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Doing Business with a Broker Engel & Hecht Chapter 20 Doing Business with a Broker Full service brokerage Discount brokerage Internet/on-line brokerage Doing Business with a Broker Full service brokerage Stocks and bonds Mutual funds Central asset accounts Retirement accounts

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Doing Business with a Broker

Engel & Hecht Chapter 20

T. A. Sgritta


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Doing Business with a Broker

  • Full service brokerage

  • Discount brokerage

  • Internet/on-line brokerage


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Doing Business with a Broker

  • Full service brokerage

    • Stocks and bonds

    • Mutual funds

    • Central asset accounts

    • Retirement accounts

    • Commodities trading

    • Limited partnerships

    • Certificates of deposit


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Doing Business with a Broker

  • Full service brokerage

    • Trained professionals to help

    • Council on investment program – fit to your needs

    • Research department


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Doing Business with a Broker

  • Consider “order taker” vs. “advisor”


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Doing Business with a Broker

  • Mutual funds companies that serve as brokers


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Doing Business with a Broker

  • Brokerage companies that provide in person “investment forums” in local areas.


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Doing Business with a Broker

  • Distrust of brokers

    • Salesmen

    • Conflict of interest

    • Commission on purchases or sales (churning)

    • Recent news


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Doing Business with a Broker

  • Churning-

    • Discretion accounts now are usually fixed fee, a % total value managed


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Doing Business with a Broker

  • Full service brokers

    • Know your client requirement


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Brokerage Guidelines(for you)

  • Think!

  • Know your firm

  • Be skeptical of unsolicited offers

  • Watch high pressure sales

  • Doubt “get rich quick” ideas

  • Understand risk vs. reward


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Brokerage Guidelines

  • Get facts – no tips or rumors

  • Get on investment “You have to learn before you earn” (T.D. Waterhouse)

  • Understand written information or find someone who does

  • Consider investments as valuable property…they are!


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Doing Business with a Broker

  • Brokered Certificates of Deposit

    • Used by institutions to raise money for the institution

    • Pays the brokerage to raise the money; brokerage will insure that the money is there

    • Saves promotion cost and uncertainty of selling CDs on their own


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Doing Business with a Broker

  • Brokered Certificates of Deposit

    • Allows higher interest rates to buyer

    • Provides flexibility in selling or cashing CDs without penalty

    • Allows large amount rate on smaller amounts

  • Others: Check Money Magazine, Business Week, others.


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Doing Business with a Broker

  • Opening an account

    • Information on you, your tolerance to risk, your goals

  • You may trade right away

  • Settlements in 3 days

  • You will usually not get certificates

  • You will receive monthly (or other period) statements (snail or e-mail)


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Doing Business with a Broker

  • Margin accounts

    • Allows you to borrow up to 50% of security’s value

    • May be necessary for certain types of trading/accounts


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Doing Business with a Broker

  • Types of accounts

    • Individual

    • Joint

    • Trust

    • Uniform Gift to Minors


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Doing Business with a Broker

  • “Broker”

    • Actually a “registered representative”

    • “account executive”

    • “financial consultant”


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Doing Business with a Broker

  • If you are unhappy

    • Change people

    • Change firm

  • Key is having the same values or philosophy

    --my experience


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Doing Business with a Broker

  • Make sure that your broker understands what you want

    • Kinross Gold Mines vs. Kindercare


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Doing Business with a Broker

  • Incentives or production credits

    • Provides incentive for broker to sell a particular investment


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Doing Business with a Broker

  • Remember, YOU are the decision maker. You can not blame the broker for a judgment mistake


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Doing Business with a Broker

  • Selling a stock

    • Street name

    • If certificates, sign, send and certify or register


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Doing Business with a Broker

  • Street name

    • Convenient

    • Can be transferred

    • Will receive mail from company

    • May be able to register with company separately


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Doing Business with a Broker

  • Easy to change brokers

    • May be a small fee

    • All processing automatically


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Doing Business with a Broker

  • Brokerage safety

    • Liquidity protection

    • Great safety record

    • SIPC- Securities Investor Protection Corporation $500K minimum. Private insurance to $10M

    • Does not protect from investment risks


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Speculation

Engel & Hecht Chapter 21

T. A. Sgritta


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Speculation

  • “Taking your chances”

  • Calculated risks

  • Speculating, not gambling


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Speculation

  • “At any time, half of the people think that a market (stock) will go up, half think that it will go down. The resulting price is right in the middle”

    -T. A. Sgritta


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Speculation

  • Speculation = reasoning

  • Gambling = chance alone


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Speculation

  • Investor – puts money into a security expecting a given return or based on fundamentals, growth and/or dividends over the long term. (Wants to own the company)

  • Speculator – puts money into a security expecting that the short term demand will cause a quick gain in the security; invests for the security rather than the fundamentals behind it.


