For investing beginners, the task of picking a stock broker is anything but easy. There are so many online stock brokers, and so little help in figuring out which one is right for you. Wouldn’t it be nice if you could determine in advance whether the online stock broker you’ve chosen is the right one?
Good news: You can.
Well, you may not be able to tell everything about a stockbroker before you invest, but you can at least figure out if the broker’s been suspended for fraud violations or the firm has had numerous customer complaints.
The Financial Industry Regulatory Authority (FINRA) has a free online tool that lets you check out everything from what licenses your stockbroker holds to whether or not the brokerage firm has had disciplinary actions against it.
Called BrokerCheck, the online tool lets you search by both individual stockbroker and brokerage firm, simply input a name, and within a few seconds, you’ll get back a report that details the broker’s 10-year employment history, where the broker is licensed to do business, what licenses the broker holds, whether or not the broker has had disciplinary action against him, bankruptcies, lawsuits and more.
For brokerage houses, you can also find out if the firm is affiliated with any kind of bank or financial institution and which regulatory organizations the firm is registered with.
How often does a report come back with bad news?
“Only about one in 10 brokers has had any kind of disclosure event,” says Herb Perone, spokesperson for FINRA, which regulates more than 5,000 securities firms; more than 660,000 individual stockbrokers. “And not every disclosure event is something that would be a serious matter. But you can find out in a few seconds who you’re dealing with.”
Stock Market Beginner Guide – Red Flags to Look For
What are the red flags?
According to Perone, a broker who has moved frequently from firm to firm is a red flag. Obviously, if the broker has been suspended or fined for anything related to fraud or misrepresentation, that’s a red flag, too.
A word of caution…
…the larger the firm and the longer they’ve been around, the more likely there are to be items on the report.
Look carefully at what those items are. Is it a technical violation for filing a tax form late? Not such a big deal.
Is it a lawsuit for fraud or misrepresentation that’s been settled for millions of dollars? Now that’s a bigger problem.
What the BrokerCheck Report Won’t Tell You
BrokerCheck won’t tell you how good an individual broker’s advice is, how fast an online broker’s web site is or whether or not other investors are happy with that particular broker.
To answer those questions, you’ll have to look for signs of good customer service such fast email response times, extended telephone customer service hours, access to a branch and a vibrant and active online community. For more signs to watch out for, see “Your Online Broker: Are You Getting the Service You Deserve?”
More Basic Broker Questions to Ask
Other basic questions to ask before plunking down your hard-earned money with a stock broker include:
1. Are you a member of the Securities Investor Protection Corporation (SIPC)?
SIPC provides limited insurance in the event that brokerage firm becomes insolvent or bankrupt. But that coverage is only for SEC-registered securities (such as stocks, bonds and mutual funds) and cash up to $500,000 (including $100,000 for cash).
It does not protect against market losses. Futures contracts, annuities and commodities are not eligible for SIPC coverage.
2. What kind of accounts do you offer?
Virtually all brokers offer margin accounts, which allow you to borrow money from the brokerage firm to buy securities. You’ll pay interest on those funds, and the broker has a right to sell any security in your account without notice if the value of the securities in your account drops suddenly.
Some brokers automatically open a margin account for you without asking. If that’s the type of account you want, fine.
If not, make sure you ask for a cash account, through which you will pay for your stocks as soon as the transaction is settled.
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