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The Forbes/CFA Institute Investment Course: Timeless Principles for Building Wealth

ISBN: 978-0-470-91965-1
288 pages
February 2011
The Forbes/CFA Institute Investment Course: Timeless Principles for Building Wealth (0470919655) cover image
The most up-to-date and all encompassing guide to investing in today's markets

From Forbes and the CFA Institute-two of the most highly respected and recognized names in the investment industry-The Forbes/CFA Institute Investment Course is an interactive roadmap to investing in today's challenging stock markets. From building capital and asset allocation and diversification to choosing a broker and reading a financial statement, The Forbes/CFA Institute Investment Course has offered investors step-by-step guidance since 1948. The course

  • Includes advice for novices, but also accommodates those who are more familiar with markets
  • Provides important information on fundamental analysis versus technical analysis
  • Details different asset classes: fixed income securities, derivatives, mutual funds, and equities

With Q&A, links to videos, expert advice, interviews with top money managers, and much more, The Forbes/CFAInstitute Investment Course is the perfect resource for anyone looking to learn about investing in today's markets.

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Preface xiii

Acknowledgments xvii

Chapter 1 Building Capital 1

Role of the Stock Market in Building Wealth 2

Determining Your Financial Position 3

Your Financial Inventory Guide 4

Investment Margin 11

Defi ning Your Goals 12

Return Requirements 13

Risk Profi le 14

Life Cycle and the Risk/Return Mix 15

Other Considerations 16

Asset Classes 17

Asset Allocation 20

Active versus Passive Investing 22

Diversifi cation 23

Dollar Cost Averaging 24

Chapter Takeaways 31

Chapter 2 How Securities Markets Function 33

Role of Securities Markets 33

The Securities Exchanges 36

Over-the-Counter Markets 37

NASDAQ 38

Electronic Communication Networks 39

Stock Quotes 39

The Third Market 40

Other Markets 40

How the New York Stock Exchange Operates 41

How the NASDAQ Operates 43

From SOES to SuperMontage 44

OTC Bulletin Board and Pink Sheets 45

How the ECNs Operate 45

Crossing Systems 46

Electronic versus Floor Trading 46

Preferencing 48

Internalization 49

Chapter Takeaways 49

Chapter 3 Selecting a Broker and Trading 51

Structure of a Brokerage Firm 52

Activities of a Brokerage Firm 53

Services Offered by All Brokers 54

Full-Service versus Discount Brokers 55

Online Brokers 58

Choosing a Brokerage Firm 58

Commissions 60

Direct Purchase of Securities 62

Placing Orders 63

Odd-Lot Trading 66

Margin 67

Transaction Example 68

Settlement 69

Stock Symbols and the Ticker Tape 70

Questions to Ask Your Broker 71

Chapter Takeaways 73

Chapter 4 Tax-Favored Investment Strategies 75

Capital Gains and Dividends 75

Traditional IRAs 77

Roth IRAs 79

401(k) Plans 80

Education Savings Accounts and 529 Plans 82

Other Pension Plans 83

Mutual Funds and Taxes 85

Using Tax-Advantaged Accounts 86

Chapter Takeaways 87

Chapter 5 Reading Financial Statements 89

Income Statements 91

Balance Sheet 95

Statement of Cash Flows 99

Making Sense of the Numbers 102

Profi tability Ratios 102

Asset Utilization Ratios 105

Leverage Ratios 108

Revisiting ROE 110

Liquidity Ratios 110

Market Multiples 112

Look Beyond the Numbers 114

Read the Footnotes 115

Can You Trust Financial Statements? 115

Chapter Takeaways 119

Chapter 6 Sources for Investment Information 121

Where to Obtain Information 123

Securities and Exchange Commission 124

Earnings Releases and Regulation Fair Disclosure 125

Investment Brokers and Dealers 127

Can You Trust Brokerage House Reports? 128

Investment Newsletters and Other Publications 129

Corporate Reports 130

Reading the Annual Report 130

Government Reports 131

Chapter Takeaways 131

Chapter 7 Common Stocks and Economic Indicators 133

Another Look at the Balance Sheet 133