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Speculation

  • Penny Stocks

    • Salt Lake City and other locations

    • Less than $1 per share

    • Little information


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Speculation

  • Penny stocks, cont’d

    • Innovation Chemical

    • Venture, Inc. (Tires, inc)


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Speculation

  • Major speculation movements

    • 1950s – Uranium mining

    • 1970s – McDonalds

    • 1990s – Dot com/Internet


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Speculation

  • Short term vs. long term tax considerations

    • Dividends = marginal tax rate (usually)

    • Short term capital gains (> 1 yr.) = marginal tax rate

    • Long term capital gains (>1 yr.) = lower rate (max. 20% or 18%)

  • Marginal tax rate


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Speculation

  • Part of the cause of the great depression

  • Discouraged by the government, hence the tax system




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Buying Stocks on Margin

Engel & Hecht Chapter 22

T. A. Sgritta


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Buying Stocks on Margin

  • Buying stock on credit

  • Making a “down payment” then borrowing the rest

  • Currently the “down payment” is 50%


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Buying Stocks on Margin

  • Not for the nervous or poorly financed

  • Minimum deposit required

  • Stocks must sell for $5 or more per share

  • Most often used by speculators


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Buying Stocks on Margin

  • Regulation “T” has controlled the down payment varying from 40% to 100%

  • Current amount is 50% (since 1974)

  • During the depression, before regulation “T”, the down payment was almost nothing


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Buying Stocks on Margin

  • Interest is at the broker’s loan rate plus a percentage, depending on how much business you do and possibly other factors. This is over prime rate


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Buying Stocks on Margin

  • Margin allows you to double the gain or loss of the money you invest! In addition, you will pay interest


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Buying Stocks on Margin

  • Margin calls

    • When your equity falls below 25% of the investment – possibly more.

    • The additional cash must restore at least the 25% level, usually higher.


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Buying Stocks on Margin

  • Margin accounts are set on the value of the entire account, not just the one stock.

  • If a margin call is not answered, the underlying stock will be sold; the broker will keep the loan value first – the owner will get what remains, if anything.


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Buying Stocks on Margin

  • Day traders—

  • People who go in and out of a stock in one day; sometimes they do in and out more than one time per day.


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Buying Stocks on Margin

  • Had a major impact on the great depression –

  • Down payments from 0 to 20%

  • Profits often “rolled over” into more margin purchases


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Stock Screens

Engel & Hecht Chapter 37

T. A. Sgritta


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Stock Screens

  • Used to locate potential investments that meet your criteria!


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Stock Screens

  • Characteristics that may be of concern

    • Industry

    • P/E ratio

    • Dividend yield

    • Growth rate

    • Book value

    • Recent stock performance

    • Analysts forecasts

    • Cash flow

    • Stock movement or volatility


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Stock Screens

  • Value line

  • Standard and Poor’s Outlook

  • Yahoo

  • Brokers!


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Stock Screens

  • Glitches

  • Bad data

  • “History is no predictor of the future”

  • Never let the screen make the final decision for you


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Stock Screens

  • Once the screen has filtered out companies for you, you still need to evaluate the results


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Stock Screens

  • Common issues: Dividends

    • May be greater than the earnings

      • Common in REITs

      • May return part of equity, which has some favorable tax advantages

      • May indicate that the dividend will soon be reduced or eliminated


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Stock Screens

  • Common issues: P/E ratio

    • P/E ratio may be higher or lower than others in the same industry

      • May indicate better or poorer outlook for the company

      • May indicate a special situation

      • May indicate a good or bad buy


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Stock Screens

  • Common issues: stock is not available

    • Try other screens

    • There may not be enough volume to warrant inclusion in the list

    • You may not have the right name or symbol


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