electronic trading

Electronic TradingElectronic Trading

Dr. Aiman H. El-MalehDr. Aiman H. El-MalehComputer Engineering DepartmentComputer Engineering Department

COE-KFUPMCOE-KFUPM Day 3Day 3--22

OutlineOutline Basics of InvestingBasics of Investing Investing StrategiesInvesting Strategies Quotes & ResearchQuotes & Research

• Stock quotesStock quotes

• Stock chartsStock charts

• Stock researchStock research

Opening Etrading AccountOpening Etrading Account SummarySummary


Why Invest at All?Why Invest at All? Maintain purchasing power to cope with even mild Maintain purchasing power to cope with even mild

inflationinflation Investing is funInvesting is fun

• Pitting your intellect against investing communityPitting your intellect against investing community• Rewarded with increase in assetsRewarded with increase in assets

Investment returns can accumulate at a faster rate than Investment returns can accumulate at a faster rate than your salary.your salary.

A successful investor puts natural curiosity and A successful investor puts natural curiosity and intellectual interest to work to earn more money. intellectual interest to work to earn more money.

Personal wealthPersonal wealth


Where Stocks TradeWhere Stocks Trade Stocks traded on securities and commodities Stocks traded on securities and commodities

exchanges or over the counter exchanges or over the counter Exchanges members handle trades for themselves and Exchanges members handle trades for themselves and

their clients. their clients. Securities and options are regulated by SEC Securities and options are regulated by SEC

(Securities and Exchange Commission) (Securities and Exchange Commission) • New York Stock Exchange (NYSE) New York Stock Exchange (NYSE) • American Stock Exchange (AMEX) American Stock Exchange (AMEX)

For the over-the-counter (OTC) market:For the over-the-counter (OTC) market:• trades are handled electronically—either via telephone or trades are handled electronically—either via telephone or

computer. computer. • Done through dealersDone through dealers

Regulated by the National Association of Securities Regulated by the National Association of Securities Dealers, NASDAQ provides the automated quotes for Dealers, NASDAQ provides the automated quotes for this market. this market.


Stock Market CycleStock Market Cycle Stock market moves in cycles: fluctuates.Stock market moves in cycles: fluctuates. Get wonderful bargains every few years and sell again Get wonderful bargains every few years and sell again

at high prices a few years later.at high prices a few years later. With this principle, you will prosper if you don't With this principle, you will prosper if you don't

become too paralyzed to act. become too paralyzed to act. Stock market is a voting machine, polling investors on Stock market is a voting machine, polling investors on

the future, not the present.the future, not the present. The worse you feel, news is bad, the safer the market.The worse you feel, news is bad, the safer the market. The better you feel, news is good, the closer you are to The better you feel, news is good, the closer you are to

a top. a top.


Stock GlossariesStock Glossaries Shares OutstandingShares Outstanding

• Shares of common stock currently owned by investors.Shares of common stock currently owned by investors. VolumeVolume

• total number of shares traded of a stock during a specific time total number of shares traded of a stock during a specific time period. period.

Revenues Revenues • net sales of the company plus any other revenues associated net sales of the company plus any other revenues associated

with business operations.with business operations.• does not include dividends, interest income or non-operating does not include dividends, interest income or non-operating

income.income. Net EarningsNet Earnings

• profit after all costs, expenses and taxes have been paid. profit after all costs, expenses and taxes have been paid. DividendsDividends

• cash payment, per share, to shareholders every quarter. cash payment, per share, to shareholders every quarter. • part of profits not reinvested in the company. part of profits not reinvested in the company.


Stock Glossaries – Cont.Stock Glossaries – Cont. Total ReturnTotal Return

• price change plus dividend return over last 12 months price change plus dividend return over last 12 months YieldYield

• annual rate of return on a stock as paid in dividends. annual rate of return on a stock as paid in dividends. • calculated by dividing latest dividend rate by latest closing calculated by dividing latest dividend rate by latest closing

price and multiplying by 100. price and multiplying by 100. • latest dividend rate is the total dividends paid in the past 12 latest dividend rate is the total dividends paid in the past 12

months.months. Net Earnings-Per-Share (EPS) Net Earnings-Per-Share (EPS)

• net earnings allocated to each share of stock.net earnings allocated to each share of stock.• calculated by dividing net earnings by common shares calculated by dividing net earnings by common shares

outstandingoutstanding


Stock Glossaries – Cont.Stock Glossaries – Cont. Estimated EPS GrowthEstimated EPS Growth

• mean estimate of EPS growth, derived from estimates from mean estimate of EPS growth, derived from estimates from Wall Street analysts. Wall Street analysts.

