Change text size

• Email This Article
• Print This Article
• Digg This
• Delicious
• Subscribe

The stock market holds no guarantees. For instance, when an investor buys a stock or options contract, it might decline in value and result in a loss. Ultimately, each individual investor is responsible for making wise investment decisions and avoiding losses. There is no one else to blame when it happens. At the same time, however, there are certain resources and sources of protection available to investors that are designed to ensure that brokerage firms treat them fairly and honestly. 

Securities Investor Protection [SIPC]

SIPC provides limited protection in case a broker goes bankrupt. In essence, it is protection of the customer in case of financial failure of the firm in which the customer’s funds are held. It does not protect the customer from a drop in the value of the securities held in the account. Every registered broker must be a member of SIPC unless it does business outside of the US or only sell mutual funds, annuities, and life insurance. Protection is limited to $500,000. In short, investors want to ensure that their broker is a member of SIPC.

Central Registration Depository [CRD]

The CRD is the electronic database of information compiled by the Public Disclosure Program of the National Association of Securities Dealers [NASD]. The CRD provides a means of obtaining information about individual advisors and brokers. 

Specifically, if you are a new investor seeking information about an individual broker or brokerage firm’s disciplinary history, you can perform a search using the CRD database on the NASD web site – www.nasdr.com. 

Checking the background of your broker is advisable. Avoid brokers with lengthy disciplinary histories. Also, in the process, make certain that the brokerage is registered with securities regulators. Never do business with an unlicensed securities brokerage house. If it goes out of business, there may be no way for you to recover your money.

The New Account Statement

The new account statement is your first introduction to a broker. Be honest when answering questions on the form. For instance, if you state in your new account agreement that your primary financial objectives are capital preservation as well as income, and later your advisor recommends highly speculative stocks for your investment portfolio, the advisor may be making inappropriate recommendations. If the speculative stocks fall dramatically in market value and you suffer sizable losses, the suitability of those investments may come into question. If you’ve stated on your new account statement that your financial objectives are conservative, you may have a case against the advisor for making inappropriate investment recommendations.

In addition, the new account statement will spell out your legal rights concerning your account with the broker. Never rely on verbal representation of the new account agreement, and take the time to read it. Take special care when considering three important factors:

1. Who is the decision maker? Discretionary authority gives someone else the permission to make decisions on your account without consulting with you. It is generally not a good idea to give discretionary authority to someone else on your account. 
2. Commissions or Fees? The new account agreement explains how the broker will be compensated. In addition, the terms of margin use are spelled out. If you buy stocks on margin, you are really borrowing money from the broker. The new account agreement will specify the interest rate on the loan. In addition, if you use margin and the securities in your portfolio drop significantly in value, you may be forced to add funds to the account. If you are not able to, the broker has the right to sell the securities in the account to repay the loan. By signing the new agreement, you are agreeing to the arrangement. 
3. What is your risk tolerance? The new account agreement gives the investor the opportunity to specify their overall investment objectives in terms of their tolerance for risk. For instance, what are your goals is trading with the broker: income, speculation, capital appreciation, etc.? Once you specify your objectives and risk tolerance, the broker will, in most cases, monitor your account to ensure you are not making investments outside of the parameters set forth in your new account statement.

When trading online in a self-directed account (where you are the sole decision maker), the risks of getting bad advice are obviously minimal. Nevertheless, the new account form is a document worth understanding before signing and funding the account.  

Confirmations

Confirmations of your trades are also important. Confirmations include the details of each specific trade – time, price, shares traded, commissions, etc. It makes sense to check the confirmations for accuracy. Review your account statements. Take care to ensure that confirmations are being sent to you on all of your trades and there are no unauthorized trades in your account. If there has been unauthorized trading or questionable behavior on the part of the broker, it might be time to file a complaint. For information on doing so, please see the article titled “Filing a Complaint.”


Frederic Ruffy
Senior Writer & Index Strategist
Optionetics.com ~ Your Options Education Site
Visit Fred Ruffy’s Forum

Investor Resources:

U.S Securities and Exchange Commission
Division of Market Regulation
450 Fifth Street, N.W.
Washington, D.C. 20549
(202) 942-0069
Email: marketreg@sec.gov
www.sec.gov

National Association of Securities Dealers, Inc.
1390 Pickard Drive
Rockville, MD 20850
(301) 590-6500
www.nasd.com

North American Securities Administrators Association, Inc.
10 G Street, N.E., Suite 170
Washington, D.C. 20002
(202) 737-0900
www.nasaa.org

Municipal Securities Rulemaking Board
1818 N Street, NW
Washington, DC 20036
(202) 223-9347
www.msrb.org

Securities Investor Protection Corporation
805 15th Street, N.W., Suite 800
Washington, D.C. 20005-2215
Tel: 202-371-8300
Fax: 202-371-6728
www.sipc.org

• Email This Article
• Print This Article
• Digg This
• Delicious
• Subscribe

Recent Articles by Frederic Ruffy, Optionetics.com

• January 23, 2009
  Closing Wrap-Up, January 23
• February 25, 2008
  Stock Talk: Visa Proposes Largest IPO Ever
• February 25, 2008
  Morning Watch, Feb. 25
• February 22, 2008
  Sentiment Journal: Boooooooo!
• February 22, 2008
  Morning Watch, Feb. 22