Buying bonds is a lot like buying stocks. You just get in touch
with your broker, set up your account, and place your order.
If you already have an account with a
broker, whether landbased
or Internet, you shouldn’t have to fill out any additional
paperwork to buy a bond. The one account should
allow you to purchase stocks, bonds, and mutual funds as
well. Unless you are going to concentrate most of your investment
money in bonds, there’s usually no need to select a broker
who specializes in this kind of security.
You do, of course, have to pay for any bonds that you purchase.
You pay in the same way and timeframe as with stocks
(within three days of placing the buying order). Fortunately,
you don’t get charged much in the way of miscellaneous fees
when you buy bonds. These fees vary with the brokerage, but
in almost all cases they are very small (sometimes less than
$1 per transaction).
Commissions on bonds are about in the same range as those
for stocks — high with full-service brokers and lower with
discount and Internet brokers. Because investors show much
less interest in bonds, competition has not yet brought bond
commissions down to the very low levels that are paid for
stock transactions on the Internet.
The Internet doesn’t have many Web sites devoted to information
about investing in bonds. There is, however, one outstanding
site that more than makes up for the lack of
numbers: the Bond Market Association site at
www.investinginbonds.com. This Web site offers
advice on buying bonds, explains how bonds fit into a balanced
portfolio, and answers just about any question you
might have about bonds.
Bonds trade on a type of OTC market, and most trade without
securities symbols you see on securities that are traded on
an organized stock exchange, like the New York Stock
Exchange. Therefore, the investor has to tell the broker the type
(tax or tax-free), how long (time) the investor will hold the
bond, and state the investor’s risk parameters. Most brokerages
(discount and full-service) maintain a bond-trading department
in order to meet varied customer needs and preferences.
Saturday, June 30, 2007
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.
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.
Buying Stocks
The most common way to buy stock is to deal with a broker,
which can be either land-based (the kind with folks who
work in offices downtown) or in cyberspace (accessed via the
Internet).
Choosing a broker
The first big choice you need to make is deciding which kind
of broker you are going to deal with: full-service or discount.
If you believe that you are going to need a
lot of advice, a
full-service broker will probably better serve you. If you are
making your own decisions about stocks, by all means use a
discount broker. Discount brokers charge much lower commissions
than do full-service brokers.
Many discount brokers have both electronic and “bricks and
mortar” systems of operation. If you discount broker is on
the Web, you can enter your order electronically and receive
confirmation the same way. Some discount brokers have
branch offices where you can sit down with a broker and discuss
your investment objectives and goals.
Either way, you can obtain commission costs and product
information by visiting a discount broker’s Web site, by calling
their phone number (usually toll-free), or by stopping by
the branch office.
In addition to discount commissions, most discount brokers
also offer other products and services, such as mutual funds,
IRAs, research reports, bonds, and others.
Full-service brokers are paid by the commissions they earn
on buying and selling stocks and other products for clients.
This arrangement can lead to a tendency on their part to recommend
frequent trading of stocks rather than pursuing a
“buy and hold” strategy. This advice can put their interests
in conflict with yours. So if you use a full-service broker,
avoid miscommunication by making sure that she or he
knows that you are not interested in frequent trading but in
buying good stocks and holding them for the long term.
You may be better off if you find a good financial advisor to
guide you on stock purchases and perhaps on other aspects
of your financial program. These advisors often work for a
flat fee on an hourly basis.
If you decide to work with a
full-service broker, you have to
choose a broker one way or another. How do you make this
choice? You probably select a broker pretty much the same
way you select a doctor, a lawyer, or other professional.
You ask people for recommendations. You look in the phone
book. You see ads in the paper or on TV. After you acquire a
list of potential brokers, take the process at least one step further.
After you get several names, make some calls.
Call their offices and ask about account minimums and commission
costs. Find out how convenient their services may
be. If you’re put on hold for longer than a few minutes or the
broker asks to call you back but never does, he or she may
not be the broker for you.
Narrow your choices down to two or three brokers and then
interview each of them.
Sooner or later, you will get on a
mailing list that is sold to
brokers. Then you start getting unsolicited calls. All brokers
have a good line and can be very persuasive. My recommendation:
Find a financial planner in your area and deal with
her or him face to face. A good financial planner whom you
trust can be a very helpful to you as you work to achieve your
financial goals.
which can be either land-based (the kind with folks who
work in offices downtown) or in cyberspace (accessed via the
Internet).
Choosing a broker
The first big choice you need to make is deciding which kind
of broker you are going to deal with: full-service or discount.
