Forbes Guide to the Markets

From the leader in financial information, a fully updated guide to investing in today's markets This accessible book is a practical guide to the financial markets. Designed to help both the new and experienced investor gain sufficient understanding and knowledge to invest wisely and confidently in today's turbulent markets, it covers all the elements necessary to become financially street smart-from products, players, and procedures to rules, regulators, and risk/reward trade-offs. Filled with solid investment principles, the Forbes Guide to the Markets, Second Edition is completely revised and updated to reflect new trends and changes in the markets. New topics discussed include the introduction and implementation of ETFs, the role of hedge funds, and the effects of the subprime crisis Updated and revised chapters contain buying and selling techniques, fundamental, technical and quantitative analysis, and futures and options information Highlights key terms and contains a complete glossary An essential resource for both the new or seasoned investor, this authoritative resource is a must-read for anyone aspiring to become a savvy investor.

Acknowledgments xi Note to the Reader xiii About the Author xv Introduction: Becoming a Savvy Investor xvii Section I Establishing a Frame of Reference 1 Chapter One From “Dumb” Barter to Intelligent Agents 3 Chapter Two Point-Counterpoint 13 Stocks 14 Mutual Funds 14 Bonds 15 ETFs 15 Options 15 Futures 16 Summary 16 Chapter Three Confronting Information Overload 17 Investor Constraints 18 Investor Choices 19 Investor Safety 21 Section II Stocks and Equity Markets 23 Chapter Four Varieties of Stocks 27 Just What is a Security, Anyway? 27 Issuers and Underwriters: Why Does a Corporation Sell Stock to the Public? 29 Why Investors Buy Stock 34 Summing Up Total Return: Dividends and Capital Gains 35 A Letter to Our Shareholders: Annual and Quarterly Reports (and Filings) 41 Making Sense of Types, Classes, and Other Stock Categories: A Map of the World of Stock 41 Chapter Five Stock Markets 47 The Big Board 48 The Incredible Growth of Trading and Capital 58 National Association of Securities Dealers Automated Quotation System (NASDAQ) 61 Technology, Dark Pools, and the Evolution of a Unified Market 63 Chapter Six Three Views of the Numbers 65 Fundamental Analysis 66 Technical Analysis 70 Quantitative Analysis 80 Chapter Seven Where to Find Information on Stocks and Financial Markets 87 A Selection of Information Sources on the Financial Markets 91 Chapter Eight How to Buy and Sell Stock 99 Full-Service Brokers 100 Discount Brokers 102 Financial Intermediaries 103 Direct Purchase 104 If It Sounds Too Good to Be True . . . Protecting Yourself from Stock Scams 104 A Note on Financial Planners 106 Section III Mutual Funds and Investment Companies 109 Chapter Nine A History and Overview of the Mutual Fund Business 113 Open-End versus Closed-End Funds 117 Index Funds 118 Load versus No-Load Funds 119 Chapter Ten Advantages of Mutual Funds 121 Simplicity 121 Diversification 122 Access to New Issues 122 Economies of Scale 123 Professional Management 125 Indexing 125 Chapter Eleven Disadvantages of Mutual Funds 127 Impact of One-Time Charges and Recurring Fees on Fund Performance 127 Hidden Cost of Brokerage 130 Some Hidden Risks of Fund Ownership 132 Chapter Twelve Sources of Information on Mutual Funds 135 Investment Company Institute Classification of Types of Funds 136 Lipper Analytical Services 139 Forbes 140 Morningstar 140 Chapter Thirteen Alternative Investments 141 Hedge Funds 141 Funds of Hedge Funds 144 Other Alternatives 145 Section IV Bonds and Other Fixed-Income Securities 147 Chapter Fourteen Seven Characteristics of Bonds 151 The Lifespan of Bonds 152 Interest versus Discount 153 Relationship of Price to Yield 154 Four Important Yield Measures 154 Credit Quality, Ratings, and Insurance 155 Call and Related Features 155 Fixed versus Floating Rates and Foreign Currencies 156 Chapter Fifteen How the Other $30 Trillion is Invested 159 Treasuries 160 Corporates 170 Mortgage-Backed Securities and Other Asset-Backed Securities 171 Municipals 172 Money Market 174 Summary 175 Section V Options, Futures, and Other Derivatives 177 Chapter Sixteen Options 181 Exchange-Traded Options 183 Combination Strategies 185 Determining the Value of an Option 187 Chapter Seventeen Futures 193 A Seller’s Need to Hedge . . . 193 Some Buyers Need to Hedge, Too 194 Speculation or Insurance? Maybe a Little of Both 195 Actuals versus Cash-Settled Contracts 195 Margin and Collateral 196 Chapter Eighteen Other Derivatives 199 Section VI Summing Up Risk and Return 203 Chapter Nineteen How Well Are My Investments Doing? 207 The Basics of Return 208 Annualized Returns: Arithmetic (Simple) or Geometric (Compound)? 211 Time-Weighted Returns versus Money-Weighted Returns 216 Complicating Factors 220 Chapter Twenty Coming to Grips with the Many Dimensions of Risk 223 A Definition of Investment Risk 223 The Relativity of Risk 224 What is Market Risk? 226 “It Will Fluctuate” 227 Other Kinds of Investment Risk: From the Quantifiable to the Subjective 228 Balancing Risk and Return 232 Chapter Twenty-One A Crescendo of Change 235 Again, We Ask, What is a Market? 235 Glossary 239 Index 267