analysis neglects utility costs because they can easily be the
same whether you rent or buy.  However, adding them to the analysis
is simple; treat them the same as the costs for insurance in both cases.

Computation of present value is reasonably straightforward and is explained
elsewhere. Programs to compute present and future value as well as for loan
amortization (pv, fv, loan) are also available from Lott.

Opportunity costs of buying are effectively captured by the present value.
For example, pretend that you are able to buy a house without having to
have a mortgage.  Now the question is, is it better to buy the house with
your hoard of cash or is it better to invest the cash and continue to rent.
To answer this question you haveally much more expensive
then it is usually better to rent, unless you get a good appreciation rate or
if you are going to own for a long period of time.  It depends on what you can
rent and what you can buy.  In other areas, where real estate is relatively
cheap, I would say it is probably better to own.

On the other hand, if you are currently at a market peak and the country is
about to go into a recession it is better to rent and let property values and
rent fall.  If you are currently at the bottom of the market and the economy
is getting better then it is better to own.

Answer 2:  When you rent from somebody, you are paying that person to assume
the risk of homeownership.  Landlords are renting out property with the long
term goal of making money.  They aren't renting out property because they want
to do their renters any special favors.  This suggests to me that it is
generally better to own.

-----------------------------------------------------------------------------

~Subject: Retirement Plan - 401(k)
~From: [e-mail]

A 401(k) plan is an employee-funded, retirement savings plan.  It
takes its name from the section of the Internal Revenue Code of
1986 which created these plans.  An employer will typically match
a certain percent of the amount contributed to the plan by the
employee, up to some maximum.

Example: the employee can contribute up to 7% of gross pay to the
     fund, and the company matches this money at 50%.  Total
     contribution to the plan is 10.5% of the employee's s income taxes.  You can buy up
to $15,000 per year in US Savings Bonds.  Many employers have an
employee bond purchase/payroll deduction plan, and most commercial
banks act as agents for the Treasury and will let you fill out the
purchase forms and forward them to the Treasury.  You will receive
the bonds in the mail a few weeks later.

Series EE bonds cost half their face value.  So you would purchase
a $100 bond for $50.  The interest rate is set by the Treasury.
Currently the interest rate is set every November and May for a
period of 6 months, and is credited each month until the 30th month,
and credited every 6 months thereafter.  The periodic rates are set
at 85% of 5-year US Treasuries.  However, the Treasury Dept currently
guarantees that the minimum interest rate for bonds held at least 5
years is 6%.  Bonds can be cashed anytime after 6 months, and must
be cashed before they expire, which for current bonds is 30 years
after issue date.  Since rates change every 6 months, it is not too
meaningful to ask when a bond will be worth its face value.

A bond's issue date is the first day of the month of purchase, and
when you cash it in the interest is calculated to the first day of
the month you cash it in (up to 30 months, and to the previous 6
month interval after).  So it is advantageous to purchase bonds near
the end of a month, and to cash it near the beginning of a month
that it credits interest (each month between month 6 through 30,
and every 6 months thereafter.)

Series E bonds were issued before 1980, and are very similar to EE
bonds except they were purchased at 75% of face value.  Everything
else stated here about EE bonds applies also to E bonds.

Interest on an EE/E bond can be deferred until the bond is cashed
in, or if you prefer, can be declared on your federal tax return as
earned each year.

When you cash the bond you will be issued a Form 1099-INT and would
normally declare as interest all funds received over what you paid
for the bond (and have not yet declared).  However, you can choose
to defer declaring the interest on the EE bonds and instead use the
proceeds from cashing in an EE bond to purchase an HH Savings bond
(prior to 1980, H Bonds).  You can purchase HH Bonds in multiples of
$500 from the proceeds of EE bonds.  HH Bonds pay interest every 6
months and you will receive a check from the Treasury.

When the HH bond matures, you will receive the principal, and a
1099-INT for that deferred EE interest.

Savings Bonds are not negotiable instruments, and cannot be transferred
to anyone at will.  They can be transferred in limited circumstances,
and there could be tax consequences at the time of transfer.

Using Savings Bonds for College Tuition:  EE  bonds purchased in your
name after December 31, 1989 can be used to pay for college tuition
for your children or for you, and the interest may not be taxable.
They have to have been issued while you were at least 24 years old.
There are income limits:  To use the full interest benefit your
adjusted gross income must be less than  (for 1992 income) $44,150
single, and 66,200 married, and phases out entirely at $59,150 single
and $96,200 married.  Use Form 8815 to exclude interest for college
tuition.  (This exclusion is not available for taxpayers who file as
Married Filing Separately.)

Effective March 1, 1993 the guaranteed interest rates were lowered to
4% for bonds bought on March 1, 1993 or later and held at least 5 years.
The 4% rate is currently guaranteed as the minimum rate for 18 years.
(The former rate -- 6% -- had been guaranteed for 12 years -- and
continues for bonds bought when the 6% guarantee was in effect.  Prior
to the 6% rate, the guaranteed rate had been 7,5%.)   The actual semi-
annual rate on March 1, 1993 is slightly over 5%.

