From: lott@informatik.uni-kl.de (Christopher Lott)
Subject: misc.invest FAQ on general investment topics
Followup-To: misc.invest
Summary: Answers to frequently asked questions about the world of investments.
         Should be read by anyone who wishes to post to misc.invest.	
Originator: lott@bogner.informatik.uni-kl.de
Keywords: invest, stock, bond, money, faq
Supersedes: <investment-faq/general_720641090@informatik.uni-kl.de>
Reply-To: lott@informatik.uni-kl.de
Organization: University of Kaiserslautern, Germany
Date: Mon, 16 Nov 1992 05:00:16 GMT
Expires: Mon, 14 Dec 1992 05:00:08 GMT

Archive-name: investment-faq/general
Last-modified: Mon Nov 16 06:00:02 MET 1992 
Compiler: Christopher Lott, lott@informatik.uni-kl.de

This FAQ addresses issues pertaining to money and investment instruments,
specifically stocks, bonds, and other goodies like gold and real estate.
Subjects more appropriate to misc.consumers are not included here.  This
FAQ is freely distributable and is posted every 14 days.  No FTP archive
is currently known to the compiler for misc.invest information and programs. 
For extensive information on mutual funds, see the mutual fund FAQ, which is
posted regularly to misc.invest and maintained by timlee@btr.btr.com

Disclaimers:  This information is guaranteed to change over time and is
probably out of date already.  Mention of a product does not constitute an
endorsement. Answers to questions closer to the bottom of the list may rely
on information given in prior answers.  Readers outside the United States
should not necessarily rely on 800 telephone numbers. All prices are listed
in US dollars unless otherwise specified.

This FAQ is available from the news.answers archive on host rtfm.mit.edu
Using FTP, fetch the file /pub/usenet/news.answers/investment-faq/general
If you don't have FTP, send an e-mail request to mail-server@rtfm.mit.edu
with the body "send usenet/news.answers/investment-faq/general".

Please send comments and new submissions to the compiler.

-----------------------------------------------------------------------------

TABLE OF CONTENTS (* means answer needed)
    Sources for Historical Stock Information
    American Depository Receipt (ADR)
    Books About Investing (especially stocks)
    Brokerage Commissions
    Bull and Bear Lore
    Computing the Rate of Return on Monthly Investments
    Computing Compound Return
    Discount Brokers
    Dollar Cost and Value Averaging
    Direct Investing and DRIPS
    Future and Present Value of Money
    How Can I Get Rich Really Quickly?
    Hedging
    Investment Associations
    Life Insurance
    Money-Supply Measures M1, M2, and M3
    Options on Stocks
    Shorting Stocks
    Stock Index - The Dow
    Stock Indexes - Others
    Treasury Direct (buying T-Bills directly from the US Treasury)
    * Zero-coupon bonds

-----------------------------------------------------------------------------

Subject: Sources for Historical Stock Information
Answerers: bakken@cs.arizona.edu, nfs@princeton.edu, gary@intrepid.com,
           discar@nosc.mil, irving@Happy-Man.com

There are no free sources for historical stock information on the Internet.

Paid services include:
    + Prodigy.  US$13/month for basic service includes 15 minute delayed
      quotes on stocks at NO additional charge.  
      Available via local dial-up all over the US.

    + Compuserve.  US$7.95/month for basic service includes 15 minute delayed
      quotes on stocks and options at an additional charge.
      Available via local dial-up all over the US.

    + Farpoint. ($4 or $8/week for an IBM-compatible diskette) provides daily
      high, low, close, and volume for for approximately 6000 stocks.  They
      offer historical data from 1 July 89 to present.  Write to Farpoint,
      3412 Milwaukee Avenue, Suite 477, Northbrook, Illinois 60062.

    + Historical Data Services in Kansas City, MO.  They carry stock quotes,
      commodities, indexes, mutual funds.  Daily stock quotes, per year: $0.75
      Contact them at 800-677-7369.

    + Standard & Poor's Compustat (most complete and most expensive).

    + Disclosure's "Compact Disclosure" on CD (only $6,000 a year).

    + Value Line's Database 

Bulletin Boards for historical stock information include:
    + The Farpoint BBS in Chicago keeps about 3 years back data on a
      boatlaod of stocks.  Free use up to 2 hours a day, they ask for
      a contribution.  Quotes updated weekly.  [ Phone number? ]

    + The Business Center BBS in San Diego carries most issues on the
      NYSE, NASDAQ, and AMEX.  It is free but limits on-line time to
      20 minutes.  Phone number is +1 (619) 482-8675.

 [ Compiler's note:  Anyone have a list of other sources?  ]

-----------------------------------------------------------------------------

Subject: American Depository Receipt (ADR)
Answerer: ask@cbnews.cb.att.com

An American Depository Receipt is a share of stock of an investment in
shares of a non-US corporation.

For example, BigCitibank might purchase 25 million shares of a non-US
stock.  Call it EuroGlom Corporation (EGC).  Perhaps EGC trades on
the Paris exchange,  where BigCitibank bought them.  BigCitibank would
then register with the SEC and offer for sale shares of EGC ADRs.

EGC ADRs are valued in dollars, and BigCitibank could apply to the
NYSE to list them.  In effect, they are repackaged EGC shares,
backed by EGC shares owned by BigCitibank, and they would then trade
like any other stock on the NYSE.

BigCitibank would take a management fee for their efforts, and the
number of EGC shares  represented by EGC ADRs would effectively
decrease, so the price would go down a slight amount;  or EGC itself
might pay BigCitibank their fee in return for helping to establish
a US market for EGC.  Naturally, currency fluctuations will affect
the US Dollar price of the ADR.

