Doing Business with a Stockbroker
By: Source: AARP.org Date Posted: 2005-03-20 12:08:26
Selecting a good stockbroker is only part of being a wise investor. Once you've found a broker you can trust, it's time to create a good working relationship with that broker. The key to success is knowing your rights and making sure the stockbroker understands your wishes.
What You Should Know
Signing the New Account Agreement
Most full-service brokerage firms require customers to sign a new account agreement. Don't sign this agreement unless you understand it fully and agree with its terms and conditions. The information contained in the agreement may affect your legal rights regarding your account.
The new account agreement answers the following questions about your account:
Who controls the decision-making on your account? You will control the investment decisions made in your account unless you give your broker discretionary authority. This allows the broker to make investment decisions for you without consulting you first. Think carefully before giving this authority to your broker.
How much risk you want to take? You can choose to buy investments that fall within such risk categories as income (low risk), growth (medium risk), or aggressive growth (high risk) Be sure you understand these terms, and that your broker follows your wishes.
How you will pay for your security purchases? Most investors maintain a cash account that requires payment in full for each security purchase. You also have the riskier option of opening a margin account. Buying stocks "on margin" means borrowing money from the brokerage firm in order to pay for your investments.
How will disputes between you and your broker be resolved? The brokerage firm may ask you to sign a legally binding contract that requires you to arbitrate any future dispute between you and the firm or your broker. By signing this agreement, you give up the right to sue your broker in court. Federal law says that you don't have to sign this agreement.
Parting Advice
Never invest in a product that you don't fully understand. Even if you deal with a full-service broker, you have a responsibility to research each investment your broker recommends.
Keep good records of all your interactions with your broker. Keep copies of forms you sign and information you receive. Take notes during conversations with your broker. Check your account statement each month. Verify that the information in these statements is correct.
Be suspicious of anyone who tells you to invest quickly or you'll miss "a once-in-a-lifetime opportunity."
For More Information
The U.S. Securities and Exchange Commission (SEC)
The SEC offers consumer information on their Web site. The e-brochure "Invest Wisely: Advice From Your Security Industry Regulators," available online, gives additional information on how to protect yourself from aggressive brokers.
URL: http://www.sec.gov/investor/pubs/inws.htm
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