Signing a customer service agreement and setting up an account

After you figure out which broker you want to use to place
your order, get back in touch with that person.

The broker will ask you to fill out an application, called the
customer agreement. You can’t avoid filling out this application.
No broker can deal with you until you have provided
him or her with information about yourself and your financial
situation and goals.

From the start, the broker will need
accurate information to process stock purchases and, regrettably
but necessarily, to keep the IRS informed about all the
money you make from your investments.

The application requires you to provide some common personal
information such as your name, address, tax identification
number (social security number for most people),
current job (if employed), your bank, and an estimate of your
net worth.

If you are working with a
full-service broker, you need to
answer some broad questions about your investment goals
and the kinds of stocks you are considering for investment.
Some very personal questions about your finances and goals
may puzzle you or even turn you off, but brokers require this
information for good reasons. A full-service broker is required
by regulation to provide stock advice appropriate to the
client’s situation. This is often referred to as the “know your
customer” rule.

There are two other aspects of the customer agreement that
you should be aware of. The first is extensive and detailed
information about how you will pay for your purchases and
what happens if you are late in paying or don’t pay at all. This
part of the application is complex and legalistic.


I don’t want to exaggerate the complexity of the agreement
in general. It is long and detailed, but your broker should be
willing to answer your questions. The securities industry is
closely regulated, and you can be quite sure that the customer
agreement is not intended to deceive you. It just takes
patience to wade through it.

If you can’t figure out what some parts of it mean, be persistent
in asking your broker to explain the difficult parts to
you. This could be a
good test of whether you have picked
the right broker. You will have lots of questions all along the
way. Don’t deal with a broker who doesn’t have the time or
inclination to work with you.

Make sure that you read and understand the customer agreement
before you sign it. Don’t be rushed into signing it.
Almost all of the customer service agreements currently in use
require that you, the client, sign away your right to sue the
broker if you believe you actually have been wronged. You will
almost certainly be informed that if you have a dispute or
problem, you must take it to arbitration for resolution.

Some brokers, especially Internet-based brokers, may require
that when you establish your account with them, you also set
up an account with sufficient funds in it to cover anticipated
purchases. The brokerage then pays you interest on the funds
you deposit with them.

Placing an order

Placing an order for stocks is simple. You need to know just
two things: the name of the stock and the number of shares
you want to buy.

If you are dealing with a
live broker, the usual process is to
place your order by phone. If you are dealing with an
Internet broker, the transaction is made on your computer
screen and you provide the same information that you would
phone in to a broker.

Under federal regulations, the buyer must pay for stock purchases
within three business days. Brokers are very concerned
to see that you pay within this period because they can be
penalized or disciplined if payment deadlines are not
observed.

After transacting your order, your broker tells you what the
total charge is and sends you a written confirmation. (You
can also check the Web site for your filled order, or call your
broker on the phone.) The charge includes the price of the
shares, the broker’s commission, and usually some small fees.
You then have three business days to get your payment to the
broker. Both discount and full-service brokerages require that
money be in the account within three business days.
Many investors find it more convenient to have funds in a
money market fund at the brokerage before a trade is placed
in order to meet the three-day requirement.

Use an overnight delivery service to deliver your payment.
Sometimes full-service brokers provide clients with prepaid
overnight mailers to use in sending payments. These services
almost always deliver checks in a timely way, and they also
have the means to precisely track when and where your payment
was delivered.