Dividends paid by EGC are received by BigCitibank and distributed
proportionally to EGC ADR holders.  If EGC withholds (foreign)
tax on the dividends before this distribution, then BigCitibank will
withhold a proportional amount before distributing the dividend to
ADR holders, and will report on a Form 1099-Div both the gross
dividend and the amount of foreign tax withheld. (Deciding just how
to report this tax withheld is too complicated for this article :^)

Most of the time the foreign nation permits US holders (BigCitibank
in this case) to vote their shares on all or most issues, and ADR
holders will receive ballots which will be received by BigCitibank
and voted in proportion to ADR Shareholder's vote.  I don't know if
BigCitibank has the option of voting shares which ADR holders
failed to vote.

Having said this, however, for the most part ADRs look and feel
pretty much like any other stock.

-----------------------------------------------------------------------------

Subject: Books About Investing (especially stocks)
Answerers: jhc@iris.uucp, nfs@princeton.edu

Author			Title
-----			------
Peter Lynch 		One Up on Wall Street 	
Train			Money Masters
Train			New Money Masters
Pring			Technical Analysis Explained
Andrew 	Tobias		The Only Investment Guide You'll Ever Need
Andrew Tobias		The Only Other Investment Guide You'll Ever Need
Benjamin Graham 	The Intelligent Investor 
Graham			Security Analysis
			  ("bible" of fundamental analysis, long but enlight.)
Martin Zweig		Winning on Wall Street
			   (best on market timing)
Fosback			Market Logic
			   (best on many market indicators)
Burton Malkiel		A Random Walk Down Wall Street 
			   (efficient market hypothesis, well written)
Jiler			How Charts Can Help You
			   (quick intro to tech. analysis)

-----------------------------------------------------------------------------

Subject: Brokerage Commissions
Answerer: BKOTTMANN@falcon.aamrl.wpafb.af.mil

A brokerage commission is a fee that your broker charges for
buying/selling securities on your behalf.  Commonly a set amount
($45, for example) plus another amount ($0.03) per share.  Most
brokerages have minimum commissions. 

See below for a table of discount broker's commissions.

[ Compiler's note:  does anybody have a table of the commission scales
  that the full-service houses use?  ]

-----------------------------------------------------------------------------

Subject: Bull and Bear Lore
Answerer: keith@iscp.Bellcore.COM

This information is excerpted from "The Lore and Legends of Wall Street,"
a book by Robert M. Sharp.

During Gold Rush days in California, there were bull fights.  Sometimes
the bull faced a bear instead of a matador.  Bulls throw the bear UP in
the air using their horns to win (kill the bear); bears pull the bull 
DOWN to the ground to win (kill the bull).

Somehow these terms became associated with the markets, probably due to
trading in gold-mining stock.  The terms 'bull' and 'bear' then told the
market's direction.

Later, Cornelius Varderbilt fought Daniel Drew for control of the Harlem
Railroad.  Some writer compared their fight to bull-bear fights in
California.  This usage apparently made the terms stick.  BTW, Vanderbilt
eventually won.

-----------------------------------------------------------------------------

Subject: Computing the Rate of Return on Monthly Investments
Answerer: jedwards@ms.uky.edu 

>Assume $ X is invested at the beginning of the year into some
>mutual fund or like account, with $ Y added to the account every month.

>Now, down the road,
>if the value at any given month "i" is Vi,
>what conclusions can be drawn from it ?

The relevant formula is F = P(1+i)**n - p((1+i)**n - 1)/i
where F is the future value of your investment (i.e., the value after
n periods), P is the present value of your investment (i.e., the
amount of money you invest initially), p is the payment each period
(p is negative if you are adding money to your account and positive
if you are taking money out of your account), n is the number of 
periods you are interested in, and i is the interest rate per
period.  You cannot manipulate this formula to get a formula for i;
you have to use some sort of iterative method (or buy a financial
calculator - the TI version is extremely cheap, although you get what
you pay for...).

One thing to keep in mind is that i is the interest rate *per period*.
You may need to compound the rate to obtain a number you can compare
apples-to-apples with other rates.  For instance, a 1 year CD paying
12% interest is not as good an investment as an investment paying 1%
per month for a year.  If you put $1000 into each, you'll have $1120
in the CD at the end of the year but $1000*(1.01)**12 = $1126.82 in
the other investment due to compounding.  I always convert interest
rates of any kind into a "simple 1-year CD equivalent" for the purposes
of comparison.

-- 

See also the 'irr' program which has been posted to misc.invest
several times.

-----------------------------------------------------------------------------

Subject: Computing Compound Return
Answerers: bakken@cs.arizona.edu, chen@digital.sps.mot.com  

To calculate the compounded return, just figure out the factor
by which the investment multiplied.  Say $1000 went to $3200 in
10 years.  Take the 10th root of 3.2 (the multiplying factor)
and you get a compounded return of 1.1233498 (12.3% per year).  To
see that this works, note that 1.1233498**10 = 3.2.


---

In my calculation, I assume all the gains are reinvested so following
formula applies:

TR = (1 + AR) ** YR

where TR is total return, AR is annualized return, and YR is year. To
calculate annualized return otherwise, following formula applies:

AR = (10 ** (Log TR/ YR)) - 1

Thus a total return of 950% in 20 years would be equivalent of 11.914454% 
annualized return.

-----------------------------------------------------------------------------

Subject: Discount Brokers
Answerers: davida@bonnie.ics.uci.edu, edwardz@ecs.comm.mot.com,
	   gary@intrepid.com

A discount broker is merely a way to save money for people who are
looking out for themselves.  

According to Charles Schwab, the big difference between them and
"the other guys" is that there is no analyst sitting in the back
that will call you up and encourage you to purchase a stock. 
They have people there that can provide good financial advice--but
only if you ask.  If you walk in the door and say "I want to buy XXX",
that's what they'll do.

