How to choose a stock 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 certificates of deposit (CD)

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?

How to Shop 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.

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.

Don’t forget to do your homework

Wise investing relies on research, which can be hard work. Just because someone touts an investment in an Internet chat room or across the lunch table at work doesn’t mean it’s a good buy. Do your homework. If you wouldn’t buy an investment except for the go-go advice, don’t buy it.

Don’t put all your eggs in one basket

Just because one type of investment is doing well this month or this year doesn’t mean that its success will continue or that you should invest all your money in that arena. Also, you don’t want to scare yourself out of continued investing by choosing a highly volatile investment that may start losing your dollars immediately.

Don’t play with fire when investing

Avoid speculative, risky investments, especially those whose terms and properties you can’t understand no matter how many times a broker or friend explains them. Your comfort level is important, so remember that some of the best investment options can seem boring and mundane. Risky investments include those based on premises that seem farfetched, such as an underwater casino, or those that promise unbelievable returns. They may also have terms that are unfavorable, such as an investment that gives a company or other investors the right to buy you out at the price you paid if the investment turns profitable.
If an investment seems too good to be true, it is.