-----------------------------------------------------------------------------

Compilation Copyright (c) 1993 by Christopher Lott, [e-mail]
--
Christopher Lott    [e-mail]   [phone], -3331 Fax
Post: FB Informatik - Bau 57, Universitaet KL, W-6750 Kaiserslautern, Germany

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From: [e-mail] (Christopher Lott)
Subject: misc.invest FAQ on general investment topics (part 3 of 3)
Message-ID: <[e-mail]>
Followup-To: misc.invest
Summary: Answers to frequently asked questions about investments.
         Should be read by anyone who wishes to post to misc.invest.
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Archive-name: investment-faq/general/part3
Version: $Id: faq-p3,v 1.4 1993/03/27 09:28:33 lott Exp lott $
Compiler: Christopher Lott, [e-mail]

This is the general FAQ for misc.invest, part 3 of 3.

-----------------------------------------------------------------------------

~Subject: Shorting Stocks
~From: [e-mail]

Shorting means to sell something you don't own.

If I do not own shares of IBM stock but I ask my broker to sell short
100 shares of IBM I have committed shorting.  In broker's lingo, I
have established a short position in IBM of 100 shares.  Or, to really
confuse the language, I hold 100 shares of IBM short.

Why would you want to short?

Because you believe the price of that stock will go down, and you can
soon buy it back at a lower price than you sold it at.  When you buy
back your short position, you "close your short position."

The broker will effectively borrow those shares from another client's
account or from the broker's own account, and effectively lend you
the shares to sell short.  This is all done with mirrors; no stock
certificates are issued, no paper changes hands, no lender is identified
by name.

My account will be credited with the sales  price of 100 shares of IBM
less broker's commission.  But the broker has actually lent me the stock
to sell; no way is he going to pay interest on the funds from the short
sale. (Exception:  Really big spenders sometimes negotiate a full or
partial payment of interest on short sales funds provided sufficient
collateral exists in the account and the broker doesn't want to lose
the client.  If you're not a really big spender, don't expect to receive
any interest on the funds obtained from the short sale.)  Also expect
the broker to make you put up additional collateral.  Why?

Well, what happens if the stock price goes way up?  You will have to
assure the broker that if he needs to return the shares whence he got
them (see "mirrors" above) you will be able to purchase them and "close
your short position."  If the price has doubled, you will have to spend
twice as much as you received. So your broker will insist you have
enough collateral in your account which can be sold if needed to close
your short position.  More lingo: Having sufficient collateral in your
account that the broker can glom onto at will, means you have "cover"
for your short position. As the price goes up you must provide more cover.

Since you borrowed these shares, if dividends are declared, you will be
responsible for paying those dividends to the fictitious person from
whom you borrowed.  Too bad.

Even if you hold you short position for over a year, your capital
gains are short term.

A short squeeze can result when the price of the stock goes up.  When
the people who have gone short buy the stock to cover their previous
short-sales, this can cause the price to rise further.  It's a death
spiral - as the price goes higher, more shorts feel driven to cover
themselves, and so on.

You can short other securities besides stock.  For example, every time
I write (sell) an option I don't already own long, I am establishing a
short position in that option. The collateral position I must hold in
my account generally tracks the price of the underlying stock and not
the price of the option itself.  So if I write a naked call option on
IBM November 70s and receive a mere $100 after commissions, I may be
asked to put up collateral in my account of $3,500 or more!  And if
in November IBM has regained ground and is at $90 [ I should be so
lucky ], I would be forced to buy back (close my short position in
the call option) at a cost of about $2000, for a big loss.

Selling short is seductively simple.  Brokers get commissions by
showing you how easy it is to generate short term funds for your
account, but you really can't do much with them.  My personal advice
is if you are strongly convinced a stock will be going down, buy the
out-of-the-money put instead, if such a put is available.

A put's value increases as the stock price falls (but decreases sort
of linearly over time) and is strongly leveraged, so a small fall in
price of the stock translates to a large increase in value of the put.

Let's return to our IBM, market price of 66 (yuck.) Let's say I strongly
believe that IBM will fall to, oh,  58 by mid-November.  I could short
IBM stock at 66, sell it at 58 in mid-November if I'm right, and make
about net $660.  If instead it goes to 70, and I have to sell then I
lose net $500 or so.  That's a 10% gain or an 8% loss or so.

Now, I could buy the IBM November 65 put for maybe net $200.  If it
goes down to 58 in mid November, I sell (close my position) for about
$600, for a 300% gain.  If it doesn't go below 65, I lose my entire
200 investment. But if you strongly believe IBM will go way way down,
you should shoot for the 300% gain with the put and not the 10% gain
by shorting the stock itself.  Depends on how convinced you are.

Having said this, I add a strong caution:  Puts are very risky, and
depend very much on odd market behavior beyond your control, and you
can easily lose your entire purchase price fast.  If you short options,
you can lose even more than your purchase price!

One more word of advice.  Start simply.  If you never bought stock
start by buying some stock.  When you feel like you sort of understand
what you are doing, when you have followed several stocks in the
financial section of the paper and watched what happens over the course
of a few months, when you have read a bit more and perhaps seriously
tracked some important financials of several companies, you might --
might -- want to expand your investing choices beyond buying stock.
If you want to get into options (see FAQ on options) start with writing
covered calls.  I would place selling stock short or writing or buying
other options lower on the list -- later in time.