• provided by Zacks Investment Research.provided by Zacks Investment Research. Forward P/EForward P/E

• calculated using latest closing price of stock divided by t calculated using latest closing price of stock divided by t latest EPS estimate latest EPS estimate

PEG ratio (price-to-earnings-growth) PEG ratio (price-to-earnings-growth) • calculated by dividing a stock's forward P/E by its projected calculated by dividing a stock's forward P/E by its projected

three- to five-year annual EPS growth rate. three- to five-year annual EPS growth rate. • A PEG ratio of less than one is considered a sign that a stock A PEG ratio of less than one is considered a sign that a stock

is a good value.is a good value.• The higher the PEG, the pricier the stockThe higher the PEG, the pricier the stock..


Shorting StocksShorting Stocks Buying a stock is taking a long position.Buying a stock is taking a long position. Shorting a stock: sell the stocks and then buy them Shorting a stock: sell the stocks and then buy them

when the price falls.when the price falls. You decide that price of a stock is going to fall. You decide that price of a stock is going to fall. Call broker ordering to short, "selling" the stocks at Call broker ordering to short, "selling" the stocks at

the current price. the current price. Broker rounds up the shares in order to sell them for Broker rounds up the shares in order to sell them for

youyou• loans you the certificates from his stashloans you the certificates from his stash• borrows them from another broker. borrows them from another broker.

When the price falls, you buy the shares at the lower When the price falls, you buy the shares at the lower price, covering the borrowed shares.price, covering the borrowed shares.


Investing StrategiesInvesting Strategies Investing is a simple process:Investing is a simple process:

• Choose a stock in which to take a position Choose a stock in which to take a position • Commit to the position by executing a trade Commit to the position by executing a trade • Monitor the trade to see if it fits your expectations Monitor the trade to see if it fits your expectations • Close the trade when your expectations are met or lost Close the trade when your expectations are met or lost

Stock SelectionStock Selection• A good Watch List is the key to successful stock selection A good Watch List is the key to successful stock selection • Compare stock performance with other stocks you're Compare stock performance with other stocks you're

watchingwatching• Collect other information about that stockCollect other information about that stock

• Price range Price range • NewsNews• Analysts reportsAnalysts reports


Investing Strategies – Cont.Investing Strategies – Cont. Commit to a PositionCommit to a Position

• Execute a long or short term tradeExecute a long or short term trade• Timing is importantTiming is important• Share your decision with a financial advisorShare your decision with a financial advisor

Monitoring the PositionMonitoring the Position• Most critical aspect of the trading process Most critical aspect of the trading process • What the investment community thinks of your picksWhat the investment community thinks of your picks• If pick is up increase your position to increase your gainsIf pick is up increase your position to increase your gains• If pick is going down, you have to know when to cut your If pick is going down, you have to know when to cut your

losses. losses. Closing the PositionClosing the Position

• To make money you have to close the trade. To make money you have to close the trade.


Value and Growth StrategiesValue and Growth Strategies One of the most popular ways of studying stocks is One of the most popular ways of studying stocks is

called fundamental analysis. called fundamental analysis. Figure out true stock value based on basic information Figure out true stock value based on basic information

such as growth of sales and profits.such as growth of sales and profits. Growth Stocks Growth Stocks

• Predict which companies will grow faster in the future Predict which companies will grow faster in the future • Stock grows its earnings and revenues faster than averageStock grows its earnings and revenues faster than average• Famous investor: Peter Lynch (Magellan mutual fund)Famous investor: Peter Lynch (Magellan mutual fund)