--- 
List of discount brokers and phone numbers:

Accutrade First National   800 762 5555
K. Aufhauser & Co.         800 368 3668
Brown & Co.                800 343 4300
Fidelity Brokerage         800 544 7272
Kennedy, Cabot, & Co.      800 252 0090  213 550 0711
Barry Murphy & Co.         800 221 2111
Norstar Brokerage          800-221-8210
Olde Discount              800 USA OLDE
Pacific Brokerage Service  800 421 8395  213 939 1100
Andrew Peck Associates     800 221 5873  212 363 3770
Quick & Reilly             800 456 4049
Charles Schwab & Co.       800 442 5111
Scottsdale Securities      800 727 1995  818 440 9957
Stock Cross                800 225 6196  617 367 5700
Vanguard Discount          800 662 SHIP
Waterhouse Securities      800 765 5185
Jack White & Co.           800 233 3411

Here is a table to compare commissions at various discount brokers.
This is based on commission schedules gotten at various times in
1991 and 1992.  These tables are for stocks only, not bonds or other
investments.

                                           $2000 trades
                     Firm    400@ 5   200@10   100@20    50@40    25@80
             K. Aufhauser  $  43.49 $  27.49 $  25.49 $  25.49 $  25.49
        Pacific Brokerage  $  38.00 $  28.00 $  28.00 $  28.00 $  28.00
         Jack White & Co.  $  45.00 $  39.00 $  36.00 $  34.50 $  33.75
    Kennedy, Cabot, & Co.  $  38.00 $  38.00 $  38.00 $  23.00 $  23.00
            Bidwell & Co.  $  41.25 $  31.25 $  27.25 $  25.75 $  23.50
           Quick & Reilly  $  50.00 $  50.00 $  49.00 $  49.00 $  49.00
            Olde Discount  $  35.00 $  50.00 $  40.00 $  40.00 $  40.00
        Vanguard Discount  $  57.00 $  57.00 $  48.00 $  40.00 $  40.00
       Fidelity Brokerage  $  63.50 $  63.50 $  54.00 $  54.00 $  54.00
           Charles Schwab  $  64.00 $  64.00 $  55.00 $  55.00 $  55.00

                                           $8000 trades
                     Firm   1600@ 5   800@10   400@20   200@40   100@80
             K. Aufhauser  $  90.50 $  61.50 $  43.49 $  27.49 $  25.49
        Pacific Brokerage  $  74.00 $  63.00 $  38.00 $  28.00 $  28.00
         Jack White & Co.  $  81.00 $  57.00 $  45.00 $  39.00 $  36.00
    Kennedy, Cabot, & Co.  $ 123.00 $  63.00 $  38.00 $  38.00 $  38.00
            Bidwell & Co.  $  84.75 $  56.75 $  45.25 $  39.25 $  30.25
           Quick & Reilly  $  79.00 $  79.00 $  79.00 $  79.00 $  49.00
            Olde Discount  $  67.50 $  95.00 $  70.00 $  60.00 $  40.00
        Vanguard Discount  $  82.00 $  82.00 $  82.00 $  82.00 $  48.00
       Fidelity Brokerage  $ 109.00 $ 102.70 $ 102.70 $ 102.70 $  54.00
           Charles Schwab  $ 120.00 $ 103.20 $ 103.20 $ 103.20 $  55.00

                                          $32000 trades
                     Firm   6400@ 5  3200@10  1600@20   800@40   400@80
             K. Aufhauser  $ 194.50 $ 138.50 $  90.50 $  72.50 $  67.50
        Pacific Brokerage  $ 218.00 $ 139.00 $  91.00 $  63.00 $  38.00
         Jack White & Co.  $ 161.00 $  97.00 $  81.00 $  57.00 $  45.00
    Kennedy, Cabot, & Co.  $ 195.00 $  99.00 $ 123.00 $  63.00 $  38.00
            Bidwell & Co.  $ 252.75 $ 140.75 $ 100.75 $  88.75 $  57.25
           Quick & Reilly  $ 222.00 $ 131.40 $ 131.40 $ 131.40 $ 131.40
            Olde Discount  $ 187.50 $ 215.00 $ 135.00 $ 115.00 $  90.00
        Vanguard Discount  $ 156.00 $ 156.00 $ 156.00 $ 156.00 $ 156.00
       Fidelity Brokerage  $ 301.00 $ 173.00 $ 169.90 $ 169.90 $ 169.90
           Charles Schwab  $ 360.00 $ 200.00 $ 170.40 $ 170.40 $ 170.40

-----------------------------------------------------------------------------

Subject: Dollar Cost and Value Averaging
Answerer: suhre@trwrb.dsd.trw.com

Dollar Cost Averaging purchases a fixed dollar amount each transaction
(usually monthly via a mutual fund).  When the fund declines, you
purchases slightly more shares, and slightly less on increases.  It
turns out that you lower your average cost slightly (assuming the fund
fluctuates up and down).

Value Averaging adjusts the amount invested, up or down, to meet the
prescribed target.  An example should clarify:  Suppose you are going
to invest $200 per month and at the end of the first month, your $200
has shrunk to $190.  Then you add in $210 the next month, bringing the
value to $400 (2*$200).  Similarly, if the fund is worth $430 at the
end of the second month, you only put in $170 to bring it up to the
$600 target.  What happens is that compared to dollar cost averaging,
you put in more when prices are down, and less when prices are up.
Dollar Cost Averaging takes advantage of the non-linearity of the 1/x
curve (for those of you who are more mathematically inclined).  Value
Averaging just goes in a little deeper when the value is down (which
implies that prices are down) and in a little less when value is up.
An article in the American Association of Individual Investors showed
via computer simulation that value averaging would outperform dollar
cost averaging about 95% of the time.  "Outperform" is a rather vague
term.  As best as I remember, whatever the percentage gain of dollar
cost averaging versus buying 100% initially, value averaging would
produce another 2 percent or so.

Warning: Neither approach will bail you out of a declining market nor
get you in on a bull market.