-----------------------------------------------------------------------------

~Subject: Stock Index Types
~From: [e-mail]

There are three major classes of indices in use today in the US.  They are:

A - equally weighted price index
    (an example is the Dow Jones Industrial Average)
B - market-capitalization-weighted index
        (an example is the S&P Industrial Average)
C - equally-weighted returns index
        (the only one of its kind is the Value-Line index)

Of these, A and B are widely used.  All my profs in the business school
claim that C is very weird and don't emphasize it too much.

+ Type A index:  As the name suggests, the index is calculated by taking the
average of the prices of a set of companies:

            Index =  Sum(Prices of N companies) / divisor

In this calculation, two questions crop up:

1. What is "N"?  The DJIA takes the 30 large "blue-chip" companies.  Why 30?
I think it's more a historical hangover than any thing else.  One rationale
for 30 might be that a large fraction of market capitalization is often
clustered in largest 50 companies or so.

Does the set of N companies change across time?  If so, how often is the
list updated (wrt companies)?  I suspect these decisions are quite
judgemental and hence not readily replicable.

If the DJIA only has 30 companies, how do we select these 30?  Why should
they have equal weights?  These are real criticisms of the DJIA type index.

2. The divisor is not always equal to N for N companies.  What happens to
the index when there is a stock issue by one of the companies in the set?
The price drops, but the number of shares have increased to leave the market
capitalization of the shares the same. Since the index does not take the
latter into account, it has to compensate for the drop in price by tweaking
the divisor.  For examples on this, look at pg. 61 of Bodie, Kane, & Marcus,
_Investments_ (henceforth, BKM).

Historically, this index format was computationally convenient.  It doesn't
have a very sound economic basis to justify it's existence today.  The DJIA
is widely cited on the evening news, but not used by real finance folks.

I have an intuition that the DJIA type index will actually be BAD if the
number of companies is very large.  If it's to make any sense at all, it
should be very few "brilliantly" chosen companies.

+ Type B index:  In this index, each of the N company's price is weighted by
the market capitalization of the company.

        Sum (Company market capitalization * Price) over N companies
Index = ------------------------------------------------------------
        Market capitalisation for these N companies

Here you do not take into account the dividend data, so effectively you're
tracking the short-run capital gains of the market.

Practical questions regarding this index:

1. What is "N"?  I would use the largest N possible to get as close to the
"full" market as possible.   BTW in the US there are companies who make a
living on only calculating extremely complete value-weighted indexes for
the NYSE and foreign markets.  CMIE should sell a very-complete value-weighted
index to some such folks.

Why does S&P use 500? Once again, I'm guessing that it's for historical
reasons when computation over 20,000 companies every day was difficult and
because of the concentration of market capitalization in the largest lot
of companies.  Today, computation over 20k companies for a Sun workstation
is no problem, so the S&P idea is obsolete.

2.  How to deal with companies entering and exiting the index?  If we're
doing an index containing "every single company possible" then the answer
to this question is easy -- each time a company enters or exits we recalculate
all weights.  But if we're a value-weighted index like the S&P500 (where there
are only 500 companies) it's a problem.  Recently Wang went bankrupt and S&P
decided to replace them by Sun -- how do you justify such choices?

The value weighted index is superior to the DJIA type index for deep reasons.
Anyone doing modern finance will not use the DJIA type index.  A glimmer of
the reasoning for this is as follows:  If I held a portfolio with equal number
of shares of each of the 30 DJIA companies then the DJIA index would accurately
reflect my capital gains.  BUT we know that it is possible to find a portfolio
which has the same returns as the DJIA portfolio but at a smaller risk.
(This is a mathematical fact).

Thus, by definition, nobody is ever going to own a DJIA portfolio.  In
contrast, there is a extremely good interpretation for the value weighted
portfolio -- it's the highest returns you can get for it's level of risk.
Thus you would have good reason for owning a value-weighted market portfolio,
thus justifying it's index.

Yet another intuition about the value-weighted index -- a smart investor is
not going to ever buy equal number of shares of a given set of companies,
which is what index type a. tracks.  If you take into consideration that the
price movements of companies are correlated with others, you are going to
hedge your returns by buying different proportions of company shares.  This
is in effect what the index type B does and this is why it is a smarter index
to follow.

One very neat property of this kind of index is that it is readily applied to
industry indices.  Thus you can simply apply the above formula to all machine
tool companies, and you get a machine tool index.  This industry-index is
conceptually sound, with excellent interpretations.  Thus on a day when the
market index goes up 6%, if machine tools goes up 10%, you know the market
found some good news on machine tools.

+ Type C index:  Here the index is the average of the returns of a certain
set of companies. Value Line publishes two versions of it:

  * the arithmetic index :  (VLAI/N) =  1  * Sum(N returns)
  * the geometric index :  VLGI  = {Product(1 + return) over N}^{1/n},
    which is just the geometric mean of the N returns.

Notice that these indices imply that the dollar value on each company has
to be the same.  Discussed further in BKM, pg 66.

