(The following is a DFI Your Money Matters program brochure reproduction)
More than 47 million Americans invest in securities and every one of them had to make the same basic decisions to get started. For example, there are many ways of investingin bank certificates of deposit, in mutual funds purchased directly from an investment company, and in stocks and bonds purchased through a brokerage firm. Even though you may be starting small, there may come a time when your total investments will represent a sizable amount of money. You should be clear about your investment goals and take at least as much care investigating and choosing someone to handle you investments as you would when buying a home or an automobile.
Choosing a stockbroker to handle your investments requires more than looking up a name in the yellow pages. This brochure contains information on how to select a stockbroker, what kinds of services you can expect from a stockbroker, and what to consider before making investments in any securities.
Your first step should be to determine what you want to accomplish through your investments. Do you want capital growth (increase in the value of your investment); income (periodic cash return); profits through speculation (by frequent trading or trading in high-risk securities); safety of principal (stability of the value of the investment); or some combination of these? These terms are commonly called "investment goals" or "investment objectives."
There are many kinds of investment objectives, although brokerage firms may use different names for the same goals. Only you, the customer, can determine what goals are right for you. Four basic investment objectives are:
Safety very conservative investment with little risk of loss of your investment dollars, while perhaps providing some income benefits.
Income investment for receiving regular income payments. Tax-free income is a common consideration. However, the market value of income securities may rise and fall as interest and dividend rates on newly-issued investments change. For example, an existing bond bearing 5% annual interest will decrease in market value if new bonds currently being issued bear a 7% interest rate; in contrast, the existing 5% bond will increase in market value if newly-issued bonds bear a 3% interest rate.
Growth investment for a long-term increase in market value. Because growth securities are more likely to increase in market value than are income and safety securities, they also carry a higher risk of decreasing in market value. Growth investments generally provide little or no dividend income.
Speculation investment for price appreciation in short-term trading. Speculation carries a high risk of losing part or even all of your investment. There is also a greater possibility of higher and/or faster market appreciation. Usually, little or no dividend or interest income is derived from investing in these securities.
These four basic objectives can be refined or combined so that they more accurately express your investment goals. For example, you can choose to have both income and growth securities in your investment portfolio.
When deciding what your investment objectives are, remember that the more money you want to make, the more risk you must be willing to take with your investment dollars. When evaluating risk, you should also consider the length of time you can afford to leave the funds invested, the proportion of your assets you can commit to securities investments, and how much you can afford to lose.
Although securities may be part of a suitable investment program, potential investors should make sure that they are protected against a financial crisis before they begin; for example, by having adequate life insurance and bank savings. Here are some things to consider before you invest:
1 DO have a money reserve set aside for emergencies before you invest.
2 DO remember that there is risk in any investment and select your securities according to how much risk you can afford to assume.
3 DO be sure you have knowledge, before you buy, of the terms, characteristics, and quality of the investments that interest you.
4 DO ask for facts and advice from a licensed salesperson and be honest with your salesperson about your finances, goals, and investment knowledge.
5 DO be selective. There is no such thing as investing in the market as a whole. Choose very carefully securities that fit your investment objectives.
6 DO understand the type of order your salesperson proposes to place for you.
7 DO have a sensible investment plan that you and your salesperson fully understand and follow.
8 DO NOT invest in common or preferred stocks, mutual funds, or long-term bonds with money you may need on short notice.
9 DO NOT disregard quality for the lure of higher yield unless you are prepared to take the risk.
10 DO NOT invest in a company merely because it is in a successful industry. Each company should be considered on its own merits.
11 DO NOT invest on the basis of tips or rumors. They are usually not trustworthy.
12 DO NOT be afraid to say NO to the suggestions of a salesperson if you are not convinced the investments are right for you or if you do not understand them completely. Ask your salesperson to explain further.
The Search Securities can be bought and sold through hundreds of different brokerage firms. Many brokerage firms have offices in Wisconsin and many more conduct their business from outside the state by mail and over the telephone. Wherever the firm or salesperson is located, all brokerage firms and their sales agents doing business with the public in Wisconsin are required to be licensed by the Wisconsin Department of Financial Institutions. Although licensing does not guarantee good performance, it does provide to the Department the opportunity to review applicants qualifications and compliance with operational and sales practice regulations.
