Five Basic Steps To Successful Investing Online

Building Your Own Online Information System

Investments provide opportunities to make money in both a bull market (that is, an up market) and a bear (down) market. No one ever knows for certain whether the market will go up or down, but investors can develop an information system to watch indicators for potential price changes and investment opportunities. This chapter introduces the elements you can use for building an online investment information system that meets your specific needs.

Investment indicators often signal future market trends. For example, changes in bond prices and interest rates often reflect trends that may affect stock prices. That is, if bond yields decline, investors often rush to purchase stocks, causing stock prices to increase.

Investors need this information to decide whether they should buy, sell, or hold. Gathering, organizing, and saving this information can be time-consuming. However, using your own online information system can make the process more efficient.

Successful investing involves five basic steps:

  1. Identifying new investments
  2. Analyzing investment candidates
  3. Purchasing investments
  4. Monitoring investments
  5. Selling investments — and reaping your rewards

The following sections summarize online sources of the information you need for each step. Knowing what type of information you need and where to get it online can help you build your personalized online information system.

1. Identifying new investments

Before investing, you need to clearly state your financial objectives and know your risk-tolerance level. This information can help you determine your required rate of return. By doing this type of homework, you can determine which categories of financial assets you may want to consider investing in. For example, if you’re selecting investments for your Individual Retirement Account (IRA), you don’t want to invest in tax-exempt municipal bonds (because being tax-exempt twice isn’t the best way to make use of tax exemptions).

Here are some examples of online sources for identifying investment opportunities:

  • Company profiles describe a firm’s organization, products, financial position, chief competitors, and executive management.
  • Direct purchase plans (DPPs) show how to purchase stock in a company without paying a broker’s commission.
  • Directories of investor sources provide hard-to-find information that’s necessary for investment decision-making.
  • Dividend reinvestment plans (DRIPs) describe how to join dividend
    reinvestment programs to purchase company stock at a discount and
    without a broker.
  • Initial public offerings (IPOs) are new opportunities for investor profits.
  • Investing e-zines (electronic magazines) provide educational articles and pertinent facts for beginning and experienced investors.
  • Mailing lists provide opinions and investors’ insights about investment candidates.
  • News reports on the Net can provide information about new investment opportunities.
  • Newsgroups are informal, online groups of individuals who share their ideas about a common interest. You can find dozens of investment-related newsgroups with topics ranging from specific types of investments to investor strategies.
  • Online databases (free and fee-based repositories of information) provide historical stock prices, economic forecasts, and more.
  • Search engines (specialized Internet programs that seek the data you desire) provide you with links to the Web pages that have the investor information you want.
  • Stock recommendations from professionals enable you to find out what brokers and analysts are saying about your investment selections.
  • Mutual fund and stock screens for selecting specific securities enable you to sort through thousands of investment candidates in seconds to find not only the right investment but also the best investment available.

2. Analyzing investment prospects

The process of analyzing investment prospects includes examining groups of investments or individual securities. For this task, you need information to forecast the timing and amount of future cash flows of investment candidates. That is, the price you pay today is based on the future income of the asset.

Figuring out what the asset will be worth in the future requires some homework, analysis, and luck. Here are a few examples of online sources for this type of information:

  • Company profiles and annual reports often forecast the company’s future revenues and earnings.
  • Databases (free and fee-based online sources) provide news, market commentary, historical stock prices, economic forecasts, industry standards, and competitor information.
  • Earnings estimates from brokers and analysts give you forecasts of a company’s future earnings.
  • Industry or business-sector news can frequently indicate whether an industry is in a downward cycle.
  • National economic data can point you toward a particular investment strategy. For example, if the country is going into a recession, you may want to select stocks that provide you with some defense.
  • News databases offer breaking news that can help you judge whether your stock purchase is a winner or a loser.
  • Securities and Exchange Commission (SEC) filings provide you with financial statements from publicly traded companies. These companies are required to file financial statements every 90 days and more often if big events are happening within the firm. More than 7,000 publicly traded firms are now filing online.

3. Purchasing investments

After you decide which investments you want to purchase, you have to decide how you want to purchase them. For example, you must decide whether you want a full-service broker or, for online investing, either a premium discount broker who offers online trades and advice or a discount broker that only executes your trades and doesn’t offer any recommendations.

You may participate in an automatic investment plan (AIP). With your approval, this type of plan deducts a certain amount from your checking account to purchase mutual funds, savings bonds, or other investments.

4. Monitoring investments

If you have more than one investment, you likely want to monitor and compare their performances to the market and to similar investments. Here are a few examples of the information and the software you need to accomplish this objective:

  • Market-monitoring tools send alerts that you determine. For example, if your stock increases by 25 percent, you may want to consider selling it. You can set up an alert that sends you an e-mail message notifying you that your stock has reached this target.
  • The Internet provides many portfolio management programs that let you know when your investments are in the news.
  • Online portfolio management tools can automatically send you an e-mail message at the end of the day to let you know whether your investments gained or lost value.
  • PC-based portfolio management tools are downloadable software programs that assist you in tracking your investments and record keeping.
  • Your online broker may track your portfolio for you and keep records of your profits and losses.

5. Selling investments

You need to decide what proportion of your personal wealth you want to invest in specific assets, how long you want to hold those assets, and whether now is a good time to sell those assets to harvest your rewards. To that end, you need information about the following topics:

  • Asset allocation methodologies: You need to determine what portion of your portfolio should be invested in mutual funds, stocks, and bonds.
  • Capital gains and tax issues: The Smart Money Capital Gains Guide ( can assist you in understanding the tax implications of investing activities.
  • Selling strategies: Determining when you should harvest your investments requires using specific order execution strategies, mutual fund redemption plans, and analyses.
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