-----------------------------------------------------------------------------

~Subject: Stock Index - The Dow
~From: [e-mail], [e-mail]

The Dow Jones Industrial Average is computed from the following stocks:

Ticker  Name
------  ----
AA    Alcoa
ALD    Allied Signal
AXP    American Express
BA    Boeing
BS    Bethlehem Steel
CAT    Caterpillar
CHV    Chevron
DD    Du Pont
DIS    Disney
EK    Eastman Kodak
GE    General Electric
GM    General Motors
GT    Goodyear Tire
IBM    International Business Machines
IP    International Paper
JPM    JP Morgan Bank
KO    Coca Cola
MCD    McDonalds
MMM    Minnesota Mining and Manufacturing (3M)
MO    Philip Morris
MRK    Merck
PG    Procter and Gamble
S    Sears, Roebuck
T    AT&T
TX    Texaco
UK    Union Carbide
UTX    United Technologies
WX    Westinghouse
XON    Exxon
Z    Woolworth

The Dow Jones averages are computed by summing the prices of the stocks
in the average and then dividing by a constant called the "divisor".  The
divisor for the industrial average is adjusted periodically to reflect
splits in the stocks making up the average; the divisor was originally 30
but has been reduced over the years to 0.462685 (as of 92-10-31).  The
current value of the divisor can be found in the Wall Street Journal
and Barron's.

-----------------------------------------------------------------------------

~Subject: Stock Indexes - Others
~From: [e-mail], [e-mail], [e-mail],
    [e-mail]

Standard & Poor's 500:    500 of the biggest US corporations.
    This is a very popular institutional index, and recently becoming
    more popular among individuals.  Most often used measure of broad
    stock market results.
Wilshire 5000
    Includes most publicly traded shares.  Considered by some a better
    measure of market as a whole, becuase it includes smaller companies.
Wilshire 4500
    These are all firms *except* the S&P 500.
Value Line Composite
    See Martin Zweig's Winning on Wall Street for a good description.
    It is a price-weighted index as opposed to a capitalization index.
    Zweig (and others) think this gives better tracking of investment
    results, since it is not over-weighted in IBM, for example, and
    most individuals are likewise not weighted by market cap in their
    portfolios (unless they buy index funds).
Nikkei Dow (Japan)
    I believe "Dow" is a misnomer.  It is called the Nikkei index (or
    the Nikkei-xx, where xx is the number of shares in it, which I
    can't quote to you out of my head).  "Dow" comes from Dow Jones &
    Company, which publishes DJIA numbers.  Nikkei is considered the
    "Japanese Dow," in that it is the most popular and commonly quoted
    Japanese market index, but I don't think Dow Jones owns it.
S&P 100 (and OEX)
    The S&P 100 is an index of 100 stocks.  The "OEX" is the option on
    this index, one of the most heavily traded options around.
S&P MidCap 400
    Medium capitalization firms.
CAC-40 (France)
    This is 40 stocks on the Paris Stock Exchange formed into an
    index.  The futures contract on this index is probably the most
    heavily traded futures contract in the world.
Europe, Australia, and Far-East (EAFE)
    Compiled by Morgan Stanley.
Russell 1000
Russell 2000
    A small cap stock index.
Russell 3000
NYSE Composite              [options on index]
Gold & Silver Index         [options on index]
AMEX Composite
NASDAQ Composite
Topix (Japan)
DAX (Germany)
FTSE 100 (Great Britain)
Major Market Index (MMI)

 [ Compiler's note: a few explanations are still missing.
   Can anyone supply a few? ]

-----------------------------------------------------------------------------

~Subject: Stock Splits
~From: [e-mail], [e-mail], [e-mail]

Ordinary splits occur when the company distributes more stock to holders
of existing stock.  A stock split, say 2-for-1, is when a company simply
issues one additional share for every one outstanding.  After the split,
there will be two shares for every one pre-split share. (So it is called
a "2-for-1 split.")  If the stock was at $50 per share, after the split,
each share is worth $25, because the company's net assets didn't increase,
only the number of outstanding shares.

Sometimes an ordinary split is referred to as a percent.  A 2:1 split is
a 100% stock split (or 100% stock dividend).   A 50% split would be a 3:2
split (or 50% stock dividend).  You will get 1 more share of stock for
every 2 shares you owned.

Reverse splits occur when a company wants to raise the price of their
stock, so it no longer looks like a "penny stock" but looks more like a
self-respecting stock.  Or they might want to conduct a massive reverse
split to eliminate small holders.  If a $1 stock is split 1:10 the new
shares will be worth $10.  Holders will have to trade in their 10 Old
Shares to receive 1 New Share.

Often a split is announced long before the effective date of the split,
along with the "record date."   Shareholders of record on the record
date will receive the split shares on the effective date (distribution
date). Sometimes the split stock begins trading as "when issued" on or
about the record date.   The newspaper listing will show both the pre-
split stock as well as the when-issued split stock with the suffix "wi."
(Stock dividends of 10% or less will generally not trade wi.)

Theoretically a stock split is a non-event.  The fraction of the company
each of your shares represents is reduced, but you are given enough
shares so that your total fraction of the company owned remains the same.
On the day of the split, the value of the stock is also adjusted so that
the total capitalization of the company remains the same.

In practice, an ordinary split often drives the new price per share up,
as more of the public is attracted by the lower price.  A company might
split when it feels its per-share price has risen beyond what an individual
investor is willing to pay, particularly since they are usually bought
and sold in 100's.  They may wish to attract individuals to stabilize the
price, as institutional investors buy and sell more often than individuals.

