Part 3 – Opening a brokerage account.
Signing 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 impose 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 financial professional.
- The new account agreement requires that you make critical decisions:
- Who will make the final decisions about what you buy and sell in your account?
- You will have final say on investment decisions unless you give “discretionary authority” to your broker. 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.
- A “margin” account instead of “cash” allows you to 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.
- 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 chose 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.
- Who will make the final decisions about what you buy and sell in your account?
- The new account agreement requires that you make critical decisions:
How can I protect myself?
- Ask questions! 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.
- What training and experience do you have? How long have you been in business?
- What is your investment philosophy? Do you take a lot of risks or are you more concerned about the safety of my money?
- Describe your typical client. Can you provide me references, the names of people who have invested with you for a long time?
- How do you get paid? By commission? Based on a percentage of assets you manage? Another method? Do you get paid more for selling your own firm’s products?
- How much will it cost me in total to do business with you?
How should I monitor my investments?
- Some people like to look at the stock quotations every day to see how their investments have done. Some people prefer to see how they’re doing once a year. What’s best for you is most likely somewhere in between. A quarterly update call with your financial professional is a smart strategy.
- It’s not enough to simply check an investment’s performance. You should compare that performance against an index of similar investments over the same period to see if you are getting the proper returns for risk that you are assuming. You should compare the fees and commissions that you’re paying to what other investment professionals charge.
- While you should monitor performance regularly, you should pay close attention every time you send your money somewhere else to work.
- Every time your buy or sell an investment you will receive a confirmation slip from your broker. Make sure each trade is completed to your instructions. Make sure the buying or selling price was what your broker quoted. And make sure the commissions or fees are what your broker said they would be.
- Watch out for unauthorized trades in your account. If you get a confirmation slip for a transaction that you didn’t approve beforehand, call your broker.