Individual salespersons are called by many names: agents, registered representatives, account executives, financial consultants, and so forth. Although their titles may differ, their functions and knowledge requirements are the same. The State of Wisconsin requires securities agents to take and pass a number of examinations that test the agents knowledge of securities products, sales practices, and state and federal securities laws. Passing an examination or using an impressive-sounding title does not insure a particular level of investment expertise, however.
Brokerage firms can be classified into three basic types: full service, discount, and limited products.
A full-service brokerage firm will provide you with the most complete package of investment services. It can provide individual service by an assigned salesperson, make recommendations on securities, provide research materials, and offer a wide variety of investment options. It usually has a varying commission schedule based on the type of security and the amount of the investment. A full-service firm is often the best choice for those who are just getting into the market or who do not have the time or desire to do their own investment research.
A discount brokerage firm can also provide you with access to a wide variety of securities products but, in most cases, you are not assigned to one salesperson. Salespersons at a discount brokerage firm are usually order-takers only and thus not allowed to give any advice, make recommendations, or provide research materials. Because of the limited service provided by such a firm, it can offer large discounts from full-service commission rates. A discount firm which provides no investment advice should be used only by those persons who are familiar with investing in securities and are capable of doing their own investment research.
Some brokerage firms specialize in a limited number of securities products. For example, some firms may sell only mutual funds or limited partnerships or certain types of bonds. Therefore, the recommendations made by the salespersons will be geared toward the specialized type of security the brokerage firm offers. Commissions will vary depending on the individual brokerage firm.
Most salespersons are paid a part of the sales commission charged by their brokerage firm on securities transactions. There may be other fees for special transactions such as exchange offers, bond redemptions, stock transfers, custody charges (charges for holding your securities if your account of commissions each year), and charges for opening, maintaining, and closing IRA accounts.
Background Information One of the best ways to begin your search for a broker is to ask friends or family members about their investment experiences and if they would recommend a particular firm or salesperson.
The Wisconsin Department of Financial Institutions can tell you when the firm and the salesperson were licensed in Wisconsin, how long they have been in the securities business, if any complaints have been filed with the Department by Wisconsin investors, and if any state or federal regulatory or law enforcement agency has taken any disciplinary action against them. To check on a firm or salesperson, call 1-800-47-CHECK and ask for a licensing background check. The Department cannot, however, tell you if any firm or salesperson is "reputable," nor can it make any recommendations.
Disciplinary information on firms and salespersons is also available from the National Association of Securities Dealers, Inc. by calling 1-800-289-9999.
The Better Business Bureau may have information as well.
Opening an Account After you decide which brokerage firm and salesperson to work with, the salesperson will prepare a number of forms to open your account. The first is a new account form. This lists your name, address, social security number, employment information, credit references, investment experience, net worth, annual income, and investment objectives. The form may also include information relating to automated money-fund purchases, transfer instructions, and check requisitions. Many firms will not require you to sign this form. However, the salesperson must sign the form and have it reviewed and approved by the branch manager. The brokerage firm must then provide a copy of the completed form to you within 20 days of your opening the account. You should review the form carefully for accuracy and request that the form be corrected if necessary, and that a corrected copy be sent to you.
Many firms are now combining a number of forms to simplify their recordkeeping. You may find other forms combined with the new account form: for instance, a W-9 form, a customer agreement, a joint account agreement, a margin agreement.
The W-9 form relates to federal tax withholding on all dividends, interest, and proceeds of securities sales or redemptions collected by the brokerage firm for your account.
The customer agreement establishes the rules by which the account will be operatedfor example, when payments are due. It will also likely include an "arbitration clause" which is a requirement that any dispute between the customer and the brokerage firm be settled by arbitration rather than in court. You should read every agreement carefully before you sign.
A joint account agreement sets forth the division of ownership of an account created in the name of two or more individuals.
A margin agreement describes the rules relating to purchasing securities on credit.
Also, depending on the type of account or the type of trading you expect to engage in, you may have to sign other specialized forms such as an option agreement or a trading authorization. Most brokerage firms will allow trading activity to begin before receiving the completed and signed agreements. However, the brokerage firm will restrict further activity in your account if you do not return the completed forms by the deadline imposed by the firm. In any event, Wisconsin law requires the brokerage firm to provide you with a copy of each agreement within 20 days of the date you signed it.