-----------------------------------------------------------------------------

~Subject: Technical Analysis
~From: [e-mail]

The following material introduces technical analysis and is intended to
be educational.  If you are intrigued, do your own reading.  The answers
are brief and cannot possibly do justice to the topics.  The references
provide a substantial amount of information.  The contributions of the
reviewers is appreciated.

First, the references:

  1. Technical Analysis of the Futures Markets, by John J. Murphy.
     New York Institute of Finance.

  2. Technical Analysis Explained, by Martin Pring.
     McGraw Hill.

  3. Stan Weinstein's Secrets for Profiting in Bull and Bear Markets, by
     Stan Weinstein.  Dow Jones-Irwin.

Next, the discussion:

1.  What is technical analysis?

Technical analysis attempts to use *past* stock price and volume
information to predict *future* price movements.  Note the emphasis.
It also attempts to time the markets.

2.  Does it have any chance of working, or is it just like reading tea leaves?

There are a couple of plausibility arguments.  One is that the chart
patterns represent the past behavior of the pool of investors.  Since
that pool doesn't change rapidly, one might expect to see similar chart
patterns in the future.  Another argument is that the chart patterns
display the action inherent in an auction market.  Since not everyone
reacts to information instantly, the chart can provide some predictive
value.  A third argument is that the chart patterns appear over and over
again.  Even if I don't know why they happen, I shouldn't trade or invest
against them.  A fourth argument is that investors swing from overly
optimistic to excessively pessimistic and back again.  Technical analysis
can provide some estimates of this situation.

A contrary view is that it is just coincidence and there is little, if
any, causality present.  Or that even if there is some sort of causality
process going on, it isn't strong enough to trade off of.

A very contrary view:  The past and future performance of a stock may
be correlated, but that does not mean or imply causality. So, relying
on technical analysis to buy/sell a stock is like relying on the position
of the stars in the atmosphere or the phases of the moon to decide whether
to buy or sell.

3.  I am a fundamentalist.  Should I know anything about technical analysis?

Perhaps.  You should consider delaying purchase of stocks whose chart
patterns look bad, no matter how good the fundamentals.  The market is
telling you something is still awry.  Another argument is that the
technicians won't be buying and they will not be helping the stock move
up.  On the other hand (as the economists say), it makes it easy for
you to buy in front of them.  And, of course, you can ignore technical
analysis viewpoints and rely solely on fundamentals.

4.  What are moving averages?

Observe that a period can be a day, a week, a month, or as little as 1
minute.  Stock and mutual fund charts normally are daily postings or
weekly postings.  An N period (simple) moving average is computed by
summing the last N data points and dividing by N.  Moving averages are
normally simple unless otherwise specified.

An exponential moving average is computed slightly differently.  Let
X[i] be a series of data points.  Then the Exponential Moving Average
(EMA) is computed by

    EMA[i] = (1-sm)*EMA[i-1] + sm*(X[i]-EMA[i-1])

    where sm = 2/(N+1), and EMA[1] = X[1].

"sm" is the smoothing constant for an N period EMA.  Note that the EMA
provides more weighting to the recent data, less weighting to the old data.

4a.  What is Stage Analysis?

Stan Weinstein [Ref 3] developed a theory (based on his observations)
that stocks usually go through four stages in order.  Stage 1 is a time
period where the stock fluctuates in a relatively narrow range.  Little
or nothing seems to be happening and the stock price will wander back
and forth across the 200 day moving average.  This period is generally
called "base building".  Stage 2 is an advancing stage characterized by
the stock rising above the 200 and 50 day moving averages.  The stock
may drop below the 50 day average and still be considered in Stage 2.
Fundamentally, Stage 2 is triggered by a perception of improved conditions
with the company.  Stage 3 is a "peaking out" of the stock price action.
Typically the price will begin to cross the 200 day moving average, and
the average may begin to round over on the chart.  This is the time to
take profits.  Finally, the Stage 4 decline begins.  The stock price drops
below the 50 and 200 day moving averages, and continues down until a new
Stage 1 begins.  Take the pledge right now:  hold up your right hand and
say "I will never purchase a stock in Stage 4".  One could have avoided
the late 92-93 debacle in IBM by standing aside as it worked its way
through a Stage 4 decline.

5.  What is a whipsaw?

This is where you purchase based on a moving average crossing (or some
other signal) and then the price moves in the other direction giving a
sell signal shortly thereafter, frequently with a loss.  Whipsaws can
substantially increase your commissions for stocks and excessive mutual
fund switching may be prohibited by the fund manager.

5a.  Why a 200 day moving average as opposed to 190 or 210?

Moving averages are chosen as a compromise between being too late to
catch much move after a change in trend, and getting whipsawed.  The
shorter the moving average, the more fluctuations it has.  There are
considerations regarding cyclic stock patterns and which of those are
filtered out by the moving average filter.  A discussion of filters is
far beyond the scope of this FAQ.  See Hurst's book on stock
transactions for some discussion.

6.  Explain support and resistance levels, and how to use them.

Suppose a stock drops to a price, say 35, and rebounds.  And that this
happens a few more times.  Then 35 is considered a "support" level.
The concept is that there are buyers waiting to buy at that price.
Imagine someone who had planned to purchase and his broker talked him
out of it.  After seeing the price rise, he swears he's not going to
let the stock get away from him again.  Similarly, an advance to a
price, say 45, which is repeatedly followed by a pullback to lower
prices because a "resistance" level.  The notion is that there are
buyers who purchased at 45 and have watched a deterioration into a loss
position.  They are now waiting to get out even.  Or there are sellers
who consider 45 overvalued and want to take their profits.

