Wednesday, July 1, 2009

How to choose a broker - part 2?

In the first post that you can read here, I talked about the different types of broker and what type of broker would be appropriate for your situation.

Today I will tell you about how to go about creating a brokerage account.

At this point you have analyzed your situation according to the first post and have decided whether you want a discount broker or a full service broker. You have most probably chosen a broker according to the factors mentioned in part one.


How to set up the account?

When setting a new brokerage account it is important to follow the following steps.

1. The broker should understand clearly what your objectives are. You may simply want him to execute your orders as you will do all the thinking or research. However you may want him to do more than that. You may have some long term objectives such as retirement, your children studies, etc. These objectives should be clear to him as he will devise an investment plan for you that will enable you to attain these objectives.

2. The broker should understand what is the level of risk that you can bear. That is your risk tolerance. Read this post to understand and determine your risk tolerance. The broker should know this so that he can recommend the type of securities that fit the level of risk that you can bear.

3. The broker should know your complete financial situation.He should know your income so that he and you can determine the amount of money that you can invest monthly so that you can reach your objectives. However this may help him determine whether investing is appropriate for you. Remember if you have any debt, investing may be inappropriate for you. Read this post on the subject.

4. The power of the broker. If you are unable to make proper assessment of securities, then it is appropriate to let the broker assess the securities and then take the decisions for you. But this right should be in written form, and any decision should be such that it goes toward reaching your goals. A decision by the broker should never be such that it is against your interest or towards reaching your aim.

5. Every time you buy and a security it must be in the prescribed form that is recommended in the contract. If the contract states that orders to be in writing then only written orders will be accepted to buy or sell securities. Also every time a securities is bought or sold you must have written confirmation of it.

If trading is done electronically then you will not have a certificate but simply a notice. If trading is not electronically then the broker can send you the certificate or keep it at the brokerage firm if that is in your contract or agreement.

6. Make sure that everything that we have talked above is in writing and that you have a copy of the contract. You should keep a copy of this for future reference. Everything that the broker can do should be according to this contract.

Now that you have a broker learn how to buy stocks here.

Do you have any questions on choosing a broker? Do you want to share your experience with us?Please leave a comment.

How to start investing with a small amount of money?
Fees and commissions and how they affect your portfolio.
What is a stock?
How to be rich buying stocks!!
How and when dividends are paid?
what is a stock exchange?


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