Investing
money in stocks has grown in popularity among millions of Americans as
a way to increase their financial security and prosperity. Although
investing may bring positive benefits, one must realize that there will
always be risks involved. Therefore, it is necessary for consumers to
educate themselves before investing their money. After deciding to
invest, you must find someone you can trust with your money.
Unfortunately, not only is investing risky, choosing the right person
to invest with can be just as risky.
Selecting a Broker or a Brokerage Firm
Many consumer invest using the services of a broker. Brokers
may also be referred to as dealers, sales representatives,
stockbrokers, account executives, or registered representatives. It is
in your best interest to talk to potential salespeople at several
firms, and if possible meet with them face to face. Find out about the
disciplinary history of the brokerage firm and sales representative by
calling 1-800-289-9999, a toll free hotline operated by National
Association of Securities Dealers. The NASD will provide information on
the disciplinary history of a broker or a brokerage firm. Potential
investors should also make sure that brokers and brokerage firms are
licensed to operate by securities regulators in their state.
Understand how the sales representatives are paid. Ask for a copy of
the firm's commissions schedule. Firms usually pay based on the amount
of money invested and the number and the amount of the transactions in
the customer's account. Ask what fees and charges you will be required
to pay when opening, maintaining and closing an account.
Determine whether you need the service of a full service brokerage or a discounted brokerage. A full service firm provides buying and selling services, recommendations, research support and investment advice. A discounted
firm provides buying and selling services but does not personally make
recommendations regarding which securities to buy and sell.
Ask if the firm is a member of the Securities Investment Protection
Commission (SIPC), which provides some limited customer protection if a
brokerage firm becomes bankrupt. You may also want to find out if the
firm provides additional insurance. The SIPC does not insure against
losses attributed to market losses in your securities.
Telemarketing and the Internet
In recent years telemarketing and the Internet have expanded
as methods of selling securities and investments. However, consumers
should be especially alert about purchasing and trading through these
venues, since less information may be provided and true identities can
be easily concealed. When contacted by a broker, do not send money
based solely on the sales pitch. Ask for information on the broker, the
brokerage firm and the securities being sold to be sent to you. In
addition, keep in mind the following rules of thumb:
- Act like a watchdog. Keep an eye (and ear) out for anything that may seem suspicious.
- Question all advice. Do not be afraid to challenge the validity of the information you receive.
- Think before you act. Take the time to research the investment possibility, and decide if it is right for you.
- Do outside research by consulting other resources.
- Use good judgement. If something sounds to good to be true, then chances are it probably is.
Making an Investment
Brokerage firms generally require customers to sign a new
customer agreement. This agreement should be read over carefully before
signing because it contains information on your legal rights regarding
your account. Request to look over any account documentation prepared
for you by the broker. Remember to only sign the agreement if you
thoroughly understand and agree to its terms. Make sure verbal
agreements are put down on paper. The broker will ask for information
about your investment objectives and personal financial situation,
which may include your income, net worth and investment history. Be
accurate! The broker will rely on this information to make investment
recommendations to you. When completing a new account agreement you
will need to make three important decisions:
1. Who will control decision-making in the account?
You will control the decision-making in your account unless you
decide to hand over “discretionary authority” to your broker. Doing
this will give your salesperson the authority to make investment
decisions in your account without consulting you about the price,
amount, the type of security, or whether to buy or sell the investment.
2. How will you pay for your investment?
Most investors maintain a “cash account.” This type of account
requires payment in full for each security purchased. An alternative is
what is known as a margin account. Buying with a margin account means
that you borrow money from the brokerage firm to buy securities and
then pay interest on that loan. You will be required to sign a margin
agreement disclosing interest terms. If you buy any securities under a
margin agreement, the firm has authority to sell any security in your
account without your notice to cover any shortfall resulting from a
decline in the value of your securities. If the value of your account
is less than the outstanding loan, you are liable for the balance.
3. How much risk should you assume?
There is some risk in every investment. When opening an account, the
firm may request that you sign a contract agreeing to arbitrate any
possible future disputes which may arise between the firm and yourself.
Be aware that the federal securities laws do not require you to sign
the contract, but a company can choose not to accept you as a client if
you do not. If you decide to sign the contract, you give up the right
to sue your sales representative and/or firm in court.
You may have to register your securities either in your name or in
the name of your firm. Ask your sales representative about the
advantages and disadvantages of each arrangement. If you plan on
trading regularly you may prefer to register the securities in the name
of the brokerage firm to facilitate clearance, settlement, and dividend
payment.
Fraudulent Investments
According to the Federal Trade Commission, every year
Americans lose more than a billion dollars on investments which turn
out to be fraudulent. There are many companies which engage in
fraudulent activities for a short time, attract a large number of
investors and close down before they can be detected, only to reopen in
a new location under another name selling another investment scam.
Fraudulent sales representatives may mislead you by using phony
sales pitches. Potential investors can avoid losing money by listening
for clues of a phony sales pitch. Do not allow yourself to be swayed by
high-pressure sales tactics. Be wary of sales representatives who claim
that you must invest immediately or lose out on a once in a lifetime
offer. These sales representatives could want your money.