One strategy is to attempt to purchase near support and take profits near
resistance.  Another is to wait for an "upside breakout" where the stock
penetrates a previous resistance level.  Purchase on anticipation of a
further move up.  [See references for more details.]

The support level (and subsequent support levels after rises) can provide
information for use in setting stops.  See the "About Stocks" section of
the FAQ for more details.

6a.  What would cause these levels to be penetrated?

Abrupt changes in a company's prospects will be reacted to in the stock
market almost immediately.  If the news is extreme enough, the reaction
will appear as a jump or gap in prices.  More modest changes will
result, in general, in more modest changes in price.

6b.  What is an "upside breakout"?

If a stock has traded in a narrow range for some time (i.e. built a
base) and then advances above the resistance level, this is said to be an
"upside breakout".  Breakouts are suspect if they do not occur on high
volume (compared to average daily volume).  Some traders use a "buy stop"
which calls for purchase when a stock rises above a certain price.

6c.  Is there a "downside breakout"?

Not by that name -- the opposite of upside breakout is called
"penetration of support" or "breakdown".  Corresponding to "buy stops,"
a trader can set a "sell stop" to exit a position on breakdown.

7.  Explain breadth measurements and how to use them.

A breadth measurement is something taken across a market.  For example,
looking at the number of advancing stocks compared to declining stocks
on the NYSE is a breadth measurement.  Or looking at the number of stocks
above their 200 day moving average.  Or looking at the percentage of stocks
in Stage 1 and 2 configurations.  In general, a technically healthy market
should see a lot of stocks advancing, not just the Dow 30.  If the breadth
measurements are poor in an advancing sense and the market has been
advancing for some time, then this can indicate a market turning point
(assuming that the advancing breadth is declining) and you should consider
taking profits, not entering new long positions, and/or tightening stops.
(See the divergence discussion.)

7a.  What is a divergence?  What is the significance?

In general, a divergence is said to occur when two readings are not
moving generally together when they would be expected to.  For example,
if the DJIA moves up a lot but the S&P 500 moves very little or even
declines, a divergence is created.  Divergences can signify turning
points in the market.  At a major market low, the "blue chip" stocks
tend to move up first as investors becoming willing to purchase quality.
Hence the S&P 500 may be advancing while the NYSE composite is moving
very little.  Divergences, like everything else, are not 100 per cent
reliable.  But they do provide yellow or red alerts.  And the bigger the
divergence, the stronger the signal.  Divergence and breadth are related
concepts.  (See the breadth discussion.)

8.  How much are charting services and what ones are available?

They aren't cheap.  Daily Graphs (weekly charts with daily prices) is
$465 for the NYSE edition, $432 for the AMEX/OTC edition.  Somewhat
cheaper for biweekly or monthly.  Mansfield charts are weekly with weekly
prices.  Mansfield shows about 2.5 years of action, Daily Graphs shows 1
year or 6 months for the less active stocks.

S&P Trendline Chart Guide is about $145 per year.  It provides over 4,000
charts.  These charts show one year of weekly price/volume data and do not
provide nearly the detail that Daily Graphs do.  You get what you pay for.

There are other charting services available.  These are merely representative.

9.  Can I get charts with a PC program?

Yes.  There are many programs available for various prices.  Daily quotes
run about $35 or so a month from Dial Data, for example.  Or you can
manually enter the data from the newspaper.

10.  What would a PC program do that a charting service doesn't?

Programs provide a wide range of technical analysis computations in
addition to moving averages.  RSI, MACD, Stochastics, etc., are routinely
included.  See Murphy's book [Ref 1] for definitions.  Frequently you can
change the length of the moving averages or other parameters.  As another
example, AIQ StockExpert provides an "expert rating" suggesting purchase
or short depending on the rating.  Intermediate values of the rating are
less conclusive.

11.  What does a charting service do that PC doesn't?

Charts generally contain a fair amount of fundamental information such
as sales, dividends, prior growth rates, institutional ownership.

11a.  Can I draw my own charts?

Of course.  For example, if you only want to follow a handful of mutual
funds of stocks, charting on a weekly basis is easy enough.  EMAs are
also easy enough to compute, but will take a while to overcome the lack
of a suitable starting value.

12.  What about wedges, exhaustion gaps, breakaway gaps, coils, saucer
     bottoms, and all those other weird formations?

The answer is beyond the scope of this FAQ article.  Such patterns can be
seen, particularly if you have a good imagination.  Many believe they are
not reliable.  There is some discussion in Murphy [Ref 1].

13.  Are then any aspects of technical analysis that don't seem quite
     so much like hokum or tea leaf reading?

RSI (Relative Strength Indicator) is based on the observation that a
stock which is advancing will tend to close nearer to the high of the day
than the low.  The reverse is true for declining stocks.  RSI is a formula
which attempts to provide a number which will indicate where you are in
the declining/advancing stage.

14.  Can I develop my own technical indicators?

Yes.  The problem is validating them via some sort of backtesting procedure.
This requires data and work.  One suggestion is to split the data into
two time periods.  Develop your indicator on one half and then see if it
still works on the other half.  If you aren't careful, you end up
"curve fitting" your system to the data.

