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Investing Basics - November 19th, 2004
http://www.investopedia.com
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Table of Contents:
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1. Term of the Week: Gorilla
2. Feature Article: Getting The Whole Story on Variable Annuities
3. Feature Tutorial: Investment Scams
4. Q&A: What is market capitulation?
5. Q&A: What is "in street name" and why are securities held this way?
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Term of the Week: Gorilla
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A company that dominates an industry without having a
complete monopoly.
Investopedia Says:
This term is a reference to the old jokes about 800-pound
gorillas, who "do whatever they want". For example,
you'll hear people say, "Microsoft is an 800-pound gorilla".
For related terms and articles, please go to:
http://www.investopedia.com/terms/g/gorilla.asp
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Feature Article: Getting the Whole Story on Variable Annuities
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So, you've maxed out your annual contributions to your 401k,
IRA, or other tax-deferred investment vehicle - now what?
There's got to be another tax-deferred investment vehicle
out there, right? Well, there is.
It's called a variable annuity, but buyer beware: not all
annuities are created equal! Most people think of annuities
simply as a steady income stream or something associated
with winning your state lottery. But before you purchase one,
you really need to consider all the benefits and shortfalls
to determine if an annuity is really a good product for you.
To read the rest of this article, Please go to:
http://www.investopedia.com/articles/04/111704.asp
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Feature Tutorial: Investment Scams
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What is a Ponzi Scheme?
A Ponzi scheme is a close cousin to the pyramid scheme.
It differs in that there is only one person (as opposed to
an army or recruits) who takes people's money as an "investment"
promising extraordinary rates of return. New investors are not
encouraging other investors to jump into the plan, rather the
onus is placed on the mastermind of the plan, so there is not
the same kind of hierarchical setup as with a pyramid scheme
as new investors are not promised greater profits based on
their ability to acquire new recruits.
To read our two new chapter additions, The Ponzi Scheme and
Pump and Dump, please go to:
http://www.investopedia.com/university/scams/scams2.asp
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If you haven't already, check out the wide range of free offers
listed on the Investopedia "Free Tools" section.
Receive everything from:
. Free CD-ROMs
. Free Books
. Free Home Study Courses
. Free Trading Calendars
. and much more!
Click here to check out the offers for yourself:
http://www.investopedia.com/free/
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What is market capitulation?
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By definition, capitulation means to surrender or give up.
In financial circles, this term is used to indicate the
point in time when investors have decided to give up on
trying to recapture lost gains as a result of falling
stock prices. Suppose a stock that you own has dropped
by 10%. Accordingly, there are two options that can be
taken: you can wait it out and hope that the stock begins
to appreciate or you can realize the loss by selling the
stock. If the majority of investors decide to wait it out,
then stock price will likely remain relatively stable.
However, if the majority of investors decide to "capitulate"
and give up on the stock, then there will be a sharp
decline in its price. When this occurrence is significant
across the entire market, it is known as market capitulation.
The significance of capitulation arises in its implication.
Many market professionals consider it to be a sign of a
bottom in prices and consequently a good time to buy stocks.
This is because basic economic factors dictate that large
sell volumes will drive prices down, while large buy
volumes will drive prices up.
Since almost everyone that wished (or has been forced)
to sell stock has already done so, only buyers are left,
who are expected to drive the prices up.
The problem with capitulation is it's very difficult to forecast
and identify. There is no magical price at which capitulation
takes place. Often investors will only agree in hindsight as
to when the market actually capitulated.
To find out more about the terms in this Q&A, please visit:
http://www.investopedia.com/ask/answers/189.asp
To learn more about the underlying economics of this thinking,
check out our "Economics Basics" Tutorial:
http://www.investopedia.com/university/economics/
For more on the topic see our "Capitulation Defined" article:
http://www.investopedia.com/articles/analyst/080702.asp
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What is "in street name" and why are securities held this way?
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In almost every instance, when you buy or sell securities
with a broker, your name is not actually represented on the
stock or bond certificate. The name that is represented on
the certificate is that of your broker, this is referred
to as being held in "street name". In fact, typically the
broker doesn't even hold the physical certificates. Rather,
they hold them in electronic form, in a large series of
computers. This occurs for many different reasons, here
are the two main ones.
1. Convenience - it is much more convenient for a broker
to carry securities in their name as they can be easily
and readily transferred between parties. Imagine the amount
of work that would occur if your broker held stocks in
your name. Every time you needed to sell stocks, the broker
would have to find the exact stocks you own and deliver
them to the buying party, who would then have to send the
stocks back to the company to have the name changed on the
certificates into their own names. This would take a great
deal of time and effort, not to mention the fact that you
wouldn't collect payment until the stocks were physically
received by the purchasing party. By holding the securities
"in street name", the broker can avoid most delays
associated with the transfer ownership and quickly settle trades.
2. Safety - if brokers were to hold the physical securities,
there would be a possibility of physical damage, loss and
theft of the certificates. By holding them in street name,
brokerages are able to retain the securities electronically,
effectively reducing the probability of anything negative
occurring. This safety is also extended to the safety of payment.
By holding the securities in street name, the broker is
ensuring that a security will be delivered promptly when
a transaction occurs. This removes any uncertainty that
would exist if the customer was responsible for delivering
the security every time a transaction occurs.
To find out more about the terms in this Q&A, please visit:
http://www.investopedia.com/ask/answers/185.asp
To learn more about this subject check out our
"Broker and Online Trading" tutorial:
http://www.investopedia.com/university/broker/
As well as our "Understanding Order Execution" article:
http://www.investopedia.com/articles/01/022801.asp
Have a great week!
The Investopedia Staff
http://www.investopedia.com
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