In today's wild business climate of corporate downsizing, hostile takeovers, rising and falling interest rates, and a stock market ever on an inexplicable spiral, you really need the help of an expensive brokerage house to help you make sense of it all, right? Not so fast! Here are some things you should consider before handing over your money to the hands of strangers.Most brokerage houses are honest businesses, but many are not above playing fast and loose with your funds. Do a lot of people lose money when they hire a brokerage firm that handles their money? Yes, and a lot more often than you think.
Furthermore, think about this: that piece of paper full of fine print you sign when you give your money into their care basically ties your hands. Once you sign, they have the power to control your money. If you don't like what they do, you may have to accept the decision of an arbitrator, unless you take your complaint to a federal district court, or insert language into the original contract which protects your rights. Either way, the hassle can be enormous, and costly.
Brokerage firms offer advice on how to invest your money, but sometimes you can run into serious trouble with a stockbroker if you are not paying attention. Stockbrokers have many ways of getting extra money from you. The most common problem is negligence, whereby the stockbroker fails to comply with an order. Another problem arises from a situation called "churning." When a stockbroker churns your account, he advises you to make a transaction which creates commissions for him instead of profits for you. Finally, and in conjunction with churning, a stockbroker can misrepresent an investment, with his own interests in mind instead of yours.
Despite the big bucks spent by brokerage firms designed to convince you that you need them, the truth is that you don't. All it takes is a bit of homework, and an ability to take advantage of free or cheap information available to you in any library or on any bookshelf.
There is nothing wrong with using a reputable brokerage firm to handle your market transactions, but don't be dazzled by the puported "knowledge" of your assigned stockbroker. They're not much smarter than you, and they'll charge you a hefty price for their services.
Several ways exist for you to cash in on markets and funds, and a number of free or reasonably-priced information sources are available to help you along the way.
Since no one wants your money to increase faster than you do, why not take responsibility of your own future and educate yourself on investing?
Small Stockholders Can ProfitEven if you don't own a great deal of stock in a company, you can occasionally make a 10 percent profit from them. Once in a while, a company offers to buy the stock of its small investors at a 10 percent profit just to save money on having to serve small stockholders. If you are offered such a deal, study the market, see where the stock is going, and then perhaps take the premium and roll it over into another kind of stock.
The nice thing about this kind of transaction is you can deal directly with the company, instead of paying an extra fee to your stockbroker for transacting the business.
Become Your Own Securities AnalystYou don't have to be a big-time investor to do the same kind of investigating top security analysts do. A security analyst gleans information from the financial statements of major companies around the world. As a smaller, individual stockholder, there is nothing to keep you from taking advantage of this source of public information.
Some of the important information located on financial statements include:
* Deviations and inconsistenciesLook for any areas where the company broke away from trends or otherwise acted unusual. Especially compare the information presented in stockholders reports with the material filed with the Securities and Exchange Commission (SEC). These sources might be able to show you places where taxes were deferred, depletion allowances, and different tax credits.
* Inventory figuresThese figures are the company's heart and soul. They can tell you whether the raw materials on hand match the finished products being shipped out, and whether work in progress is keeping up with production.
* Accounts receivableThese can show you a company's policy on handling allowances for doubtful accounts. If the ratio to receivables is down, the company is manufacturing false earnings. If it is up, they might be heading into trouble. An accounts receivable can also let you compare this year's receivables' activity to previous years.
* Accounts payableYou can spot potential cash problems in a company by investigating the accounts payable section of the financial statement. If the company pays its bills on time in one lump sum, it is in good financial condition. If you notice that bill payments are getting stretched out, the company might be having cash flow problems.
Another source for information is an investment newsletter. There are dozens of them on the market today, and the trick is to find the one that best deals with your interests and needs.
No investment newsletter is going to be 100 percent, or even 75 percent accurate on its choices. You need to view a newsletter as a springboard for your own investment ideas and research. Avoid newsletters full of hype and adjectives like "stupendous" or "once in a lifetime chance." Try to locate a newsletter that is full of restraint, and explains its choices in a logical manner. It also helps if the newsletter you choose has a consistent record of picking the good stocks.