-----------------------------------------------------------------------------

~Subject: Ticker Tape Terminology
~From: [e-mail], [e-mail]

Ticker tape says:        Translation (but see below):
        NIKE68 1/2            100 shares sold at 68 1/2
     10sNIKE68 1/2           1000 shares sold at   "
 10.000sNIKE68 1/2          10000 shares sold at   "

The extra zeroes for the big trades are to make them stand out.  All
trades on CNN and CNBC are delayed by 15 minutes.  CNBC once advertised
a "ticker guide pamphlet, free for the asking", back when they merged
with FNN.  It also has explanations for the futures they show.

However, the first translation is not necessarily correct.  CNBC has
a dynamic maximum size for transactions that are displayed this way.
Depending on how busy things are at any particular time, the maximum
varies from 100 to 5000 shares.  You can figure out the current maximum
by watching carefully for about five minutes.  If the smallest number
of shares you see in the second format is "10s" for any traded security,
then the first form can mean anything from 100 to 900 shares.  If the
smallest you see is "50s" (which is pretty common), the first form
means anything between 100 and 4900 shares.

Note that at busy times, a broker's ticker drops the volume figure and
then everything but the last dollar digit (e.g. on a busy day, a trade
of 25,000 IBM at 68 3/4 shows only as "IBM 8 3/4" on a broker's ticker).
That never happens on CNBC, so I don't know how they can keep up with all
trades without "forgetting" a few.

-----------------------------------------------------------------------------

~Subject: Treasury Direct
~From: [e-mail]

You can buy T-Bills directly from the US Treasury.  Contact any Federal
Reserve Bank and ask for information on Treasury Direct.  The minimum
for a Treasury Note (2 years and up) is only $5K and in some instances
(I believe 5 year notes) $1K.  There are no fees and you may elect to
have interest payments made directly to your account.  You even may pay
with a personal check, no need for a cashier's or certified check as
Treasury Bills (1 year and under) required.  AAII Journal had an article
on this a couple of years ago. Like they said, the government service is
great, they just do not advertise it well.

-----------------------------------------------------------------------------

~Subject: Uniform Gifts to Minors Act (UGMA)
~From: [e-mail], [e-mail]

The Uniform Gifts to Minors Act allows you to give $10,000 per year
to any minor, tax free.  You must appoint a custodian.

Some accountants advise that one person should make the gift and
that a different person should be the custoidian, but I have never
seen any IRS publication to justify this, nor any tax case ruling
which makes this a problem.  I suspect some people are just being
conservative.

To give such a gift, go to your friendly neighborhood stockbroker,
bank, mutual fund manager, or (close your eyes now: S&L), etc. and
say that you wish to open a Uniform Gifts (in some states "Transfers")
to Minors Act account.

You register it as:
  [ Name of Custodian ] as custodian for [ Name of Minor ] under the
  Uniform Gifts/Transfers to Minors Act - [ Name of State of Minor's
  residence ]

You use the minor's social security number as the taxpayer ID for this
account.  When you fill out the W-9 form for this account, it will
show this form.  The custodian should certify the W-9 form.

The money now belongs to the minor and the custodian has a legal
fiduciary responsibility to handle the money in a prudent manner for
the benefit of the minor.

So you can buy common stocks but cannot write naked options.  You
cannot "invest" the money on the horses, planning to donate the
winnings to the minor.  And when the minor reaches age of majority -
usually 18 - the minor can claim all of the funds even if that's
against your wishes.  You cannot place any conditions on those funds
once the minor becomes an adult.

Until the minor reaches 14, the first $500 earned by the minor is
tax free, the next $500 is taxed at the minor's rate, and the rest
is taxed at the higher of the minor's or the parent's rate.  After
the minor reaches 14, all earnings over $500 are taxed at the
minor's rate.

Note that if you want to continue doing your childs taxes even after
they turn 18, there is no reason they need to know about their UGMA
account that you set up for them.  They certainly can't blow their
college fund on a Trans Am if they don't know about it.

Even if your child does his/her own taxes, you can still give them
gifts through a trust without them knowing about it until they are
more mature.  Call and ask Twentieth Century Investors for information
about their GiftTrust fund.  The fund is entirely composed of trusts
like this.  The trust pays its own taxes.

-----------------------------------------------------------------------------

~Subject: Warrants
~From: [e-mail]

There are many meanings to the word warrant.

The marshal can show up on your doorstep with a warrant for your arrest.

Many army helicopter pilots are warrant officers, who have received
a warrant from the president of the US to serve in the Army of the
United States.

The State of California ran out of money earlier this year and
issued things that looked a lot like checks, but had no promise to
pay behind them.  If I did that I could be arrested for writing a
bad check.  When the State of California did it, they called these
thingies "warrants" and got away with it.

And a warrant is also a financial instrument which was issued with
certain conditions.  The issuer of that warrant sets those conditions.
Sometimes the warrant and common or preferred convertible stock are
issued by a startup company bundled together as "units" and at some
later date the units will split into warrants and stock.  This is a
common financing method for some startup companies.  This is the
"warrant" most readers of the misc.invest newsgroup ask about.