-----------------------------------------------------------------------------

Subject: Direct Investing and DRIPS
Answerers: BKOTTMANN@falcon.aamrl.wpafb.af.mil, das@impulse.ece.ucsb.edu

DRIPS are an easy, low cost way of buying stocks.  Various companies
(lists are available through NAIC and some brokerages) allow you to
purchase (at least) one share of stock, then periodically purchase
more shares directly from the company.  This is either through
dividends or directly by sending in a check.  (Thus the two names
for DRIP: Dividend/Direct Re-Investment Plan.) By buying direct you
don't have brokerage fees.  The periodic purchase also allows you
to automatically dollar-cost-average the purchase of the stock.

---

There is a "Guide to Dividend Reinvestment Plans" which supposedly
lists over a one hundred companies that offer DRIP's.  The number
given for the company is 800-443-6900; the cost is $9.00 (charge to
Master Card or Visa) and they will send you the DRIPs booklet and a
copy of a newsletter called the Money Paper.  (They will probably make
you a subscription offer when you call.)

There is also a book called "Low cost/No cost investing" (author forgotten) 
which lists about 300-400 companies that offer DRIPs.

 [ Compiler's note:  It seems to me that a listing of the hundreds or more
   companies that offer DRIPS belongs in its own FAQ.  And I want to avoid
   reprinting other people's copyrighted lists!  Please don't send me lists
   of companies that offer DRIPS. ]

-----------------------------------------------------------------------------

Subject: Future and Present Value of Money
Answerer: lott@informatik.uni-kl.de

This note explains briefly two concepts concerning the time-value-of-money,
namely future and present value.

* Future value is simply the sum to which a dollar amount invested today
will grow given some appreciation rate.  The formula for future value
is the formula from Case 2 of present value (below), but solved for the
future-sum rather than the present value.  In this formulation, the
appreciation rate is computed monthly.

    To compute the future value of a sum invested today, the formula is:
	fv = principal * (1 + (rrate / 100) / 12) ** (12 * termy)
    where
    	principal = dollar value you have now
    	termy     = term, in years
    	rrate     = annual rate of return, in percent

    Example of calculating the future value of an invested sum:
	I invest 1,000 today at 10% for 10 years.  The future value
	of this amount is 2707.04.

* Present value is the value in today's dollars assigned to an amount
of money in the future, based on some estimate of inflation and rate-of-return
over the long-term.  A reasonable estimate for long-term inflation is 4.5%.
In this analysis, inflation is compounded yearly and rate-of-return is
calculated based on monthly compounding.

Two cases of present value are discussed next. Case 1 involves a single
sum that stays invested over time.  Case 2 involves a cash stream that is
paid regularly over time (e.g., rent payments).

Case 1: Present value of money invested over time.  This tells you what a
        future sum is worth today, given some inflation rate over the time
        between now and the future.  Another way to read this is that you
        must invest the present value today at the rate-of-return to have
        some future sum in some years from now (but this only considers the
        raw dollars, not the purchasing power).

    To compute the present value of an invested sum, the formula is:
		        future-sum 
	pv =   --------------------------------------
	       (1 + (rrate/100) / 12) ** (12 * termy)
    where
	future-sum = dollar value you want in termy years
	termy = term, in years
	rrate = annual rate of return on money that you can expect, in percent

    Example:
	In 30 years I will receive 1,000,000 (a gigabuck).  What is
	that amount of money worth today (what is the buying power)
	assuming a rate of inflation of 4.5%?  The answer is 259,895.65

    Example:
	I need to have 10,000 in 5 years.  The present value of 10,000
	assuming a rate-of-return of 8% is 6712.10.  I.e., 6712 will
	grow to 10k in 5 years at 8%.  

Case 2: Present value of a cash stream.  This tells you the cost in 
	today's dollars of money that you pay over time.  Usually the
	payments that you make increase over the term.  Basically, the
	money you pay in 10 years is worth less than that which you pay
	tomorrow, and this equation lets you compute just how much.

    To compute the present value of a cash stream, the formula is:
         month = 12*termy   paymt  * (1 + irate/100) ** int ((month - 1)/ 12)
    pv = SUM                -------------------------------------------------
         month = 1               (1 + (rrate/100) / 12) ** (month - 1)
    where
	month = month number
	termy = term, in years
	paymt = monthly payment, in dollars
	irate = rate of inflation (increase in payment per year), in percent
	rrate = rate of return on money that you can expect, in percent
	int() function = keep integral part; used to compute yr nr from mo nr 

    Example:
	You pay $500/month in rent over 10 years and estimate that inflation
	is 4.5% over the period (your payment increases with inflation.)
	Present value is 49,530.57

-----------------------------------------------------------------------------

Subject: How Can I Get Rich Really Quickly?
Answerer: jim@doink.b23b.ingr.com

Buy low, sell high!

also:

Take this with a lot of :-) 's.

Legal methods:
  1. Marry someone who is already rich.
  2. Have a rich person die and will you their money.
  3. Strike oil.
  4. Discover gold.
  5. Win the lottery.

Illegal methods:
  6. Rob a bank.
  7. Blackmail someone who is rich.
  8. Kidnap someone who is rich and get a big ransom.
  9. Become a drug dealer.

For completeness sakes:
 10. "If you really want to make a lot of money, start
      your own religion."
                - L. Ron Hubbard

Hubbard made that statement when he was just a science fiction writer in
either the '30s or '40s.  He later founded the Church of Scientology. 
I believe he also wrote Dianetics.

-----------------------------------------------------------------------------

Subject: Hedging
Answerer: nfs@princeton.edu

Hedging is a way of reducing some of the risk involved in holding an
investment.  There are many different risks against which one can
hedge and many different methods of hedging.  When someone mentions
hedging, think of insurance.  A hedge is just a way of insuring an
investment against risk.