Value StocksValue Stocks• Look for stocks that have been overlooked by other investors Look for stocks that have been overlooked by other investors

and may have a "hidden value." and may have a "hidden value." • Famous investor: Warren Buffet (Berkshire Hathaway)Famous investor: Warren Buffet (Berkshire Hathaway)


Importance of DiversificationImportance of Diversification Diversification means building a portfolio with Diversification means building a portfolio with

securities from different asset classes. securities from different asset classes. Example: a portfolio that includes a certain percentage Example: a portfolio that includes a certain percentage

of stocks and bonds. of stocks and bonds. • bonds tend to do well when stocks don't bonds tend to do well when stocks don't

Buy securities not affected by the same variables. Buy securities not affected by the same variables. • Utilities, grocery stores, and airlines are completely different Utilities, grocery stores, and airlines are completely different

businessesbusinesses A diversified portfolio will have less volatility, and A diversified portfolio will have less volatility, and

steadier returns.steadier returns. Overall return lower than in an undiversified portfolio. Overall return lower than in an undiversified portfolio.


Mutual Funds InvestingMutual Funds Investing Most mutual funds invest in stocks, are called equity Most mutual funds invest in stocks, are called equity

funds. funds. Mutual funds are categorized by market capitalization Mutual funds are categorized by market capitalization

of stocks in their portfolios.of stocks in their portfolios. Some funds specialize in investing inSome funds specialize in investing in

• Small-cap stocks < $500 millionSmall-cap stocks < $500 million• Mid-cap stocks $500 million to $5 billionMid-cap stocks $500 million to $5 billion• Large-cap stocks > $5 billionLarge-cap stocks > $5 billion

Equity fund managers styles of stock picking Equity fund managers styles of stock picking • Value approachValue approach• Growth approachGrowth approach• Blend approachBlend approach


Index Fund InvestingIndex Fund Investing An index fund builds its portfolio by buying all the An index fund builds its portfolio by buying all the

stocks in a particular index.stocks in a particular index. Most popular index of stock index funds is the Most popular index of stock index funds is the

Standard and Poor's 500.Standard and Poor's 500. Key distinction between stock index funds and Key distinction between stock index funds and

"actively managed" mutual funds"actively managed" mutual funds• No need for stock selection No need for stock selection

• No need for a team of highly-paid stock analysts No need for a team of highly-paid stock analysts • Much cheaper to run than an active fundMuch cheaper to run than an active fund• Perform better than actively managed fundsPerform better than actively managed funds

• In 1998, 85% of all mutual funds that were set up to beat the In 1998, 85% of all mutual funds that were set up to beat the S&P 500 failed to meet that goal.S&P 500 failed to meet that goal.


Impact of News on InvestmentImpact of News on Investment Chasing a hot stock or attempting to time the swings in Chasing a hot stock or attempting to time the swings in

the marketthe market• costly to implement, costly to implement, • extremely low probability of success, extremely low probability of success, • ineffective in adding value to your portfolio.ineffective in adding value to your portfolio.

When you hear news about a company, you need to When you hear news about a company, you need to figure out its impact on your investmentfigure out its impact on your investment• news likely to affect the profitability of the stock in the future, news likely to affect the profitability of the stock in the future,

short-term and long-term? short-term and long-term? • problem specific to this company, or affect entire industry? problem specific to this company, or affect entire industry? • how news likely to affect performance of investment in your how news likely to affect performance of investment in your

time frame?time frame?• time frame analyst used in making "downgrade", "upgrade" ?time frame analyst used in making "downgrade", "upgrade" ?


Do not Rush to an InvestmentDo not Rush to an Investment Good investing is an exercise in controlled fussiness. Good investing is an exercise in controlled fussiness. Safest strategy is being very hard to please.Safest strategy is being very hard to please. Focus on not make avoidable mistakes.Focus on not make avoidable mistakes. Insist on waiting for a stock to satisfy you completely Insist on waiting for a stock to satisfy you completely

before you risk your capital.before you risk your capital. Take your time, plenty of other possibilities.Take your time, plenty of other possibilities.


Common MistakesCommon Mistakes Panic sellingPanic selling

• will sell at low, possibly below its cost and at a loss will sell at low, possibly below its cost and at a loss compared with its earlier prices. compared with its earlier prices.

