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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

Doing Business with a Broker

Engel & Hecht Chapter 20

T. A. Sgritta

doing business with a broker2
Doing Business with a Broker
  • Full service brokerage
  • Discount brokerage
  • Internet/on-line brokerage
doing business with a broker3
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
doing business with a broker4
Doing Business with a Broker
  • Full service brokerage
    • Trained professionals to help
    • Council on investment program – fit to your needs
    • Research department
doing business with a broker5
Doing Business with a Broker
  • Consider “order taker” vs. “advisor”
doing business with a broker6
Doing Business with a Broker
  • Mutual funds companies that serve as brokers
doing business with a broker7
Doing Business with a Broker
  • Brokerage companies that provide in person “investment forums” in local areas.
doing business with a broker8
Doing Business with a Broker
  • Distrust of brokers
    • Salesmen
    • Conflict of interest
    • Commission on purchases or sales (churning)
    • Recent news
doing business with a broker9
Doing Business with a Broker
  • Churning-
    • Discretion accounts now are usually fixed fee, a % total value managed
doing business with a broker10
Doing Business with a Broker
  • Full service brokers
    • Know your client requirement
brokerage guidelines for you
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
brokerage guidelines
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!
doing business with a broker13
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
doing business with a broker14
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.
doing business with a broker15
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)
doing business with a broker16
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
doing business with a broker17
Doing Business with a Broker
  • Types of accounts
    • Individual
    • Joint
    • Trust
    • Uniform Gift to Minors
doing business with a broker18
Doing Business with a Broker
  • “Broker”
    • Actually a “registered representative”
    • “account executive”
    • “financial consultant”
doing business with a broker19
Doing Business with a Broker
  • If you are unhappy
    • Change people
    • Change firm
  • Key is having the same values or philosophy

--my experience

doing business with a broker20
Doing Business with a Broker
  • Make sure that your broker understands what you want
    • Kinross Gold Mines vs. Kindercare
doing business with a broker21
Doing Business with a Broker
  • Incentives or production credits
    • Provides incentive for broker to sell a particular investment
doing business with a broker22
Doing Business with a Broker
  • Remember, YOU are the decision maker. You can not blame the broker for a judgment mistake
doing business with a broker23
Doing Business with a Broker
  • Selling a stock
    • Street name
    • If certificates, sign, send and certify or register
doing business with a broker24
Doing Business with a Broker
  • Street name
    • Convenient
    • Can be transferred
    • Will receive mail from company
    • May be able to register with company separately
doing business with a broker25
Doing Business with a Broker
  • Easy to change brokers
    • May be a small fee
    • All processing automatically
doing business with a broker26
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
speculation

Speculation

Engel & Hecht Chapter 21

T. A. Sgritta

speculation28
Speculation
  • “Taking your chances”
  • Calculated risks
  • Speculating, not gambling
speculation29
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

speculation30
Speculation
  • Speculation = reasoning
  • Gambling = chance alone
speculation31
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.
speculation32
Speculation
  • Penny Stocks
    • Salt Lake City and other locations
    • Less than $1 per share
    • Little information
speculation33
Speculation
  • Penny stocks, cont’d
    • Innovation Chemical
    • Venture, Inc. (Tires, inc)
speculation34
Speculation
  • Major speculation movements
    • 1950s – Uranium mining
    • 1970s – McDonalds
    • 1990s – Dot com/Internet
speculation35
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
speculation36
Speculation
  • Part of the cause of the great depression
  • Discouraged by the government, hence the tax system
buying stocks on margin

Buying Stocks on Margin

Engel & Hecht Chapter 22

T. A. Sgritta

buying stocks on margin40
Buying Stocks on Margin
  • Buying stock on credit
  • Making a “down payment” then borrowing the rest
  • Currently the “down payment” is 50%
buying stocks on margin41
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
buying stocks on margin42
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
buying stocks on margin43
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
buying stocks on margin44
Buying Stocks on Margin
  • Margin allows you to double the gain or loss of the money you invest! In addition, you will pay interest
buying stocks on margin45
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.
buying stocks on margin46
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.
buying stocks on margin47
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.
buying stocks on margin48
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
stock screens

Stock Screens

Engel & Hecht Chapter 37

T. A. Sgritta

stock screens50
Stock Screens
  • Used to locate potential investments that meet your criteria!
stock screens51
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
stock screens52
Stock Screens
  • Value line
  • Standard and Poor’s Outlook
  • Yahoo
  • Brokers!
stock screens53
Stock Screens
  • Glitches
  • Bad data
  • “History is no predictor of the future”
  • Never let the screen make the final decision for you
stock screens54
Stock Screens
  • Once the screen has filtered out companies for you, you still need to evaluate the results
stock screens55
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
stock screens56
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
stock screens57
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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