Consider a simple (perhaps the simplest) case.  Much of the risk in
holding any particular stock is market risk; i.e. if the market falls
sharply, chances are that any particular stock will fall too.  So if
you own a stock with good prospects but you think the stock market in
general is overpriced, you may be well advised to hedge your position.

There are many ways of hedging against market risk.  The simplest, but
most expensive method, is to buy a put option for the stock you own.
(It's most expensive because you're buying insurance not only against
market risk but against the risk of the specific security as well.)
You can buy a put option on the market (like an OEX put) which will
cover general market declines.  You can hedge by selling financial
futures (e.g. the S&P 500 futures).

In my opinion, the best (and cheapest) hedge is to sell short the
stock of a competitor to the company whose stock you hold.  For
example, if you like Microsoft and think they will eat Borland's
lunch, buy MSFT and short BORL.  No matter which way the market as a
whole goes, the offsetting positions hedge away the market risk.  You
make money as long as you're right about the relative competitive
positions of the two companies, and it doesn't matter whether the
market zooms or crashes.

-----------------------------------------------------------------------------

Subject: Investment Associations
Answerer:

AAII:	American Association of Individual Investors
	625 North Michigan Avenue 
	Chicago, IL 60611

NAIC:


 [ Compiler's note: could someone please explain these briefly?
   Are there any others? ]

-----------------------------------------------------------------------------

Subject: Life Insurance
Answerer: joec@is.morgan.com

This is my standard reply to life insurance queries.  And, I
think many insurance agents will disagree with these comments.

First of all, decide WHY you want insurance. Think of insurance
as income-protection, i.e. if the insured passes away, the
beneficiary receives the proceeds to offset that lost income.
With that comment behind us, I would never buy insurance on kids,
after all, they don't have income and they don't work. An agent
might say to buy it on your kids while its cheap - run the
numbers, the agent is usually wrong.  And I am strongly against
this on two counts. One, you are placing a bet that you kid will
die and you are actually paying that bet in premiums. I can't bet
my child will die. Two, it sounds plausible, but factor inflation
in - it doesn't look so good. A policy of face amount of
$10,000, at 4.5% inflation and 30 years later is like having
$2,670 in today's dollars - its NOT a lot of money. So don't plan
on it being worth much in the future to your child as an
investment.

I have some doubts about insurance as investments - it might be
a good idea but it certainly muddies the water.

So you have decided you want insurance, i.e. to protect your
family against your passing away prematurely, i.e. the loss of
income you represent.

Next decide how LONG you want insurance for. If you're around 60
years old, I doubt you want to get any at all. Your income stream
is largely over and hopefully you have accumulated the assets you
need anyway by now.

If you are married and both work, its not clear you need
insurance at all if you pass on. The Spouse just keeps working
UNLESS you need both incomes to support your lifestyle. Then you
should have one policy on each of you.

If you are single, its not clear you need it at all. You are not
supporting anyone so no one cares if you pass on, at least
financially.

If you are married and the spouse is not working, then the
breadwinner needs insurance UNLESS you are independently wealthy.

If you are independently wealthy, you don't need it because you
already have the money you need. You might want it for tax
shelters but that is a very different topic.

Suppose you have a 1 year old child, the wife stays home and the
husband works.  In that case, you might want 2 types of
insurance: Whole life for the long haul, i.e. age 65, 70, etc
Term until your child is off on his/her own.  Once the child has
left the stable, your need for insurance goes down since your
responsibilities have diminished, i.e. fewer dependents, education
finished, wedding expenses done, etc

Do you have a mortgage? Perhaps you want some sort of Term during
the duration of the mortgage - but remember that the mortgage
balance declines over time.  But don't buy mortgage insurance
itself - much too expensive. Include it in the overall analysis
of what insurance needs you might have.

Now, how much insurance?  One rule of thumb is 5x your annual
income. What agents will ask you is 'Will your spouse go back to
work if you pass away?' Many of us will think nobly and say NO.
But its actually likely that your spouse will go back to work and
good thing - otherwise your insurance needs would be much larger.
After all, if the spouse stays home, your insurance must be large
enough to be invested wisely to throw off enough return to live
on. Assume you make $50,000 and the spouse doesn't work. You pass
on. The Spouse needs to replace a portion of your income (not all
of it since you won't be around to feed, wear clothes, drive an
insured car, etc.). Lets assume the Spouse needs $40,000 to live
on. Now that is BEFORE taxes. Lets say its $30,000 net to live
on. $30,000 is the annual interest generated on a $600,000 tax
free investment at 5% per year (i.e. munibonds).  So this means
you need $600,000 of face value insurance to protect your $50,000
current income.

This is only one example of how to do it and income taxes, estate
taxes can complicate it. But hopefully you get the idea.

Which kind of insurance IMHO is a function of how long you need
it for. I once did an analysis of TERM vs WHOLE LIFE and based on
the assumptions at the time, WHOLE LIFE made more sense if I held
the insurance more than about 20-23 years. But TERM was cheaper
if I held it for a shorter period of time.  How do you do the
analysis and why does the agent want to meet you? Well he/she
will bring their fancy charts, tables of numbers and effectively
snow you into thinking that the biggest, most expensive policy is
the best for you over the long term. Translation: mucho
commissions to the agent.  Whole life is what agents make their
money on due to commissions.  The agents typically gets 1/2 of
your first years commissions as his pay.  And he typically gets
10% of the next years commissions and likewise through year 5.
Ask him how he gets paid. If he won't tell you, ask him to leave.

What I did was to take their numbers, review their assumptions
(and corrected them when they were far-fetched) and did MY
analysis. They hated that but they agreed my approach was
correct. They will show you a 12% rate of return to predict the
cash value flow. Ignore that - it makes them look too good and
its not realistic. Ask him/her exactly what they plan to invest
your premium money in to get 12%. How has it done in the last 5
years? 12? Use a number between 4.5% (for TBILL investments,
ultra-conservative) and 10% (for growth stocks, more risky), but
not definitely not 12%. I would try 8% and insist it be done that
way.