If you believe that you are going to need a
lot of advice, a
full-service broker will probably better serve you. If you are
making your own decisions about stocks, by all means use a
discount broker. Discount brokers charge much lower commissions
than do full-service brokers.
Many discount brokers have both electronic and “bricks and
mortar” systems of operation. If you discount broker is on
the Web, you can enter your order electronically and receive
confirmation the same way. Some discount brokers have
branch offices where you can sit down with a broker and discuss
your investment objectives and goals.
Either way, you can obtain commission costs and product
information by visiting a discount broker’s Web site, by calling
their phone number (usually toll-free), or by stopping by
the branch office.
In addition to discount commissions, most discount brokers
also offer other products and services, such as mutual funds,
IRAs, research reports, bonds, and others.
Full-service brokers are paid by the commissions they earn
on buying and selling stocks and other products for clients.
This arrangement can lead to a tendency on their part to recommend
frequent trading of stocks rather than pursuing a
“buy and hold” strategy. This advice can put their interests
in conflict with yours. So if you use a full-service broker,
avoid miscommunication by making sure that she or he
knows that you are not interested in frequent trading but in
buying good stocks and holding them for the long term.
You may be better off if you find a good financial advisor to
guide you on stock purchases and perhaps on other aspects
of your financial program. These advisors often work for a
flat fee on an hourly basis.
If you decide to work with a
full-service broker, you have to
choose a broker one way or another. How do you make this
choice? You probably select a broker pretty much the same
way you select a doctor, a lawyer, or other professional.
You ask people for recommendations. You look in the phone
book. You see ads in the paper or on TV. After you acquire a
list of potential brokers, take the process at least one step further.
After you get several names, make some calls.
Call their offices and ask about account minimums and commission
costs. Find out how convenient their services may
be. If you’re put on hold for longer than a few minutes or the
broker asks to call you back but never does, he or she may
not be the broker for you.
Narrow your choices down to two or three brokers and then
interview each of them.
Sooner or later, you will get on a
mailing list that is sold to
brokers. Then you start getting unsolicited calls. All brokers
have a good line and can be very persuasive. My recommendation:
Find a financial planner in your area and deal with
her or him face to face. A good financial planner whom you
trust can be a very helpful to you as you work to achieve your
financial goals.
Comparing CDs
When you shop around for a CD, ask the following questions.
As with the other investments I discuss in this chapter,
talk to at least three different institutions before you take
the plunge.
What’s the minimum deposit to open the account?
Usually this amount is $500.
What’s the interest rate? What is the compounded
annual yield? Interest is the percent that the bank pays
you for your allowing them to keep your money. The
rate of interest is also called yield. Compounded annual
yield comes into play if a bank is paying interest monthly,
for example. Once the first month’s interest is credited
to your account, that interest starts earning interest, too,
meaning that the compounded annual yield is slightly
higher than the interest rate.
How often is the interest compounded? Remember,
the more frequently it’s compounded, the better it is for
you. Continuous compounding is best.
Is the interest rate fixed or variable? Make sure that
the institution offers you a way to get current interest
rates quickly and easily — by phone, for example.
Can you add to your fund at a higher interest rate if
the rate goes up while your money is invested? If the
rate goes up substantially, and you can add to your fund,
then you can significantly increase your yield.
What’s the penalty for early withdrawal? These penalties
can wipe out any interest you earn.
What happens to the deposit when the CD matures?
Does the institution roll a matured CD into a new one
of a similar term? Does it mail a check? Credit your
checking account?
As with the other investments I discuss in this chapter,
talk to at least three different institutions before you take
the plunge.
What’s the minimum deposit to open the account?
Usually this amount is $500.
What’s the interest rate? What is the compounded
annual yield? Interest is the percent that the bank pays
you for your allowing them to keep your money. The
rate of interest is also called yield. Compounded annual
yield comes into play if a bank is paying interest monthly,
for example. Once the first month’s interest is credited
to your account, that interest starts earning interest, too,
meaning that the compounded annual yield is slightly
higher than the interest rate.
How often is the interest compounded? Remember,
the more frequently it’s compounded, the better it is for
you. Continuous compounding is best.
Is the interest rate fixed or variable? Make sure that
the institution offers you a way to get current interest
rates quickly and easily — by phone, for example.
Can you add to your fund at a higher interest rate if
the rate goes up while your money is invested? If the
rate goes up substantially, and you can add to your fund,
then you can significantly increase your yield.
