Brokers make recommendations about specific investments like stocks, bonds, or mutual funds. While taking into account your overall financial goals, brokers 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.
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.
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.
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:
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 can never ask a dumb question about your investments and the people who help you choose them, especially when it comes to how much you will be paying for any investment, both in upfront
costs and ongoing management fees.
Your investment professional should understand your investment goals, whether you.re saving to buy a home, paying for your children.s education, or enjoying a comfortable retirement.
Your investment professional should also understand your tolerance for risk. That is, how much money can you afford to lose if the value of one of your investments declines?
An investment professional has a duty to make sure that he or she only recommends investments that are suitable for you. That is, that the investment makes sense for you based on your other
securities holdings, your financial situation, your means, and any other information that your investment professional thinks is important.
The best investment professional is one who fully understands your objectives and matches investment recommendations to your goals. You.ll want someone you can understand, because your
investment professional should teach you about investing and the investment products.
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