Ask each agent:
1)-what is the present value of the payment stream represented by
my premiums, using a discount rate of 4.5% per year (That is the
inflation average since 1940). This is what the policy costs you,
in today's dollars.  Its very much like paying that single number
now instead of a series of payments over time. 
2)-what is the present value of the the cash value earned
(increasing at no more than 8% a year) and discounting it back to
today at the same 4.5%. This is what you get for that money you
just paid, in cash value, expressed in today's dollars, i.e. as
if you got it today in the mail. 
3)-What is the present value of the life insurance in force over
that same period, discounted back to today by 4.5%, for inflation.
That is the coverage in effect in today's dollars.

Pick an end date for comparing these - I use age 60 and age 65.

With the above in hand from various agents, you can see fairly
quickly which is the better policy, i.e. which gives you the most
for your money.

By the way, inflation is slippery and sneaky.  All too often we
see $500,000 of insurance and it sounds great, but at 4.5%
inflation and 30 years from now, that $500,000 then is like
$133,500 now - truly!

Have the agent do your analysis, BUT you give him the rates to
use, don't use his. Then you pick the policy that is the best
value, i.e. you get more for your money. Factor in any tax angles
as well. If the agent refuses to do this analysis for you, get
rid of him/her.

If the agent gets annoyed but cannot fault your analysis, then
you have cleared the snow away and gotten to the truth. If they
smile too much, you may have missed something. And that will cost
you money.

Never agree to any policy unless you understand all the numbers
and all the terms. Never 'upgrade' policies by cashing in a whole
life for another whole life. That just depletes your cash value,
real cash available to you. And the agent gets to pocket that
money, literally, through new commissions.

Check out the insurer by going to the reference section of a big
library.  Ask for the AM BEST guide on insurance. Look up where
the issuer stands relative to the competition.

Agents will usually not mention TERM since they work on
commission and get much more money for Whole Life than they do
for term. Remember, figure the agents gets fully 1/2 of your 1st
years premium payments and 10% or so for all the money you send
in over the following 4 years. Ask them to tell you how they are
paid- after all, its your money they are getting.

Now why don't I like UNIVERSAL or VARIABLE? Mainly because with
Whole Life and with TERM, you know exactly what you must pay
because the issuer must manage the investments to generate the
appropriate returns to provide you with the insurance (and with
cash value if whole life). With UNIVERSAL and VARIABLE, it
becomes YOU who must decide how and where to invest your premium
income. If you guess badly, you will have to pay a higher premium
to cover those bad decisions. The insurance companies invented
UNIVERSAL and VARIABLE because interest rates went crazy in the
early 80's and they lost money. Rather than taking that risk
again, they offered these new policies to transfer that risk to
you. Of course, UNIVERSAL and VARIABLE will be cheaper in the
short term but BE CAREFUL - they can and often will increase
later on.

Okay, so what did I do? I bought both term and whole life. I plan
to keep the term until my son graduates from college and he is on
his own.  That is about 11 years from now. I also bought whole
life (NorthWest Mutual) which I plan to keep forever, so to
speak. NWM is apparently the cheapest and best around according
to A.M.BEST.

Where do you buy term? Just buy the cheapest policy since you
will tend to renew the policy once a year and you can change
insurers as each time.

Also:   A hard thing to factor in is that one day you may become
uninsurable just when you need it, i.e. heart attack, cancer and
the like. I would look at getting cheap term insurance that is a
bit more but then you can keep renewing, even if ill, or you can
convert to whole life.

Last thought. I'll bet you didn't you know that you are 3x more
likely to become disabled during your working career than you to
die during your working career. How is your short term disability
insurance looking? Get a policy that has a waiting period before
it kicks in. This will keep it cheaper. Look at the exclusions,
if any.

Hope this all helps and again, this is my opinion only. Thus, the
usual disclaimers apply. By the way, I work in the financial
industry but I am not in sales and do not deal with clients.

Good luck.  Don't feel overwhelmed, its been said that there are
many policies out there that even the agents don't understand.
and think of agents as saleclerks. Don't let them glorify
themselves.

-----------------------------------------------------------------------------

Subject: Money-Supply Measures M1, M2, and M3
Answerer: merritt@macro.bu.edu

M1: Money that can be spent immediately.  Includes cash, checking accounts,
    and NOW accounts.

M2: M1 + assets invested for the short term.  These assets include money-
    market accounts and money-market mutual funds.

M3: M2 + big deposits.  Big deposits include institutional money-market
    funds and agreements among banks.

"Modern Money Mechanics," which explains M1, M2, and M3 in gory detail,
is available free from:
        Public Information Center
        Federal Reserve Bank of Chicago
        P.O. Box 834
        Chicago, Illinois 60690

-----------------------------------------------------------------------------

Subject: Options on Stocks
Answerer: ask@cbnews.cb.att.com

First, an option is a contract between buyer and seller.

The option is connected to something, such as a listed stock or an
exchange index or futures contracts or real estate.  For simplicity,
I will discuss only options connected to listed stocks.

The option is designated by:
       - Name of the associated stock
       - "strike price"
       - Expiration Date

       - The option costs a "premium" to buy, plus brokers commission.

The two most popular types of options are Calls and Puts.

    Example:  The Wall Street Journal might list an 
                IBM Oct 90 Call @ $2.00

    Translation:  This is a Call Option

                  The company associated with it is IBM
                    (See also the price of IBM stock on the NYSE)

                  The option expires on the third Saturday
                      following the third Friday of October, 1992.

                  (an option is worthless and useless once it expires)

                  The strike price is $90.00  If you own this option
                  you can buy  IBM @ $90.00  (even if it is then
                  trading on the NYSE @$100.00, I should be so lucky!)