As an example of a "condition," there may be an exchange privilege
which lets you exchange 1 warrant plus $25 in cash (or even no cash
at all) for 100 shares of common stock in the corporation, any time
after some fixed date and before some other designated date.
(And often the issuer can extend the "expiration date.")

So there are some similarities between warrants and call options for
common stock.

Both allow holders to exercise the warrant/option before an
expiration date, for a certain number of shares.  But the option is
issued by independent parties, such as a member of the Chicago Board
Options Exchange, while the warrant is issued and guaranteed by the
corporate issuer itself.  The lifetime of a warrant is often
measured in years, while the lifetime of a call option is months.

Sometimes the issuer will try to establish a market for the warrant,
and even try to register it with a listed exchange.  The price can
then be obtained from any broker.  Other times the warrant will be
privately held, or not registered with an exchange, and the price
is less obvious, as is true with non-listed stocks.

-----------------------------------------------------------------------------

~Subject: Wash Sale Rule (from U.S. IRS)
~From: [e-mail]

From IRS publication 550, "Investment Income and Expenses" (1990).
Here is the introductory paragraph from p.37:

    Wash Sales
    You cannot deduct losses from wash sales or trades of stock or
    securities.  However, the gain from these sales is taxable.

    A wash sale occurs when you sell stock or securities at a loss and
    within 30 days before or after the sale you buy or acquire in a
    fully taxable trade, or acquire a contract or option to buy,
    substantially identical stock or securities.  If you sell stock and
    your spouse or a corporation you control buys substantially
    identical stock, you also have a wash sale.  You add the disallowed
    loss to the basis of the new stock or security.

It goes on explaining all those terms (substantially identical, stock
or security, ...).  It runs on several pages, too much to type in.  You
should definitely call IRS for the most updated ones for detail.  Phone
number:  800-TAX-FORM (800-829-3676).

-----------------------------------------------------------------------------

~Subject: Zero-Coupon Bonds
~From: [e-mail]

Not too many years ago every bond had coupons attached to it.  Every
so often, usually every 6 months, bond owners would take a scissors
to the bond, clip out the coupon, and present the coupon to the bond
issuer or to a bank for payment.  Those were "bearer bonds" meaning
the bearer (the person who had physical possession of the bond) owned
it.  Today, many bonds are issued as "registered" which means even if
you get to touch the actual bond at all, it will be registered in your
name and interest will be mailed to you every 6 months. It is not too
common to see such coupons. Registered bonds will not generally have
coupons, but may still pay interest each year.  It's sort of like the
issuer is clipping the coupons for you and mailing you a check.  But
if they pay interest periodically, they are still called Coupon Bonds,
just as if the coupons were attached.

When the bond matures, the issuer redeems the bond and pays you the
face amount.   You may have paid $1000 for the bond 20 years ago and
you have received interest every 6 months for the last 20 years, and
you now redeem the matured bond for $1000.

A Zero-coupon bond has no coupons and there is no interest paid.

But at maturity, the issuer promises to redeem the bond at face value.
Obviously, the original cost of a $1000 bond is much less than $1000.
The actual price depends on: a) the holding period -- the number of
years to maturity, b) the prevailing interest rates, and c) the risk
involved (with the bond issuer).

Taxes:  Even though the bond holder does not receive any interest while
holding zeroes, in the US the IRS requires that you "impute" an annual
interest income and report this income each year.  Usually, the issuer
will send you a Form 1099-OID (Original Issue Discount) which lists the
imputed interest and which should be reported like any other interest
you receive.  There is also an IRS publication covering imputed interest
on Original Issue Discount instruments.

For capital gains purposes, the imputed interest you earned between the
time you acquired and the time you sold or redeemed the bond is added to
your cost basis.  If you held the bond continually from the time it was
issued until it matured, you will generally not have any gain or loss.

Zeroes tend to be more susceptible to prevailing interest rates, and
some people buy zeroes hoping to get capital gains when interest rates
drop. There is high leverage.   If rates go up, they can always hold them.

Zeroes sometimes pay a better rate than coupon bonds (whether registered
or not).  When a zero is bought for a tax deferred account, such as an
IRA, the imputed interest does not have to be reported as income, so
the paperwork is lessened.

Both corporate and municipalities issue zeroes, and imputed interest on
municipals is tax-free in the same way coupon interest on municipals is.
(The zero could be subject to AMT).

Some marketeers have created their own zeroes, starting with coupon
bonds, by clipping all the coupons and selling the bond less the coupons
as one product -- very much like a zero -- and the coupons as another
product. Even US Treasuries can be split into two products to form a
zero US Treasury.

There are other products which are combinations of zeroes and regular
bonds.  For example, a bond may be a zero for the first five years of
its life, and pay a stated interest rate thereafter.  It will be treated
as an OID instrument while it pays no interest.

(Note:  The "no interest" must be part of the original offering; if a
cumulative instrument intends to pay interest but defaults, that does not
make this a zero and does not cause imputed interest to be calculated.)

Like other bonds, some zeroes might be callable by the issuer (they are
redeemed) prior to maturity, at a stated price.

-----------------------------------------------------------------------------

Compilation Copyright (c) 1993 by Christopher Lott, [e-mail]
--
Christopher Lott    [e-mail]   [phone], -3331 Fax
Post: FB Informatik - Bau 57, Universitaet KL, W-6750 Kaiserslautern, Germany