What’s the penalty for early withdrawal? These penalties
can wipe out any interest you earn.
What happens to the deposit when the CD matures?
Does the institution roll a matured CD into a new one
of a similar term? Does it mail a check? Credit your
checking account?
Shopping for Money Market Accounts
When you open a money market account, as the song says,
you’d better shop around. On any given day, certain banks
may try to attract deposits. Those banks often offer money
market accounts that yield over 5%, although the average
yield nationwide is more in the range of 2.5%. In many cases,
the yield also depends on the amount you deposit.
The first step in opening a money market account is to decide
which type best suits your needs. Money market accounts
come in three types:
The basic money market account: These usually
require a
minimum opening deposit of $
100.
The “tiered” money market account: These often
require a
minimum opening deposit in excess of $
100
and pay a higher yield than most basic accounts. For
example, you might earn 2.5% interest with a $500
account balance, but as much as 5% interest or more
with a balance of $50,000.
The package deal: This is a money market account coupled
with a savings account, certificates of deposit, and
other bank investments. Because the package deal utilizes
several products, banks and credit unions may offer
a slightly higher yield than they do for basic or tiered
accounts. What’s more, the minimum deposit may be
waived.
you’d better shop around. On any given day, certain banks
may try to attract deposits. Those banks often offer money
market accounts that yield over 5%, although the average
yield nationwide is more in the range of 2.5%. In many cases,
the yield also depends on the amount you deposit.
The first step in opening a money market account is to decide
which type best suits your needs. Money market accounts
come in three types:
The basic money market account: These usually
require a
minimum opening deposit of $
100.
The “tiered” money market account: These often
require a
minimum opening deposit in excess of $
100
and pay a higher yield than most basic accounts. For
example, you might earn 2.5% interest with a $500
account balance, but as much as 5% interest or more
with a balance of $50,000.
The package deal: This is a money market account coupled
with a savings account, certificates of deposit, and
other bank investments. Because the package deal utilizes
several products, banks and credit unions may offer
a slightly higher yield than they do for basic or tiered
accounts. What’s more, the minimum deposit may be
waived.
Diving into Savings Accounts
Rather than “taking the plunge,” opening a savings account
is more like dipping your toe into the water. But, we’ve all
got to start somewhere, and this is where many people start
out. Opening a savings account can be the first step to a lifetime
of good savings habits.
You’ve probably heard the advice, “Pay yourself first.” That
doesn’t mean give yourself some cash so that you can go shopping.
When you sit down to pay bills, write the first check
to a savings or investment account. It doesn’t matter if you
start with a very small amount, just make savings a habit.
And when you get bonuses and raises, you can increase those
checks you write to yourself.
When you shop for a bank, savings and loan, or credit union
where you can open a savings account, make sure to ask the
following questions:
Is there a required minimum balance for a savings
account? Some institutions charge a fee if your balance
falls below a required minimum.
What are your fees for savings accounts? You can
expect to be charged either a monthly or quarterly maintenance
fee. The institution may also charge you a fee if
you close the account before a
specified period of time.
How much interest will I get on my savings? Expect
around 2% interest.
Is the account federally insured? Ask specifically
whether the institution has Federal Deposit Insurance
Corporation (FDIC) insurance. If it does, then you can
get up to $100,000 of your savings back if the bank fails.
What services do you offer? Many banks now offer
banking by telephone or the Internet.
Does the bank use a tiered account system? A tiered
account system allows you to earn higher interest if your
account balance is consistently over an amount specified
by the bank.
Call around to at least three different institutions (banks, savings
and loans, and/or credit unions) to compare their offerings.
(You can also call brokerage firms, which offer CDs, to
find out what their minimums and fees are.)
If the answers to all of these questions come out about equal,
choose the institution that’s most convenient for you and
offers the best service, convenient hours, friendly tellers —
whatever suits your banking habits best.
is more like dipping your toe into the water. But, we’ve all
got to start somewhere, and this is where many people start
out. Opening a savings account can be the first step to a lifetime
of good savings habits.
You’ve probably heard the advice, “Pay yourself first.” That
doesn’t mean give yourself some cash so that you can go shopping.
When you sit down to pay bills, write the first check
to a savings or investment account. It doesn’t matter if you
start with a very small amount, just make savings a habit.
And when you get bonuses and raises, you can increase those
checks you write to yourself.
When you shop for a bank, savings and loan, or credit union
where you can open a savings account, make sure to ask the
following questions:
Is there a required minimum balance for a savings
account? Some institutions charge a fee if your balance
falls below a required minimum.