• most who sell near a bottom fail to reenter until well toward most who sell near a bottom fail to reenter until well toward the next top. the next top.

Never sellingNever selling• far from a perfect approach in most cases far from a perfect approach in most cases

Investing in Penny stocksInvesting in Penny stocks• riskiest investments riskiest investments • the remnants of the stock marketthe remnants of the stock market


Tap the Power of the InternetTap the Power of the Internet Internet shattered barriers between Wall Street and Internet shattered barriers between Wall Street and

Main Street.Main Street. Previously, took a lot of manpower and computing Previously, took a lot of manpower and computing

power to research a stock.power to research a stock. With internet you canWith internet you can

• retrieve in seconds sock price and volume information retrieve in seconds sock price and volume information • plot intraday stock graphs or historical graphs for one week or plot intraday stock graphs or historical graphs for one week or

one month, one year or twentyone month, one year or twenty• up-to-date company newsup-to-date company news• inspect corporate financial statements filed with the Securities inspect corporate financial statements filed with the Securities

and Exchange Commission (SEC). and Exchange Commission (SEC). • Insider informationInsider information


Quotes & ResearchQuotes & Research Many excellent internet sites for stock quotes and Many excellent internet sites for stock quotes and

researchresearch• finance.yahoo.comfinance.yahoo.com• www.excite.comwww.excite.com• www.www.etradeetrade.com.com

Most stock quotes are delayed by 20 minutesMost stock quotes are delayed by 20 minutes Free real time quotes with accountFree real time quotes with account Example: finance.yahoo.comExample: finance.yahoo.com

• Stock QuoteStock Quote• Charts: stock price rangesCharts: stock price ranges• ResearchResearch• NewsNews• SEC & insiderSEC & insider

http://www.excite.com/

http://www.etrade.com/




Stock QuotesStock Quotes Basics :Basics :

• SymbolSymbol• NameName• Last Trade Last Trade • Change & PercentChange & Percent• VolumeVolume• Average Daily VolumeAverage Daily Volume

Fundamentals :Fundamentals :• Earnings/ShareEarnings/Share• P/E RatioP/E Ratio• Dividend Pay DateDividend Pay Date• Dividend/ShareDividend/Share• Market CapitalizationMarket Capitalization

Details :Details :• Bid/AskBid/Ask• Previous ClosePrevious Close• OpenOpen• Day's RangeDay's Range• 52-week Range52-week Range

Portfolios:Portfolios:• Shares OwnedShares Owned• Price PaidPrice Paid• CommissionCommission• Holdings ValueHoldings Value• Day's Value ChangeDay's Value Change• Holdings Gain & PercentHoldings Gain & Percent• Trade DateTrade Date• Annualized GainAnnualized Gain


Stock Quote ExampleStock Quote Example

Symb Last Change Volume Day's

Range52-week Range

INTC 131 1/8 -5 11/16 -4.16% 22,361,100 130 7/8 - 139 1/16 50 1/8 - 145 3/8

Intel CorporationIntel Corporation

http://finance.yahoo.com/q?s=INTC&d=t


Stock Quote - DetailedStock Quote - Detailed

Last Trade

2:55PM · 131 3/8

Change +1/4

(+0.19%)

Prev Cls 131

1/8

Volume

21,959,200

Div Date

Jun 1

Small: [ 1d | 5d | 1y | none ] Big: [ 1d | 5d | 3m | 1y | 2y |

5y | max ]

Day's Range

127 31/64 - 134 1/4

Bid 131 5/16

Ask 131

3/8

Open

130

Avg Vol

27,561,364

Ex-Div May

3

52-week Range 50 1/8 - 145 3/8

Earn/Shr 2.11

P/E 62.14

Mkt Cap 439.1B

Div/Shr 0.12

Yield

0.09

http://finance.yahoo.com/q?s=INTC&d=1y


http://finance.yahoo.com/q?s=INTC&d=1b

http://finance.yahoo.com/q?s=INTC&d=2b

http://finance.yahoo.com/q?s=INTC&d=nc

http://finance.yahoo.com/q?s=INTC&d=1d

http://finance.yahoo.com/q?s=INTC&d=5d

http://finance.yahoo.com/q?s=INTC&d=3m




Stock ChartsStock Charts

Intel Corporation – 1 year chartIntel Corporation – 1 year chart


Stock Charts – Cont.Stock Charts – Cont.