                  If you want to buy the option it will cost you $2.00
                  plus brokers commissions.   If you want to sell
                  the option you will get $2.00 less commissions.


In general, options are written on blocks of 100s of shares.  So
when you buy "1" IBM Oct 90 Call @ $2.00 you actually are buying a
contract to buy 100 shares of IBM @ $90 per share ($9,000) on or
before the expiration date in October.   You will pay $200 plus
commission to buy the call.

If you wish to exercise your option you call your broker and say you
want to exercise your option.  Your broker will arrange for the
person who sold you your option ( a financial fiction:  A computer
matches up buyers with sellers in a magical way) to sell you 100
shares of IBM for $9,000 plus commission.

If you instead wish to sell (sell=write) that option you instruct
your broker that you wish to write 1 Call IBM Oct 90s, and the very
next day your account will be credited with $200 less commission.

If IBM does not reach $90 before the call expires, the option writer
gets to keep that $200 (less commission)   If the stock does reach
above $90,  you will probably be "called."

If you are called you must deliver the stock.  Your broker will sell
your IBM stock for $9000 (and charge commission).  If you owned the
stock, that's OK.  If you did not own the stock your broker will buy
the stock at market price and immediately sell it at $9000.
Commissions each way.

If you write a Call option and own the stock that's called
"Covered Call Writing."  If you don't own the stock it's called
"Naked Call Writing."   It is quite risky to write naked calls,
since the price of the stock could zoom zooom up and you would have
to buy it at the market price.

My personal advice for new options people if to begin by writing
covered call options for stocks currently trading below the
strike price of the option.  (write out-of-the-money covered calls)

When the strike price of a call is above the current market price
of the associated stock, the call is "out of the money" and is "in
the money" when the stock price is below the call's strike price.

Most regular folks like you and me do not exercise our options; we
trade them back, covering our original trade.  Saves commissions and
all that.

The other common option is the PUT.

If you buy a put from me, you gain the right to sell me your stock
at the strike price on or before the expiration date.

Puts are almost the mirror-image of calls. (I ran out of time, so
will post this;  if more questions, please ask.  If there's a demand
to expand the PUT story, I'll be glad to , or let the other options
experts do that.)

-----------------------------------------------------------------------------

Subject: Shorting Stocks
Answerer: ask@cblph.att.com

Shorting means to sell something you don't own.

If I do not own shares of IBM stock but I ask my broker to sell
short 100 shares of IBM I have committed shorting.  In broker's
lingo, I have established a short position in IBM of 100 shares.
Or, to really confuse the language, I hold 100 shares of IBM
short.

Why would you want to short?

Because you believe the price of that stock will go down, and you
can soon buy it back at a lower price than you sold it at.  When
you buy back your short position, you "close your short position."

The broker will effectively borrow those shares from another
client's account or from the broker's own account, and effectively
lend you the shares to sell short.  This is all done with mirrors;
no stock certificates are issued, no paper changes hands, no
lender is identified by name.

My account will be credited with the sales  price of 100 shares
of IBM less broker's commission.  But the broker has actually
lent me the stock to sell; no way is he going to pay interest on
the funds from the short sale.  (Exception:  Really big spenders
sometimes negotiate a full or partial payment of interest on
short sales funds provided sufficient collateral exists in the
account and the broker doesn't want to lose the client.  If
you're not a really big spender, don't expect to receive any
interest on the funds obtained from the short sale.)  Also expect
the broker to make you put up additional collateral.  Why?

Well, what happens if the stock price goes way up?  You will have
to assure the broker that if he needs to return the shares whence
he got them (see "mirrors" above) you will be able to purchase
them and "close your short position."  If the price has doubled,
you will have to spend twice as much as you received. So your
broker will insist you have enough collateral in your account
which can be sold if needed to close your short position.  More
lingo: Having sufficient collateral in you account that the
broker can glom onto at will, means you have "cover" for your
short position. As the price goes up you must provide more cover.

Since you borrowed these shares, if dividends are declared, you
will be responsible for paying those dividends to the fictitious
person from whom you borrowed.  Too bad.

Even if you hold you short position for over a year, your capital
gains are short term.

A short squeeze can result when the price of the stock goes up.
When the people who have gone short buy the stock to cover their
previous short-sales, this can cause the price to rise further. 
It's a death spiral - as the price goes higher, more shorts feel
driven to cover themselves, and so on.

You can short other securities besides stock.  For example, every
time I write (sell) an option I don't already own long, I am
establishing a short position in that option. The collateral
position I must hold in my account generally tracks the price of
the underlying stock and not the price of the option itself.  So
if I write a naked call option on IBM November 70s and receive a
mere $100 after commissions, I may be asked to put up collateral
in my account of $3,500 or more!  And if in November IBM has
regained ground and is at $90 [ I should be so lucky ], I would
be forced to buy back (close my short position in the call
option) at a cost of about $2000, for a big loss.

Selling short is seductively simple.  Brokers get commissions by
showing you how easy it is to generate short term funds for your
account, but you really can't do much with them.  My personal
advice is if you are strongly convinced a stock will be going
down, buy the out-of-the-money put instead, if such a put is
available.

A put's value increases as the stock price falls (but decreases
sort of linearly over time) and is strongly leveraged, so a small
fall in price of the stock translates to a large increase in
value of the put.

Let's return to our IBM, market price of 66 (yuck.)

Let's say I strongly believe that IBM will fall to, oh,  58 by
mid-November.  I could short IBM stock at 66, sell it at 58 in
mid-November if I'm right, and make about net $660.  If instead
it goes to 70, and I have to sell then I lose net $500 or so.
That's a 10% gain or an 8% loss or so.