Some salespersons may provide you with brochures that describe their firms services. However, they must also disclose to you in writing any fee for retirement accounts, for holding securities in your account, and for special services such as bond redemptions, exchanges, and transfers.
Brokerage firms may hold customer securities in "street name," which means that the securities are registered in the name of the brokerage firm. Having securities held in street name makes it easier to sell securities for your account and provides a way to safeguard your securities without the expense of a safe deposit box. However, you should also be aware that you cannot participate in a dividend reinvestment program for street name shares and that many brokerage firms are beginning to levy a custody charge on accounts not generating a minimum amount of commissions each year. If you do not intend to trade frequently, you should be sure you know how much the custody fee will be. To avoid any custody fees, you may want to have the certificates delivered to you instead.
Suitability State and federal securities laws require salespersons to make a reasonable inquiry about a potential customers financial condition and investment objectives and to seek any other information which would provide the salesperson with sufficient knowledge to make suitable investment recommendations. The agent must collect this information to enable him or her to recommend an investment strategy compatible with the investors goals and other pertinent factors. Wisconsin law further requires that each salesperson learn the customers net worth, annual income, and investment objectives to record this information on the customer new account form.
Annual income refers to how much money you earn during the year, including spousal income if the account will be a joint account. Net worth is the value of all cash, bank accounts, securities (all sometimes referred to as liquid assets), property, and other assets of saleable value, less total indebtedness.
This information is vital to your salesperson in helping you to assess your ability to accept varying levels of risk and in determining the suitability of recommendations. You do have the right to refuse to provide this information but you should understand that by doing so, you restrict the salespersons ability to make recommendations regarding your investment activity.
Having the financial capability to engage in a particular investment strategy is not the only basis for determining its suitability. You should also understand the nature of the securities being recommended and be able to evaluate how their performance may affect you. Investing in any security includes an element of risk. You need to determine the degree of risk that is acceptable to you in exchange for the hoped-for return. The answer lies in your assessment of your "human capital," an intangible but important consideration when deciding on an investment strategy.
Human capital includes such things as your future earning capacity as you progress in your career, how many income-earning years you have ahead of you, what future financial commitments you can expect (for example, having children, paying for college educations, buying a home, and so forth), what your retirement needs will be, and any personal needs.
Your income, net worth, and human capital affect the types of risks you are willing and able to accept and how much of your assets you are willing to expose to risk at a given time.
Transactions When you discuss a purchase or sale with your salesperson, remember that unless you have given the salesperson specific written authority to use his or her own discretion in making investment decisions for your account, each purchase and sale in your account requires your prior specific authorization. Once you have given an order to your agent, even orally, it becomes a binding contract. If you change your mind for any reason, and the trade has already been executed, the chances are slim that the salesperson will be able to cancel it. You are then responsible for payment for securities purchased or delivery of securities sold. If you fail to complete the transaction, the brokerage firm will sell out or buy back the security at the then-current market price and you will be liable for any loss.
When a transaction is made for your account, two dates are relevant. "Trade date" is the date the purchase or sale was executed. "Settlement date" is the date the funds or certificates must be received by the brokerage firm and the date on which the firms representing the buyer and seller exchange cash and securities to "settle" the trade. It is also the first day that proceeds of sales of securities are available to be paid to you. Normal settlement is currently three business days after trade date. Option transactions and U.S. government securities transactions generally settle on the next business day following trade date.
According to Federal Reserve regulations, payment for purchases is due by settlement date; however, in most instances, the regulations provide a two-day grace period. The brokerage firm may apply for an extension of time for such payment (up to five additional business days) if the reason for the delay meets the applicable extension criteria.
If an extension is not granted or if funds are not received by the expiration of the extension, the brokerage firm is required to sell sufficient securities in the account to cover the amount owed. This can be done without specific authorization of the customer and may include selling not only the security purchased, but also any other securities in the account if necessary.
Upon settlement, the proceeds of a sale will be available to you if the securities were in street name or you delivered certificates to your brokerage firm in "good delivery form" (properly signed and not requiring any legal papers, such as estate papers or residency documents).
You should never place with one brokerage firm, an order to sell a security
that you have on deposit with another brokerage firm. You may be unable to make delivery of the securities to the selling brokerage firm in the allotted time. You would thus be required by the selling brokerage firm to repurchase an equal number of such securities, at the then-current market price, in order to cover the sale. You would also be liable for any commissions, fees, or losses incurred.
