Investment Advice

If you were to ask most investors how they decide which stocks to buy, the responses would range from mystical to hysterical. In general, most investors rely on three sources: stockbrokers, the media, and friends. Unfortunately, none of them have any "secret insights" to advise you on which are the best companies. You should also cast a suspicious eye over stock recommendations in newspapers, unless you are the only person with a subscription. USA Today's "Money" section covers stocks and virtually always recommends a "buy." At a rate of two per day, they could recommend the entire New York Stock Exchange within three years. The recommendations of friends and acquaintances should, obviously, be acted upon with care. Stockbrokers and other professionals in the business may be good sources of information but should not be considered infallible, nor do they possess special "inside information." Stockbrokers are paid for generating trading activity, not for picking stocks, so don't be afraid to ask questions before setting up an account.

  1. "How many other accounts do you handle?" Too many, and you may get lost in the shuffle, especially if you are one of the smaller accounts.
  2. "How long have you been a stockbroker?" Often, new accounts are given to new stockbrokers. Try to meet an established stockbroker.
  3. "May I speak to some of your other clients?" This is perhaps the best thing to do. It's the only way to get a reasonably reliable feel for this person's ability to give you good advice. If he won't refer you to any of his other clients, find a different broker. Consider whether you should be using a broker at all. If you don't feel confident in your stock selections without advice from a broker, you may be better off investing in mutual funds.

Discount Brokers The 1990s have seen significant movement from full-service brokers to full-service discount, to discount, and now to deep discount brokers. Consider using a discount or deep discount broker if you make your own investment decisions. Discount brokerage houses achieve substantial cost savings by hiring no analysts and dealing with customers through salaried employees rather than commission brokers. Thus, they cannot provide you with any guidance, but they do pass along most of their savings to you in substantially lower commissions when you trade. Discount brokerage firms provide the same service you get from conventional brokers with regard to trade execution and documentation, record keeping, and securities safekeeping. The following table lists several brokerage houses under each category:

Full-Service Full-Service Discount Discount Deep Discount/ Online
Paine-Webber Merrill Lynch Salomon Smith Barney Fidelity Charles Schwab Quick & Reilly TD Waterhouse

Before selecting any brokerage house, it's important to shop around. You need to decide the level of support and services you want, then find the firm that best meets your needs at the lowest cost. By contacting any of the above firms, you can receive information regarding all of their accounts and services offered. Because of the extreme competitiveness in the brokerage industry, coupled with advances in technology, the costs associated with trading stocks have been reduced substantially. Many of the deep discount firms can execute trades of one thousand shares or less for under $20.

Next: Finding a Broker

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