Why Common Shares Have Value 136

Macroeconomic Factors 136

Industry-Specifi c Factors 140

Other Barometers 141

Evaluating Data 141

Chapter Takeaways 143

Chapter 8 Fundamental Analysis 145

Investing versus Trading 145

Passive Investing 146

Active Investing 147

Business Focus 153

Industry Outlook 154

Company Status 155

Major Trends 157

Earnings History and Outlook 158

Dividends 159

Price-Earnings and Price-Book Ratios Revisited 161

Discounted Cash Flow 163

Evaluating Management 164

Some Final Thoughts on Fundamental Analysis 165

Chapter Takeaways 165

Chapter 9 Technical Analysis 167

The Value of Charts 169

Reading Charts 171

Dow Theory 171

Head and Shoulders 175

Support and Resistance Levels 176

Trading Ranges 177

Breakaway Gaps 178

Importance of Volume 179

Other Technical Indicators 182

Time to Grow Bullish 184

Chapter Takeaways 187

Chapter 10 Fixed-Income Securities 189

Bonds 189

Understanding Bonds 190

Understanding Bond Prices 191

Bond Prices and Interest Rates 192

Call Feature 194

Credit Quality of Bonds 194

Other Issues Concerning Bonds 196

How to Buy Bonds 199

Money Market Securities 200

Preferred Stock 201

Understanding Preferred Stock 202

Tax Treatment 203

Trust Preferred Securities 204

Final Thoughts on Bonds and Preferred Stocks 204

Chapter Takeaways 205

Chapter 11 Derivatives 207

Defi ning Derivative Instruments 207

Futures 209

Spot Asset 209

The Futures Market 210

Delivery 211

Hedging 212

Stock Index Futures 212

Single-Stock Futures 214

Options 215

Defi nition of Options 216

Options Markets 216

Important Terms to Know 216

Listed Options 217

What an Option Is Worth 219

Commissions 221

To Sell or to Exercise 222

Some Popular Option Strategies 222

A Warning about Naked Option Writing 225

Chapter Takeaways 226

Chapter 12 Mutual Funds 229

An Investment Company 229

Closed-End or Open-End 230

A Short History of the Mutual Fund Industry 232

Categories of Mutual Funds 232

Advantages of Mutual Funds 237

Disadvantages of Mutual Funds 238

Mutual Fund Expenses 239

How to Choose a Fund 242

Some Final Thoughts about Mutual Funds 243

Hedge Funds 243

Chapter Takeaways 247

Chapter 13 Rules of Thumb and Key Phrases 249

Final Comments 254

Suggested Readings 255

About the Authors 257

Index 259

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VAHAN JANJIGIAN is Chief Investment Officer at Greenwich Wealth Management, LLC, a SEC registered investment advisor. He is a Forbes magazine columnist and Editor of the Forbes Special Situation Survey, widely regarded as one of the best performing investment newsletters. He previously served on the faculties of several leading universities. He is a frequent guest on popular television and radio business programs and is the author of Even Buffett Isn't Perfect.

STEPHEN M. HORAN is the head of professional educational content for CFA Institute and specializes in private wealth management. Prior to joining CFA Institute, he was a professor of finance at St. Bonaventure University, principal of Alesco Advisors LLC, and a financial analyst and forensic economist in private practice. He is editor of Private Wealth: Wealth Management in Practice and the author of numerous articles in leading peer-reviewed journals. Dr. Horan isa frequent columnist in the Financial Times.

CHARLES TRZCINKA is the James W. & Virginia E. Cozad Chair in Finance at the Kelley School of Business, Indiana University, Bloomington. Previouspositions have included the faculties of SUNY Buffalo and New York University; director of the U.S. Commerce Department's MBA program in the People's Republic of China; and senior economist with the United States Securities and Exchange Commission.

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The Forbes/CFA Institute Investment Course: Timeless Principles for Building Wealth (US $39.95)

-and- The Only Three Questions That Still Count: Investing By Knowing What Others Don't, 2nd Edition (US $29.95)

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