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Doing Business with a Broker

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Discount brokerage. Internet/on-line brokerage. Doing Business with a Broker ... ( Tires, inc) Speculation. Major speculation movements. 1950s Uranium mining ... – PowerPoint PPT presentation

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Title: Doing Business with a Broker


1
Doing Business with a Broker
  • Engel Hecht Chapter 20

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 propertythey
    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 securitys
    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

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, contd
  • 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

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 brokers 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

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

51
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

52
Stock Screens
  • Value line
  • Standard and Poors Outlook
  • Yahoo
  • Brokers!

53
Stock Screens
  • Glitches
  • Bad data
  • History is no predictor of the future
  • Never let the screen make the final decision for
    you

54
Stock Screens
  • Once the screen has filtered out companies for
    you, you still need to evaluate the results

55
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

56
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

57
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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