Picking a Broker
by
Charles Lamson
If you plan to put your investment dollars into no-load mutual funds exclusively, then you are dismissed from this class. You do not need a broker to buy mutual funds. By the way, investing exclusively in mutual funds is a common and sound strategy.
However, many people want a more hands-on involvement with investing decisions and are interested in owning individual stocks as well as mutual funds. This is a fine strategy also.
The writer of this book being analyzed Alpha Teach yourself Investing, Ken Little, cautions against beginning investors owning just individual stocks. Mutual funds provide a diversity of investment that a beginning investor owning just individual stocks cannot achieve, especially on a modest investment budget.
With those cautions in mind, let us look at stockbrokers.
Why Do I Need a Broker?
Brokers provide the link between you and the stock market. Except under unusual circumstances, which we will look at in a later post, you need this link to buy stocks, bonds, and many other financial instruments, but not no-load mutual funds.
One of the reasons you do not need a broker to buy mutual funds is that they, for the most part, are bought from the mutual fund company. When you sell your mutual fund holdings, the mutual fund company buys them back from you. Thus there is no need for an intermediary.
When you buy stocks, you are purchasing the shares from another investor, not the company. There are some exceptions, but for the vast majority of trades, this is the case.
Matching the buyer with the seller is a function of a very sophisticated market system. Your access to that system is through a broker. Your broker has the network connections to execute simple transactions in a matter of seconds.
In addition to accessing the market, the following sections will cover some common considerations that apply to all brokers.
SIPC Insurance
Securities Investor Protection Corporation (SIPC) offers insurance to protect your account at a brokerage firm. Do not use a broker that is not covered by this protection.
SIPC insurance protects your assets in the event the brokerage you are using fails. Maximum coverage is $500,000 per account, although some firms purchase more. SIPC is like the FDIC protection of your bank deposits, although it is not backed by the federal government.
This insurance will not protect you against bad investment decisions or an errant stock market. SIPC insurance comes into play when a brokerage fails or substantial fraud is discovered. Regulators will contact account holders with claim information.
Consumer Protection
Consumers do have some protection against brokers who screw up their trades or accounts through neglect, incompetence, or fraud. The National Association of Securities Dealers (NASD) is the primary regulatory body for brokers.
You can contact the NASD through their Web sight: www.nasd.com or one of their district offices.
The NASD licenses individual brokers and brokerage firms. Individual brokers must pass a series of tests and a background check to be licensed to sell securities. There are several tests that cover different products.
The people who supervise brokers also must pass examinations, and brokerage firms are required to meet certain standards. If a firm fails to maintain its records and accounts or fails to adequately supervise its brokers, the firm could lose its ability to do business.
Consumers who have complaints against brokers or their firms can petition the NASD if their concerns are not properly addressed.
The NASD regularly yanks broker's licenses for a variety of infractions, and more rarely, closes down brokerage firms.
Stock Certificates
Some investors want to take possession of the certificates of stock they buy. It may give you some pleasure to drag the stock certificates out every once in awhile to look at them, but it is a bad idea to keep them in your possession.
Most brokers recommend you keep your stock in a "street name," which means they keep the certificates for you. In reality, there may not be an actual certificate unless you request it. Most transactions are recorded electronically.
If you insist on keeping possession of your certificates, put them in a safe deposit box at your bank. Lost certificates can be replaced, but it is a big headache and may cost money.
*ALPHA TEACH YOURSELF INVESTING IN 24 HOURS, 2000, KEN LITTLE, PGS. 111-113*
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