What are your fees for savings accounts? You can
expect to be charged either a monthly or quarterly maintenance
fee. The institution may also charge you a fee if
you close the account before a
specified period of time.
How much interest will I get on my savings? Expect
around 2% interest.
Is the account federally insured? Ask specifically
whether the institution has Federal Deposit Insurance
Corporation (FDIC) insurance. If it does, then you can
get up to $100,000 of your savings back if the bank fails.
What services do you offer? Many banks now offer
banking by telephone or the Internet.
Does the bank use a tiered account system? A tiered
account system allows you to earn higher interest if your
account balance is consistently over an amount specified
by the bank.
Call around to at least three different institutions (banks, savings
and loans, and/or credit unions) to compare their offerings.
(You can also call brokerage firms, which offer CDs, to
find out what their minimums and fees are.)
If the answers to all of these questions come out about equal,
choose the institution that’s most convenient for you and
offers the best service, convenient hours, friendly tellers —
whatever suits your banking habits best.
First Steps in Stock Investing
If you’re willing to roll up your sleeves and do the research
necessary to invest in individual companies, a stock may be
a good fit for your new portfolio. The key is to avoid excessive
risk. The best way to minimize risk is to buy a solid
company — one that is essentially a blue chip or a largercompany
growth stock.
Look for a stock with consistent performance
that appears to sustain and even increase over time.
The Dow Jones Industrial Average is the index of blue chips,
listing the likes of IBM, Kodak, McDonald’s, and Sears.
These stocks tend to hedge investors’ first exposure to equity investing by paying
dividends that offset any lackluster performance.
You may also want to seek out a value stock — a stock that
has been underperforming its peers, but that seems poised to
turn things around. An index called “Dogs of the Dow,”
which is compiled by Dow Jones and printed in The Wall
Street Journal, lists specifically those stocks that are on the
outs. Of course, none is guaranteed to become the next best
stock to own. You have to judge for yourself by looking at a
company’s long-term growth and earnings; its price-to-earnings
(P/E) ratio; and any company news that can give you
insight into debt level, acquisitions on the horizon, and competitive
edge of products, services, and management. (The
P/E ratio is derived by dividing a stock’s share price by its
earnings-per-share price. The result shows how much
investors are willing to pay for each $1 of earnings.
Annual reports, which you can request from a company’s own
investor relations department, can give you some of these
details;
These services can show you a stock’s ups and downs over the years
and even over the past month. Analysts’ reports can project
a company’s earnings, dividends, and price growth over the
next few months and years.
Don’t forget to check on competitors, too. Because all performance
data is relative, a company that may seem like a
great catch may actually be inferior to its peers, but you won’t
know that if you don’t check. For example, if you’re thinking
about investing in McDonald’s, make sure that you check
out the stocks for Wendy’s, too
necessary to invest in individual companies, a stock may be
a good fit for your new portfolio. The key is to avoid excessive
risk. The best way to minimize risk is to buy a solid
company — one that is essentially a blue chip or a largercompany
growth stock.
Look for a stock with consistent performance
that appears to sustain and even increase over time.
The Dow Jones Industrial Average is the index of blue chips,
listing the likes of IBM, Kodak, McDonald’s, and Sears.
These stocks tend to hedge investors’ first exposure to equity investing by paying
dividends that offset any lackluster performance.
You may also want to seek out a value stock — a stock that
has been underperforming its peers, but that seems poised to
turn things around. An index called “Dogs of the Dow,”
which is compiled by Dow Jones and printed in The Wall
Street Journal, lists specifically those stocks that are on the
outs. Of course, none is guaranteed to become the next best
stock to own. You have to judge for yourself by looking at a
company’s long-term growth and earnings; its price-to-earnings
(P/E) ratio; and any company news that can give you
insight into debt level, acquisitions on the horizon, and competitive
edge of products, services, and management. (The
P/E ratio is derived by dividing a stock’s share price by its
earnings-per-share price. The result shows how much
investors are willing to pay for each $1 of earnings.
Annual reports, which you can request from a company’s own
investor relations department, can give you some of these
details;
These services can show you a stock’s ups and downs over the years
and even over the past month. Analysts’ reports can project
a company’s earnings, dividends, and price growth over the
next few months and years.
Don’t forget to check on competitors, too. Because all performance
data is relative, a company that may seem like a
great catch may actually be inferior to its peers, but you won’t
know that if you don’t check. For example, if you’re thinking
about investing in McDonald’s, make sure that you check
out the stocks for Wendy’s, too
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