Now, I could buy the IBM November 65 put for maybe net $200.  If
it goes down to 58 in mid November, I sell (close my position)
for about $600, for a 300% gain.  If it doesn't go below 65, I
lose my entire 200 investment. But if you strongly believe IBM
will go way way down, you should shoot for the 300% gain with the
put and not the 10% gain by shorting the stock itself.  Depends
how convinced you are.

Having said this, I add a strong caution:  Puts are very risky,
and depend very much on odd market behavior beyond your control,
and you can easily lose your entire purchase price fast.  If you
short options, you can lose even more than your purchase price!

One more word of advice.  Start simply.  If you never bought
stock start by buying some stock.  When you feel like you sort of
understand what you are doing, when you have followed several
stocks in the financial section of the paper and watched what
happens over the course of a few months, when you have read a bit
more and perhaps seriously tracked some important financials of
several companies, you might -- might -- want to expand your
investing choices beyond buying stock.  If you want to get into
options (see FAQ on options) start with writing covered calls. 
I would place selling stock short or writing or buying other
options lower on the list -- later in time.

-----------------------------------------------------------------------------

Subject: Stock Index - The Dow
Answerers: vision@cup.portal.com, nfs@princeton.edu

The Dow Jones Industrial Average is computed from the following stocks:

Ticker  Name
------  ----
AA	Alcoa
ALD	Allied Signal
AXP	American Express
BA	Boeing
BS	Bethlehem Steel
CAT	Caterpillar
CHV	Chevron
DD	Du Pont
DIS	Disney
EK	Eastman Kodak
GE	General Electric
GM	General Motors
GT	Goodyear Tire
IBM	International Business Machines
IP	International Paper
JPM	JP Morgan Bank
KO	Coca Cola
MCD	McDonalds
MMM	Minnesota Mining and Manufacturing (3M)
MO	Philip Morris
MRK	Merck
PG	Procter and Gamble
S	Sears, Roebuck
T	AT&T
TX	Texaco
UK	Union Carbide
UTX	United Technologies
WX	Westinghouse
XON	Exxon
Z	Woolworth

The Dow Jones averages are computed by summing the prices of the stocks
in the average and then dividing by a constant called the "divisor".
The divisor for the industrial average is adjusted periodically to reflect
splits in the stocks making up the average; the divisor was originally 30
but has been reduced over the years to 0.462685 (as of 92-10-31). 
The current value of the divisor can be found in the Wall Street Journal
and Barron's.

-----------------------------------------------------------------------------

Subject: Stock Indexes - Others
Answerers: jld1@ihlpm.att.com, pearson_steven@tandem.com, jordan@imsi.com,
           rajiv@bongo.cc.utexas.edu

Standard & Poor's 500:	500 of the biggest US corporations.
    This is a very popular institutional index, and recently becoming 
    more popular among individuals.  Most often used measure of broad 
    stock market results.
Wilshire 5000
    Includes most publicly traded shares.  Considered by some a better
    measure of market as a whole, becuase it includes smaller companies. 
Wilshire 4500 
    These are all firms *except* the S&P 500.
Value Line Composite
    See Martin Zweig's Winning on Wall Street for a good description.
    It is a price-weighted index as opposed to a capitalization index.
    Zweig (and others) think this gives better tracking of investment
    results, since it is not over-weighted in IBM, for example, and
    most individuals are likewise not weighted by market cap in their
    portfolios (unless they buy index funds). 
Nikkei Dow (Japan)
    I believe "Dow" is a misnomer.  It is called the Nikkei index (or
    the Nikkei-xx, where xx is the number of shares in it, which I
    can't quote to you out of my head).  "Dow" comes from Dow Jones &
    Company, which publishes DJIA numbers.  Nikkei is considered the
    "Japanese Dow," in that it is the most popular and commonly quoted
    Japanese market index, but I don't think Dow Jones owns it. 
S&P 100 (and OEX)
    The S&P 100 is an index of 100 stocks.  The "OEX" is the option on 
    this index, one of the most heavily traded options around.  
S&P MidCap 400 
    Medium capitalization firms.
CAC-40 (France)
    This is 40 stocks on the Paris Stock Exchange formed into an
    index.  The futures contract on this index is probably the most
    heavily traded futures contract in the world. 
Europe, Australia, and Far-East (EAFE)
    Compiled by Morgan Stanley.
Russell 1000
Russell 2000
    A small cap stock index.
Russell 3000
NYSE Composite              [options on index]
Gold & Silver Index         [options on index]
AMEX Composite
NASDAQ Composite
Topix (Japan)
DAX (Germany)
FTSE 100 (Great Britain)
Major Market Index (MMI)

 [ Compiler's note: a few explanations are still missing.
   Can anyone supply a few? ]

-----------------------------------------------------------------------------

Subject: Treasury Direct (buying T-Bills directly from the US Treasury)
Answerer: jberlin@falcon.aamrl.wpafb.af.mil

You can contact any Federal Reserve Bank  and ask for information on
Treasury Direct.  The minimum for a Treasury Note (2 years and up) is
only $5K and in some instances (I believe 5 year notes) $1K.  There
are no fees and you may elect to have interest payments made directly
to your account.  You even may pay with a personal check, no need for
a cashier's or certified check as Treasury Bills (1 year and under)
required.  AAII Journal had an article on this a couple of years ago. 
Like they said, the government service is great, they just do not
advertise it well.

-----------------------------------------------------------------------------

Subject: * Zero-coupon bonds
Answerer:

 [ Compiler's note: help! ]

-----------------------------------------------------------------------------

Compilation Copyright (c) 1992 by Christopher Lott, lott@informatik.uni-kl.de
-- 
Christopher Lott    lott@informatik.uni-kl.de   +49 (631) 205-3334, -3331 Fax
Post: FB Informatik - Bau 57, Universitaet KL, W-6750 Kaiserslautern, Germany
Newsgroups: misc.invest