Doing Business with a Broker

1. Doing Business with a Broker Engel & Hecht Chapter 20 T. A. Sgritta

2. Doing Business with a Broker • Full service brokerage • Discount brokerage • Internet/on-line brokerage

3. 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

4. Doing Business with a Broker • Full service brokerage • Trained professionals to help • Council on investment program – fit to your needs • Research department

5. Doing Business with a Broker • Consider “order taker” vs. “advisor”

6. Doing Business with a Broker • Mutual funds companies that serve as brokers

7. Doing Business with a Broker • Brokerage companies that provide in person “investment forums” in local areas.

8. Doing Business with a Broker • Distrust of brokers • Salesmen • Conflict of interest • Commission on purchases or sales (churning) • Recent news

9. Doing Business with a Broker • Churning- • Discretion accounts now are usually fixed fee, a % total value managed

10. Doing Business with a Broker • Full service brokers • Know your client requirement

11. 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

12. 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!

13. 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

14. 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.

15. 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)

16. 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

17. Doing Business with a Broker • Types of accounts • Individual • Joint • Trust • Uniform Gift to Minors

18. Doing Business with a Broker • “Broker” • Actually a “registered representative” • “account executive” • “financial consultant”

19. Doing Business with a Broker • If you are unhappy • Change people • Change firm • Key is having the same values or philosophy --my experience

20. Doing Business with a Broker • Make sure that your broker understands what you want • Kinross Gold Mines vs. Kindercare

21. Doing Business with a Broker • Incentives or production credits • Provides incentive for broker to sell a particular investment

22. Doing Business with a Broker • Remember, YOU are the decision maker. You can not blame the broker for a judgment mistake

23. Doing Business with a Broker • Selling a stock • Street name • If certificates, sign, send and certify or register

24. Doing Business with a Broker • Street name • Convenient • Can be transferred • Will receive mail from company • May be able to register with company separately

25. Doing Business with a Broker • Easy to change brokers • May be a small fee • All processing automatically

26. 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

27. Speculation Engel & Hecht Chapter 21 T. A. Sgritta

28. Speculation • “Taking your chances” • Calculated risks • Speculating, not gambling

29. 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

30. Speculation • Speculation = reasoning • Gambling = chance alone

31. 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.

32. Speculation • Penny Stocks • Salt Lake City and other locations • Less than $1 per share • Little information

33. Speculation • Penny stocks, cont’d • Innovation Chemical • Venture, Inc. (Tires, inc)

34. Speculation • Major speculation movements • 1950s – Uranium mining • 1970s – McDonalds • 1990s – Dot com/Internet

35. 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

36. Speculation • Part of the cause of the great depression • Discouraged by the government, hence the tax system

37. Marginal Tax Rates

38. Marginal Tax Rates

39. Buying Stocks on Margin Engel & Hecht Chapter 22 T. A. Sgritta

40. Buying Stocks on Margin • Buying stock on credit • Making a “down payment” then borrowing the rest • Currently the “down payment” is 50%

41. 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

42. 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

43. 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

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

45. 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.

46. 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.

47. 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.

48. 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

49. Stock Screens Engel & Hecht Chapter 37 T. A. Sgritta

50. Stock Screens • Used to locate potential investments that meet your criteria!