How to Select and Work With a Stock Broker

Investing in the stock market can be a complex business. The assistance of a good stockbroker can be an essential element in achieving success with investments and in the stock market. A stockbroker, also known as a registered representative, account executive, financial consultant, and securities salesperson, is an employee of a brokerage firm. Both the brokerage firm and stockbroker need to be licensed/registered by the state securities agency in each state in which stockbroker will be transacting business with customers.

The following information can increase your chances of establishing and maintaining a good relationship with a stockbroker, which will help you achieve your ultimate investment goals.

General Considerations

Before you invest, take the time to review your personal finances thoroughly. Decide upon investment goals and the amount of time you want funds invested after assessing all other personal obligations, including sufficient liquid assets. Understand your investment goals. Know the degree of risk you are willing to take. As a general rule, the greater the rate of return, the greater the risk.

Types of Stockbrokers

There are two general categories of brokerage firms: full-service and discount firms. A full-service firm and their stockbrokers recommend specific securities and give advice on securities to fit the investor's financial situation. A discount brokerage firm and their stockbrokers make securities purchases and sales at a lower commission but generally do not provide specific securities advice. You should choose the type that suite your needs.

Services of the Stockbroker:

A stockbroker offers many services to a client, including the following:

  • Know the client. To assist the investor, the stockbroker needs to learn "who" the investor is, his or her financial condition, and the needs and investment goals of the investor. This information is obtained through interviews and completion of an account form providing personal data and investment experience and preferences. The stockbroker must exercise due diligence to know the client so as to provide appropriate investment advice.
  • Keeps the client informed. A prospectus or other necessary information about the security being considered for purchase must be furnished by the stockbroker. The prospectus describes the company in which you are investing and how your money will be used. It should also set forth potential risks, fees, commissions and expenses, and how to receive a return of principal and any earnings. Read all information carefully before investing.
  • Purchases and confirms securities sales. The purchase or sale of securities is made by the stockbroker. Notice of confirmation, with details of price, proceeds and charges will be received in a few days after the transaction. If an investor requests delivery of a stock certificate, the stock certificate should arrive in a few weeks. The stockbroker should make no transaction in an investor's account without the investor's approval. If this happens, the stockbroker or the stockbroker's supervisor should be notified at once upon learning of it and cancellation requested of the transaction that was not approved.
  • Insurance protection. Most brokerage firms are members of the Securities Investor Protection Corporation (SIPC) which provides insurance for losses suffered in the event of financial difficulties and liquidation of a brokerage firm. SIPC is a quasi-governmental agency which provides each investor coverage up to $500,000 for loss of securities, which could include $100,000 for cash claims. This coverage does not extend to investor loss incurred from the loss in value of the securities that have been purchased, but from loss of cash or securities caused by the financial difficulties of the brokerage firm.
  • Offers special accounts. Additional services may be available in special accounts that give the stockbroker discretion to make trades for an investor without each trade being approved by the investor, known as discretionary accounts. Credit for the purchase of additional securities may also be provided by the use of margin accounts. Both types of accounts should be closely investigated and understood fully before using such services.

Choosing a Stockbroker

In selecting a stockbroker, the following suggestions can be helpful:

  1. Tips for Selection. Look for a well-trained specialist, as in the selection of an accountant of lawyer. Get recommendations from an accountant or lawyer or persons who have had successful relationships with a broker.
    Contact the Iowa Securities Bureau for the application/CRD information of the broker.
  2. Background. Brokerage firms have pamphlets describing their services, the securities available and exchanges where traded, purchase recommendations, and the costs and commission charges. Make certain that the services provided can accommodate your investment objectives.
  3. Qualities. You should feel at ease with your stockbroker since you will be providing personal information about your finances and investment goals. The stockbroker should listen to your expectations and understand your needs. Based on the information provided, the stockbroker can develop an investment strategy tailored to an investor's needs. Make sure you understand the investments that are recommended to you for purchase. A good stockbroker takes the time to explain how any security purchase fits your investment goals.

Working with the Stockbroker

As investment decisions are made with the help and advice of your stockbroker, keep these factors in mind:

  • It is your money being invested and you have the final decision of how and when the investment should or should not be made.
  • Read and understand the prospectus and other information given to you by your stockbroker.
  • Always understand what risks are involved? How does this security purchase help you reach your investment goals?
  • Any questions should be fully answered by your stockbroker. Continue to make contact until answers are obtained. Do not approve any purchase until your questions are satisfactorily answered.
  • Keep track of your investment through review of the quarterly and annual company report, and financial information in newspapers and periodicals. Review all confirmations and account statements you receive from the brokerage firm. Ask your stockbroker to explain anything you might not understand or answer any questions you might have from your review.

If you have a problem with your account or stockbroker, first contact the brokerage firm's office supervisor or manager and explain the problem. If the situation is not satisfactorily resolved, contact the Iowa Securities Bureau at 515/281-5705 or write to:

Iowa Securities Bureau
601 Locust St. - 4th Floor
Des Moines, IA 50309-3738

Additional investor education information is available upon request.

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