Archive for Sunday, April 29, 2001

Motley Fool

April 29, 2001

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Q: How does online stock trading work? -- B.C., Tucson, Ariz.

A: It's simple. All you need is a computer, a modem and Internet access. (And some money, of course.) Most major brokerages offer online trading through their Web sites. You simply open an account and mail in a check. Then click over to the brokerage's Web site and log on via the password they'll send you. From there you can check the status of your account or place an order. All reputable online brokerages have security measures in place. Read up on them first at the Web site or call and ask, to ease your mind.

If you're comfortable making your own investment decisions, you may find online trading preferable to old-fashioned alternatives. It's generally less expensive, with some commission rates lower than $8 per trade. Also, you can examine orders carefully before placing them.

Learn more about online brokerages at www.gomez.com or www.broker.Fool.com. Don't let the many choices confuse you. Most major online brokerages will serve most of us fairly well. There really aren't enormous differences between them.

Q: What does it mean if my broker is holding my stocks in "street name"? -- S.G., Mount Pleasant, S.C.

A: It simply means that the stock is registered as belonging to your broker, not you. This sounds shady, but it's not. By having shares registered under your broker's name, you can trade them immediately by phone or computer. If you register shares in your own name, you'll receive the actual certificates, will have to store them safely, and will have to mail them in when you want to sell. Holding your stocks in "street name" doesn't mean you don't own them. It's merely an artificial classification designed to facilitate trading.

THE FOOL SCHOOL

Cold Calls

Ever been interrupted at home by a phone call from a broker you don't know who urges you to buy some investment? If so, then congratulations -- you've been cold called.

Don't end up as one of many victims of shady cold calls. Understand that promises of high returns for low risk are likely to be broken. Scoff at warnings that you have to "act now!" Any good investment should still be around tomorrow. Avoid "inside" tips, because it's illegal to pass on or act on material that is inside information. Steer clear of anyone unwilling to provide details in writing. Beware of predicted or guaranteed profits, even if the cold-caller has a Ouija board.

If a cold-calling broker really had a valuable stock to offer, he or she wouldn't have to convince strangers to buy it. People would be snapping up shares on the open market. Stocks that cold callers try to sell are often ones that no one else wants, that their firm is trying to unload. This applies to initial public offerings, too. Shares of IPOs that people are excited about are hard to come by, not aggressively hawked over the phone to strangers.

You can ask any cold caller to put you on his firm's "do not call" list. You can also prevent some others from being conned by turning in any hypesters. Take notes during the call and report anything shady to the Securities and Exchange Commission (SEC) at (202) 942-7040. The SEC also lists cold-caller restrictions online at www.sec.gov/answers/cold.htm. (Shady behavior would include rudeness, aggressive sales techniques or ultimatums.)

Anyone thinking of investing with a cold caller should check out the regulatory background of the salesperson and/or brokerage firm. To do that, call the NASD Regulation's Public Disclosure Hotline at (800) 289-9999.

If this seems too much to remember, just remember these two words instead: Hang up.

MY DUMBEST INVESTMENT

Overinsured

In 1956, I purchased a life insurance policy that cost me $400 per year in payments for 20 years. The policy would pay me 90 percent of the policy earnings. Today, nearly half a century later, those earnings amount to $300 per year. If I'd invested that $400 per year in the stock market instead, earning the historical average of 11 percent per year, I'd have ended up with $25,681 after 20 years. That money, invested for an additional 25 years, would be worth more than $351,000 today. I've used my bad example to teach my kids the importance of investing intelligently. The sad thing is that I worked for a major corporation that offered me term insurance at almost no cost. I didn't really need the insurance policy in the first place. -- Dal Wolf, Auburn, Ind.

The Fool Responds: Life insurance isn't necessary in every situation. It's useful as protection against the loss of an income stream (i.e., your salary, if you suddenly buy the farm). If you're looking for an investment, though, you can usually do better elsewhere.

Foolish Trivia

I'm the world's third-biggest media maven, raking in more than $20 billion per year. I reach consumers in some 100 countries, employ more than 125,000 people and hold more than 500,000 copyrights. My brands include CBS, MTV, Nickelodeon, TV Land, VH1, BET, Paramount Pictures, Infinity Broadcasting, UPN, Country Music Television, Showtime, The Movie Channel and Simon & Schuster. MTV alone reaches 330 million households. My syndication unit, King World Productions Inc., offers "Wheel of Fortune," "Jeopardy!" and "The Oprah Winfrey Show." I co-own Comedy Central with HBO. My subsidiary Blockbuster, the world's largest video renter, encompasses 7,700 stores. Who am I?

Last Week's Trivia Answer: I trace my roots back to the Star Furniture Co. of Zeeland, Mich., in 1923, where I first produced traditional furniture for the home. Today, I rake in about $2 billion annually, serving homes and businesses with my innovative products, customer-focused technology and furniture-management services. Decades ago, I pioneered open office designs and introduced ergonomic products. Today, you might know me for my popular Aeron chair, owned even by museum collections. Who am I? (Answer: Herman Miller)

THE FOOL TAKE

Adobe Shimmers

Software maker Adobe Systems is the standard in the desktop publishing industry and is making progress in Web publishing and electronic books. The company has grown earnings per share at a compound annual growth rate of more than 24 percent over the last five years.

Software companies typically enjoy high profit margins. Adobe generates more than $0.20 in cash for every $1 in sales. With revenues of $12.7 billion, Adobe has more than $670 million in cash and no debt.

Sales of Acrobat, Adobe's electronic document distribution software, jumped 61 percent over the last year, to $208 million. Photoshop, a leading photo-editing product, had sales last year of about $350 million. It's the company's most successful product to date. (Adobe also produces graphics software Illustrator and desktop publishing software PageMaker and InDesign.)

Maintaining the kind of growth rates that Adobe has achieved over the last five years isn't easy. Software companies must fight to keep talented programmers from moving. Investors should be aware that competition in the software industry is just as fierce, perhaps more so, than in any other business. But a software franchise built around a product that's an industry standard can be a solid long-term investment.

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