The Handy Investing Answer Book. Paul A Tucci

economics, or behavioral finance, is a relatively new science that tries to help you understand why people make often irrational financial decisions, based upon their own perceptions and biases. For example, if the consumers of a product or stock investment perceive the supply is somehow diminishing, they may be more prone to purchase it now, rather than waiting for a better, more rational time during which to purchase.

      Using principles of behavioral economics, how do men and women differ when it comes to investing?

      After concluding a study of the investing behavior of men compared with women, experts from the University of California found that single women investors outperformed single men investors by a 2.3% average return. When it comes to investment groups, female-based investment groups outperformed male-based investment groups by 4.6%. The experts assert that the reasons behind this are that men traded 45% more often than women, generally making poor decisions, and holding on to a position too long because of ego and a constant comparison to other investor friends, as opposed to rationally selling laggards and retaining winners.

      How do I purchase a company’s shares directly from the company, rather than using a broker?

      In order to avoid paying transaction fees, many individual investors purchase stocks directly from companies, rather than going through a broker and paying commissions on the purchase and sale of the stock, which may amount to several percent of the value of the trade. In this case, individual investors may buy shares directly from some companies by identifying the target company’s stock transfer agent, discovering if the company offers shares directly to individual investors, and opening an account on the transfer agent’s website. The company may require a minimum investment.

      Studies have shown that female investors have outperformed their male counterparts because they tend to trade less often and make better, less ego-driven decisions.

      What are some important stock market indexes that I should consider when I am investing, and why?

      There are many key markets and indexes upon which investors may focus when measuring investing success. Each composite market and its underlying index has its own character, created in part by the types of stocks that are listed, as well as historical factors. Companies that are listed on various exchanges may change, and the market on which they are traded may also change. Some important indexes are the NASDAQ Composite Index (many key technology-based stocks), Standard and Poor’s 500 Index (includes blue chip stocks and key stocks on different exchanges), and the Russell 2000 Index (small capitalization company stocks often valued below $1 billion).

      What are the New York Stock Exchange’s “circuit breaker” rules?

      Circuit breaker rules limit steep, unexpected declines in stock prices, as they are being traded, to prevent market price collapse, and to offer some protections to both buyers and sellers. The circuit breakers comprise three levels: Level 1 (a 7% decline between 9:30 A.M. and 3:25 P.M.), Level 2 (a 13% decline between 9:30 A.M. and 3:25 P.M.), and Level 3 (a 20% decline at any time during the trading day). When the NYSE reaches the Level 1 or Level 2 threshold, the NYSE pauses trading for 15 minutes. When the NYSE reaches its Level 3 threshold, all trading activity is halted for the remainder of the trading day. The circuit breaker rules also mandate that each level can only be reached once per day. So if the markets decline by 7%, and after a 15-minute pause, decline by another 7%, trading continues until the next level is reached, and that rule will be used once. If prices slide and the 20% decline level is reached, then trading is suspended until the next trading day. The rules are meant to prevent bottomless declines in stock market prices or severe crashes.

      What are “growth stocks”?

      Growth stocks have had—and may continue to have—good track records for growing revenues, profits, and market share, even as larger economic forces may depress the performance of other similar companies. For example, many experts believe these types of stocks may include great companies in industries such as health care and food as people need to eat and receive medical care despite any current economic conditions.

      What are “cyclical stocks”?

      Cyclical stocks typically signal the recovery of a period of economic decline, as they tend to begin to grow early as a recovery is under way. Experts like to include companies within certain industries such as automotive, steel, heavy machinery, and mining, as indicative of an impending recovery as they may recover sooner from a decline, and play a pivotal role in the general economy.

       How much change must occur in a stock market in order to call it a correction?

      A stock market correction occurs upon a 10% decline from a high observed on a major exchange or composite stock average.

      How much of an increase in the average price of stocks must occur in order to declare a bull market?

      In order to better understand broad movements in the market—and whether today’s conditions represent buying or selling opportunities—investors characterize increases in the price of stocks in an average by more than 20% from a low as a bull market. It characteristically is a period in which stock prices are rising, profits are increasing, inflation is low, interest rates are relatively low, and money is flowing into the stock market.

      How do companies use an initial public offering to help support their continued growth?

      An IPO is a way in which a private company raises capital in order to fuel further expansion and investment. Typically, a private company may need more capital than what its current business generates in order to expand its market imprint, product offering, innovation, manufacturing, information systems, or a combination of all of these. Company founders may desire a liquidity event in order to cash out of the company. By making an offer for the sale of equity (shares), the company can quickly raise capital needed and continue to generate or improve its profitability over time.

      What kinds of information can I find by using the U.S. Securities and Exchange Commission (SEC) website?

      The SEC website makes available to the public all information concerning publicly traded companies’ filings that are required by law. This library of business information may provide the details necessary to make informed decisions regarding purchasing or selling stocks in publicly traded companies. It includes such information sources as the EDGAR Company Database (Electronic Data Gathering, Analysis, and Retrieval System), and publishes all corporate filings and forms necessary for publicly traded companies, as well as earnings reports, annual reports, and IPO forms. The site also includes tutorials and information for individual investors, including tips and information regarding stockbrokers and firms to see if they are properly licensed, or have complaints or actions against them.

      According to the SEC, what types of questions should I ask when trying to decide which broker to choose?

      The SEC recommends that investors ask potential brokers the following questions, in order to determine if the broker is legitimate, properly licensed, and trained. Questions may include:

      • What experience do you have, especially with people in my circumstances?

      • Where did you go to school?

      • What is your recent employment history?

      • What licenses do you hold?

      • Are you registered with the SEC, a state, and/or the Financial Industry Regulatory Authority (FINRA)?

      • Are the firm, the clearing firm, and any other related companies that will do business with me members of the Securities Investor Protection Corporation (SIPC)?

      • What products and services do you offer?

      • Can you recommend only a limited number of products or services to me? If so, why?

      • How are you paid for your services?

      • What is your usual hourly rate, flat fee, or commission?

      • Have you ever been disciplined by any government regulator