- What should I do before I meet a professional?
- What kind of help can my bank provide?
- What are brokers and do I need one?
- How do I become an investor?
- How do I open a Brokerage Account?
- How much am I really responsible for?
- Can I get help if I don't speak English well?
- Questions to Ask a Financial Advisor
- How will I know who is right for me?
- What do titles like CPA, PFA and others mean?
- How can I check on my financial advisor’s background and credibility?
- How do I know if I’m getting the best service from an advisor that I’m already working with?
- What if I want to change financial advisors?
How Do I Open a Brokerage Account?
You can open a brokerage account in person or online. You will be asked to sign a new account agreement. Review all information in the agreement, ask questions and do not sign anything unless you understand and agree with what you are signing. If you are told something that is not in the agreement you should not rely on those verbal statements. Keep copies of any documentation that is prepared for you.
The broker will ask you about your personal financial situation, investment goals, and tolerance for risk. If a broker tries to sell you investments before asking you these questions, then you should be concerned. He or she may not be interested in suggesting investments to you that meet your financial needs, goals and plans.
The Securities and Exchange Commission (SEC) notes that brokerage account agreements require you to make three critical decisions:
Who will make the final decisions about what you buy and sell in your account? Unless you give “discretionary authority” to your broker, YOU will have the final say on investment decisions. Discretionary authority means that you would allow your broker to invest your money without consulting you—which means you are turning control of your money over to another person which is probably not a good idea.
How will you pay for your investments? Most investors have a “cash” account that requires the investor to pay in full for each investment purchase. A “margin” account allows you to buy investments by borrowing money from your broker for a portion of the purchase. When you buy stocks on margin you can be forced to pay back the entire margin loan all at one time and immediately if the price of the stock drops suddenly. The brokerage firm can also immediately sell any security in your account without notice to you and you still may owe a substantial amount of money even after every security in your account is sold. Moreover, margin accounts allow for the brokerage firm to lend out securities in your account without telling you or compensating you. For all these reasons, beginning investors generally should not have a “margin” account but stick with a “cash” account.
How much risk should you assume? A new account agreement requires you to be clear on your investment goals so that you can also be clear as to how much risk you are willing to take vis a vis the chance you will lose the money you are investing. Make sure you understand what the different risk and goal related words that the agreement uses mean (for example if you are asked to choose between investments that might provide “growth” and investments that might provide “aggressive growth”) and how one term differs from another. You are not only asked to choose the risk levels for investment products you might buy; you also have to make sure that whatever products are suggested actually fit the profile or category of risk that you are comfortable with.
If the brokerage firm asks you to sign a legally binding contract to use an arbitration process to settle any dispute between you and the firm or the sales representative, you should understand that if you sign it, you are agreeing to give you the right to sue your sales representative and firm in court.