Always inform your salesperson of the location of your securities before placing an order to sell. Your brokerage firm may have procedures that will allow the sale to take place immediately, but those procedures must be started before the order is entered.
If within a week after settlement date you do not receive payment for securities sold, check with your salesperson. Sometimes there are problems with the transfer or in the accounting which are not your salespersons fault. If you are not satisfied with the answer you get from your salesperson or his or her supervisor, contact the Wisconsin DFI.
You should receive a written "confirmation" of each trade executed for your account. A confirmation is not a bill. Brokerage firms do not issue bills; payment or delivery is due for a transaction on settlement date whether you receive the confirmation or not. You should contact your salesperson to find out what you owe if you have not received the confirmation.
Through the Years You will receive a monthly or quarterly statement from the brokerage firm which shows all the trades and other activity in your account. If there were no trades in your account during a particular month, you may not receive a statement for that month. Trades are usually listed by settlement date. Other entries, such as for funds received or securities delivered, are listed by the date on which they actually occurred. You should review your account statement carefully, question anything that does not look quite right, and take notes of the explanations given to you. Be sure to keep the statements and your notes in case any problems arise so that you will have them handy as a ready reference source.
Should the brokerage firm you are dealing with cease to do business or experience a financial failure, the Securities Investor Protection Corporation (SIPC) will often take control and liquidate the firm. Arrangements will be made to transfer customer accounts to another brokerage firm, deliver customer funds and securities directly to the customers, or replace any securities or funds up to a value of $400,000 in securities, and $100,000 in cash, per account. However, SIPC does not insure against losses resulting from trading or poor recommendations.
There are many more aspects to dealing with a stockbroker than we can cover here. Other brochures available from the Wisconsin Department of Financial Institutions can provide additional information on a variety of specific subjects. However, the key points to remember before Getting Started in securities are:
- Carefully assess your investment needs;
- Do some checking before deciding on a brokerage firm and a salesperson; and
- Maintain communication with your salesperson so each of you knows and understands what is expected from the relationship.
If problems develop, try to work them out with the salesperson, the branch manager, or the brokerage firms compliance officer.
About the State of Wisconsin Department of Financial Institutions
DFI Provides financial education through our Your Money Matters program including:
- Speakers for meetings and seminars, conventions, professional and civic groups, high school and college classes, and other audiences of 30 or more.
- Presentations for the public on current financial topics.
- Education centers featuring on-line access.
- Informational brochures on Investing, Credit, Financing, and Entrepreneurship.
DFI regulates the following:
Division of Banking regulatory responsibility for state-chartered banks, mortgage bankers and licensed financial service providers.
Division of Corporate and Consumer Services- responsible for the Uniform Commercial Code (UCC) filings, and maintaining the state-wide data base of UCC lien filings for secured transactions, and for organizing or licensing domestic and foreign corporations, limited partnerships, limited liability companies, and limited liability partnerships.
Office of Credit Unions- supervision of savings and loans, and savings banks.
Division of Securities- regulates offerings of securities including mutual funds; franchise offerings; broker dealers and securities agents; investment advises and investment adviser representatives.
Wisconsin Consumer Act- Counsels consumers and merchants regarding their rights and responsibilites under the Act, which governs consumer credit transactions and the collection of consumer debt.
More About DFI
DFI is a self-supporting agency funded by fees charged to those it regulates.
DFI is here to serve you! Visit us at:
201 West Washington Avenue,
Office hours are Monday through Friday, 7;45 a.m. to 4:30 p.m.
DFI To learn more about us visit our Website at:
DFI Department of Financial Institutions
201 West Washington Avenue
Madison, WI 53703
Office of the Secretary 608-264-7800
Mortgage Banking 608-261-7578
Credit Unions 608-261-9543
Savings Institutions 608-261-7578
Uniform Commercial Codes 608-261-9548
Wisconsin Consumer Act 608-264-7969
Your Money Matters
Financial Education 608-261-9555
You can file a complaint by writing to:
Department of Financial Institutions
Division of Securities
PO BOX 1768
Madison, WI 53701-1768
Above all, the most important thing to remember is investigate before you invest!