Before taking any investment newsletter, decide if you are a long term investor-willing to take a loss at times and in the investment for the long haul-or short term investor in need of immediate information for today's stock market. There are newsletters available for both kinds of investors.
n the surface, newsletters can seem expensive, with a $45 to a whopping $7,000 per year subscription price, but compared to what you would pay for a money manager, you can end up saving in the long run. Whether you use a broker or not, remember that the information in these newsletters is up-to-the-minute in many cases. If you act on it too late, it can cost you.
Here are some of the best investing newsletters:
Astro Geometrics Journal
$282 per year for 12 issues
To subscribe, call: 312-559-5500
$45 per year for 12 issues
To subscribe, call: 317-357-6855
$250 per year for 12 issues
To subscribe, call: 212-535-6202
Cash in on Chaos
$250 per year for 12 issues
To subscribe, call: 303-452-5566
$366 per year for 12 issues
To subscribe, call: 818-509-1133
Be Your Own Broker
If you enjoy investing in government securities, you can cut out the broker's price by buying you own Treasury notes and bonds directly from the Federal Reserve Bank.
Simply write a letter to the Bank or one of its branches, stating the securities to be bought, and the name under which any notes or bonds will be registered. Enclose a check for the face value of the securities ($10,000 minimum for bills, $5,000 for short-term notes, and $1,000 for bonds). Make sure your letter is postmarked by midnight the day before the next securities auction. The government will send you a receipt along with a refund for the discount determined at the auction.
Do Your Own Forecasting Through Technical Analysis Technical analysis is the fine art of predicting the major trends of a particular stock by studying its price pattern. It can work very much in your favor, because the price of stocks is set by what others think it is worth, not by what it is actually worth. Since stockholders tend to stay in love with a stock for a period of time, you may be able to cash in on this without using any inside information or top research analysts.
The technical analysis of price patterns can show you how big of a move to expect from a particular stock, but it can also get you into trouble if you become too impatient and buy or sell before the signal for it actually happens. The result can be disastrous for you.
One way to tell when the market is ripe for a breakthrough is to watch the Dow. If you see, interest rates peaking and heading down, a large number of stocks hitting the new high list, volumes in excess of 60 million shares a day, and strong moves in the transportation and utility averages. This is the time to put your knowledge to work for you.
Watch Other Indicators Besides the Dow Although trends on the Dow Jones Industrial Average are reliable sources of market information, it is not the only method for predicting market movements. Some of the other indicators to use in conjunction with the Dow are:
*The Quotron Change This indicator is especially effective if you have mutual funds, because funds track more closely to Quotron than to the Dow. Quotron lets you know what the market is doing in broad term, on both the New York and American Stock Exchanges.
* The Over-the-Counter Composite IndexThis index shows the cumulative performance of over-the-counter issues. If you see it outpacing the Dow, get ready for a bull market. If the index is weaker than the Dow, plan for a bear market.
* The Dow Jones Transportation Average
This indicator tracks intermediate trends between bull and bear markets.
* The Dow Jones Utilities AverageThis long-term lead indicator shows the condition of sensitive income and interest stocks.
* TRIN (Trading Index)This indicator tracks the volume of rising and declining issues. When you have a bull market, TRIN falls from above 1.20 to below .70 during one trading day. When the market is bearish, TRIN goes from below .70 to above 1.20. If TRIN registers 1.00, this means there is an even relationship between declining and advancing stocks.
Ask the Investor Relations Officer
When all else fails, you can ask a company's investor relations officer (IRS) for information about a corporation's status. Before you turn to this source, do your homework and see if your questions cannot be answered in some other way. When you call the IRS, have a written set of questions in front of you that you want specifically answered.
It is the company's right to not answer any of your questions. In fact, the IRS is limited to information like the company's future plans, media announcements, or figures which have already been made public. But the IRS can discuss pertinent information, such as labor relations and competitors, which may influence the actions of your stock.
As you can see, you are not limited to information given to you by your stock broker. The more you learn about corporations and the stock market, the more wise you will be with your money. If possible, take a couple of investment courses at your local college. If not, read all the information you can find on the subject. It's your money. You are the one who can take care of it like no one else.
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