Intel Corporation – 5 year chartIntel Corporation – 5 year chart


Stock Charts – Cont.Stock Charts – Cont.

Intel Corporation – 1 year chart vs. S&P500Intel Corporation – 1 year chart vs. S&P500


Stock ResearchStock Research

Number of brokersrecommending as: Strong Buy 22

Moderate Buy 12

Hold 6

Moderate Sell 0

Strong Sell 0

Average Recommendation

(Strong Buy) 1.00 - 5.00 (Strong Sell)

This Week 1.52

Last Week 1.57

Change 0.1

Earnings Per Share

Last Quarter

(Dec1999) 0.69

Surprise 9.5%

Consensus Estimates

This Quarter

)Mar 00( 0.68

This Year )Dec 00( 2.91

Next Year 3.39

Research SummaryResearch Summary


Stock Research- Cont.Stock Research- Cont.

Dec 1998 Mar 1999 Jun 1999 Sep 1999 Dec 1999Estimate

ActualDifference% Surprise

0.530.600.0712.26 %

0.540.570.035.56 %

0.540.51-0.03-5.56 %

0.570.55-0.02-3.51 %

0.630.690.069.52 %

Earnings History & GrowthEarnings History & Growth

Last 5 Years

This Year(Dec 00)

Next Year(Dec 01)

Next 5 Years

Price/Earn(Dec 00)

PEG Ratio(Dec 00)

Intel CorpELEC COMP-SEMICS&P 500

16.5 %10.8 %9.2 %

25.3 %30.4 %11.6 %

16.5 %36.7 %8.5 %

19.3 %30.8 %15.2 %

45.057.626.7

1.781.892.30


Opening Etrading AccountOpening Etrading Account There are several companies to Etrade with.There are several companies to Etrade with. Types of accounts:Types of accounts:

• CashCash• MarginMargin

E*trade: www.etrade.comE*trade: www.etrade.com• $20 per trade (upto 5000 shares)$20 per trade (upto 5000 shares)• $1000 for cash account$1000 for cash account• $2000 for margin account$2000 for margin account• Free real time quotesFree real time quotes

Charles Shwab: www.shwab.comCharles Shwab: www.shwab.com• $30 per trade (upto 1000 shares)$30 per trade (upto 1000 shares)• $5000 for margin account$5000 for margin account• Free real time quotes Free real time quotes


Opening Etrading Account – Cont.Opening Etrading Account – Cont. Datek Online: www.datek.comDatek Online: www.datek.com

• $10 per trade (upto 5000 shares)$10 per trade (upto 5000 shares)• $2000 for margin account$2000 for margin account• Free real time quotesFree real time quotes

National Discount Brokers: www.ndb.comNational Discount Brokers: www.ndb.com• $15 market order, $20 limit order per trade (upto 5000 $15 market order, $20 limit order per trade (upto 5000

shares)shares)• No minimum balance to open accountNo minimum balance to open account

TD Waterhouse: www.tdwaterhouse.comTD Waterhouse: www.tdwaterhouse.com• $12 per trade (upto 5000 shares)$12 per trade (upto 5000 shares)

Ameritrade: www.ameritrade.comwww.ameritrade.com• $8 market orders, $13 limit and stop orders (upto 10,1000

shares)• Free real time quotes


SummarySummary Investing is important to maintain money powerInvesting is important to maintain money power Before investing learn Before investing learn

• Investing basicsInvesting basics• Investing strategiesInvesting strategies

Internet has made trading simpleInternet has made trading simple Tap the power of the internet in stock research and Tap the power of the internet in stock research and

collecting informationcollecting information Extensive information resources and toolsExtensive information resources and tools Any one can make good money by electronic tradingAny one can make good money by electronic trading

electronic trading

Documents

share of stock

stock glossaries cont

latest closing price

latest dividend rate

share eps net earnings

t latest eps

personal wealthcoekfupmday

faster rate