While taking into account your overall
financial goals, stockbrokers generally do not give you a detailed financial
plan. Brokers are generally paid commissions when you buy or sell
securities through them. If they sell you mutual funds make sure to ask
questions about what fees are included in the mutual fund purchase.
Brokerages vary widely in the quantity and quality of the services they
provide for customers. Some have large research staffs, large national
operations, and are prepared to service almost any kind of financial
transaction you may need. Others are small and may specialize in promoting
investments in unproven and very risky companies. And there's everything
else in between.
A discount brokerage charges lower
fees and commissions for its services than what you'd pay at a
full-service brokerage. But generally you have to research and choose
investments by yourself.
A full-service brokerage costs more,
but the higher fees and commissions pay for a broker's investment advice
based on that firm's research. The best way to choose an investment
professional is to start by asking your friends and colleagues who they
recommend. Try to get several recommendations, and then meet with
potential advisers face-to-face. Make sure you get along. Make sure you
understand each other. After all, it's your money.
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Opening a Brokerage
Account
When you open a brokerage account,
whether in person or online, you will typically be asked to sign a new
account agreement. You should carefully review all the information in this
agreement because it determines your legal rights regarding your account.
Currency Options
Do not sign the new account agreement unless
you thoroughly understand it and agree with the terms and conditions it
imposes on you. Do not rely on statements about your account that are not
in this agreement. Ask for a copy of any account documentation prepared
for you by your broker.
The broker should ask you about your
investment goals and personal financial situation, including your income,
net worth, investment experience, and how much risk you are willing to
take on. Be honest. The broker relies on this information to determine
which investments will best meet your investment goals and tolerance for
risk. If a broker tries to sell you an investment before asking you these
questions, that's a very bad sign. It signals that the broker has a
greater interest in earning a commission than recommending an investment
to you that meets your needs. The new account agreement requires that you
make three critical decisions:
A Stock broker sells or buys
stock on behalf of a customer. The stock broker works as an
agent matching up stock buyers and sellers. A transaction on a stock
exchange must be made between two members of the exchange - a typical
person may not walk into the New York Stock Exchange (for example),
and ask to trade stock. Such an exchange must be done through a
broker.
In addition to actually trading stocks for their clients, stock
brokers may also offer advice to their clients on which stocks, mutual
funds, etc. to buy. |
Who will make the final decisions about what you buy and sell in your
account?
You will have the final say on investment decisions unless you give
"discretionary authority" to your broker. Discretionary authority allows
your broker to invest your money without consulting you about the price,
the type of security, the amount, and when to buy or sell. Do not give
discretionary authority to your broker without seriously considering the
risks involved in turning control over your money to another person.
How will you pay for your investments?
Most investors maintain a "cash" account that requires payment in full for
each security purchase. But if you open a "margin" account, you can buy
securities by borrowing money from your broker for a portion of the
purchase price.
Be aware of the risks involved with buying stocks on
margin. Beginning investors generally should not get started with a
margin account. Make sure you understand how a margin account works, and
what happens in the worst case scenario before you agree to buy on margin.
Unlike other loans, like for a car or a home, that allow you to pay back a
fixed amount every month, when you buy stocks on margin you can be faced
with paying back the entire margin loan all at once if the price of the
stock drops suddenly and dramatically. The firm has the authority to
immediately sell any security in your account, without notice to you, to
cover any shortfall resulting from a decline in the value of your
securities. You may owe a substantial amount of money even after your
securities are sold. The margin account agreement generally provides that
the securities in your margin account may be lent out by the brokerage
firm at any time without notice or compensation to you.
How much risk should you assume?
In a new account agreement, you must specify your overall investment
objective in terms of risk. Categories of risk may have labels such as
"income," "growth," or "aggressive growth." Be certain that you fully
understand the distinctions among these terms, and be certain that the
risk level you choose accurately reflects your age, experience and
investment goals. Be sure that the investment products recommended to you
reflect the category of risk you have selected.
When opening a new account, the brokerage firm may ask you to sign a
legally binding contract to use the arbitration process to settle any
future dispute between you and the firm or your sales representative.
Signing this agreement means that you give up the
right to sue your sales representative and firm in court
You'll want to find out
if a broker is properly licensed in your state and if they have had
run-ins with regulators or received serious complaints from investors.
You'll also want to know about the
brokers' educational backgrounds and where they've worked before their
current jobs. To get this information, you can ask either your state
securities regulator or the NASD to provide you with information from the
CRD, which is a computerized database that contains information about most
brokers, their representatives, and the firms they work for. Your state
securities regulator may provide more information from the CRD than NASD,
especially when it comes to investor complaints, so you may want to check
with them first.
You can find out how to get in touch with your state securities regulator
through the North American Securities Administrators Association, Inc.'s
website. You can go to NASD's
website to get CRD information or call them toll-free at (800) 289-9999.
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