Watch out for the following, they may indicate illegal activity:
- A “ground floor opportunity” (once in a lifetime)
- Claims that no risk is involved
- Guarantees of big profits
- Lots of pressure to act now because the “market is moving”
- Recommendations from brokers based on “inside” or “confidential” information.
- An excessive number of transactions in your account or errors in record keeping.
- Unauthorized trades or adjustments to your account.
- Excessive pressure to change trading strategies.
Pre–Investment Questions
Determine if the Investment Opportunity is a Fraud
Before investing ask the following questions of yourself and your
investment solicitor. Beware of offers where the answers to any of the
following questions are vague, complicated or a definite “no.”
1. Is the company I'm investing in registered to sell securities?
Be wary of a company that has not registered its securities.
Companies that do register their securities must file annual reports
with securities regulators.
To get a broker's Central Registration Depository Record (CRD), call
the National Association of Securities Dealers (NASD) at
1-800-289-9999, or go on-line .
When you request a CRD have as much information as possible about your
broker such as: full name, firm and address. CRDs are free from the
NASD.
2. Is it “too late” if I don't invest my money now?
Be suspicious of sellers that give the impression that only a few
shares of stocks or partnership units are left. Many try to convince
you to wire or send money overnight, but remember that once you give
money, it may be gone forever.
3. Does the investment have a track record?
Many scam artists link their investment opportunity to similar “hot”
entrepreneurs, often using news stories about the success of legitimate
companies as bait. These stories can be completely irrelevant to your
investment purpose. Get the track record of the company you are
considering investing in and the people promoting the investment from
the Better Business Bureau or the securities regulators in your state.
4. Where is my money going?
Legitimate companies account for investors' money at all times.
Request written proof from the company about the amount of money going
to the actual purchase of the investment opportunity and how much is
going to commissions, marking costs, and promoters profits. The more
expenses, the fewer earnings for you.
5. Do I have an independent, knowledgeable, trustworthy person who can advise me?
Get an independent appraisal of the investment. Keep in mind that
the company's appraisal may be false. Try to speak to previous owners
or investors of the company. Discuss all investment plans or ideas with
an accountant or advisor you trust.
6. Do I know who I'm dealing with?
Try to find published information of the company in which you'd like
to invest including the registration of securities. Check with your state's securities agency
to see if the promoters are licensed to sell securities in your state.
Check with the law enforcement agencies and the Better Business Bureau
in the area in which these promoters are located.
7. Can I be certain the promoter is not lying to me?
Scam artists lie. Their success depends on having an airtight answer
for everything. They alter the costs and value of numerous worthless
investments. Many promise you profit in the “long run,” so that in the
“short run” you won't notice that your investment is a total bust.
8. Do I know when something is too good to be true?
Investing is always risky. However, you can make it a little less
risky if you demand written proof of profit projections and do not rely
solely on verbal projections.
If You Have a Problem or Need More Information
If you should
run into a problem with your salesperson or account, promptly speak to
their manager or the firm's compliance officer. Confirm your complaint
in writing, keep written records of all conversations, and ask for
written explanations.
There are numerous agencies that register, regulate, investigate, or
monitor companies and individuals offering investment opportunities. If
you should have any questions or wish to make a complaint, contact one
the following appropriate agencies.
- For a Reliability Report or to file a complaint
against a brokerage firm, visit the Better Business Bureau web site.
The BBB Serving Metropolitan New York can be reached in other ways. For
immediate assistance, call 212-533-6200. The charge is $3.80 plus
applicable tax, charged to a major credit card. Consumers can also call
1-900-225-5222. The charge is $3.80 for the first four minutes, and 95
cents per minute thereafter. The average call costs $3.80; the maximum
charge is $9.50. For free information or to file a complaint, consumers
may also write to 257 Park Avenue South, New York, NY 10010-7384.
- The National Association of Securities Dealers is a
regulatory organization that governs stock brokers. Reports on brokers
and brokerage firms can be obtained by calling 1-800-289-9999.
National Association of Securities Dealers
33 Whitehall Street
New York, NY 10004
www.nasdr.com
- The Federal Trade Commission is a law enforcement agency that investigates and prosecutes a variety of investment frauds.
Federal Trade Commission
Investment Fraud Project
Room 200, Bureau of Consumer Protection
Washington, D.C. 20580
- The New York State Attorney General's Office investigates and prosecutes cases of fraud.
For information about a particular broker or brokerage firm contact:
New York State Attorney General's Office
Bureau of Investor Protection
120 Broadway
New York, NY 10271
(212) 416-8200
For complaints contact:
New York State's Attorney General Office
Bureau of Consumer Frauds and Protection
120 Broadway
New York, NY 10271
(212) 416-8345
- The Commodity Futures Trading Commission regulates most firms that
deal in commodity futures markets. Futures trading markets include
petroleum products, U.S. government securities, foreign currencies,
options on futures contracts, and dealer options.
Commodity Futures Trading Commission
2033 K Street, N.W.
Washington, D.C. 20581
- The Securities and Exchange Commission is a federal agency that
regulates the public offer and sales of securities. Contact SEC
toll-free at 1-800-SEC-0330 or
U.S. Securities and Exchange Commission
7 World Trade Center
New York, NY 10048
See Division of Enforcement Complaint Center