Five Questions To Ask Before Investing With A Stockbroker

Whether you’re a first-time investor or have been investing for many years, there are some basic questions you should always ask before you commit your hard-earned money to an investment.

Question 1: Is the seller licensed?

Con-artists are experts at the art of persuasion, often using a variety of influence tactics tailored to the vulnerabilities of their victims. Smart investors check the background of anyone promoting an investment opportunity, even before learning about opportunity itself. While it’s usually safe to trust larger firms with more established reputations – relying on their internal oversight to keep you safe – even the biggest and best of brokerages have loosed wolves among their flocks, albeit unknowingly.

Researching brokers: Details on a broker’s background and qualifications are available for free on FINRA’s BrokerCheck website.

Researching investment advisers: The Investment Adviser Public Disclosure website provides information about investment adviser firms registered with the SEC and most state-registered investment adviser firms.

Researching SEC actions: The SEC Action Lookup – Individuals allows you to look up information about certain individuals who have been named as defendants in SEC federal court actions or respondents in SEC administrative proceedings.

If you are not sure who to contact or have any questions regarding checking the background of an investment professional, call the SEC’s toll-free investor assistance line at (800) 732-0330.

Question 2: Is the investment registered?

Any offer or sale of securities must either be registered with the SEC or exempt from registration. Registration is best because it provides investors with access to key information about the company’s management, products, services, and finances. Smart investors always check whether an investment is registered with the SEC by using the SEC’s EDGAR database or contacting the SEC’s toll-free investor assistance line at (800) 732-0330.

Question 3: How do the risks compare with the potential rewards?

The potential for greater returns comes with greater risk. Understanding this crucial trade-off between risk and reward can help you separate legitimate opportunities from unlawful schemes. Investments with greater risk may offer higher potential returns, but they may expose you to greater investment losses. Keep in mind every investment carries some degree of risk and no legitimate investment offers the best of both worlds. Many investment frauds are pitched as high return opportunities with little or no risk. It’s usually best to ignore these so-called opportunities. If you truly believe you smell a fraud, report them to the SEC, your local state securities licensing agency or state’s attorney general’s office.

Question 4: Do you understand the investment?

Many successful investors follow this rule of thumb: Never invest in something you don’t understand. Be sure to always read an investment’s prospectus or disclosure statement carefully. If you can’t understand the investment and how it will help you make money, ask a trusted financial professional for help. If you are still confused, you should think twice about investing.

This particular question, “Do you understand the investment?” has broader application. Savvy investors apply it across the investment spectrum, not just in their stock market considerations. Real estate, cryptocurrency, NFTs, the bond and commodities futures markets are all unique in their own ways, all offering potential rewards, all presenting their own potential pitfalls. If you don’t understand them, don’t invest in them until you do. Keep safe!

Question 5: Where can you turn for help?

Whether checking out an investment professional, researching an investment, or learning about new products or scams, unbiased information can be a great advantage when it comes to investing wisely. Make a habit of using the information and tools on available on reputable public sites, and take advantage of the securities regulators’ websites. If you have a question or concern about an investment, get a second opinion from a different broker or investment advisor. Remember, too, that you can contact the SEC, FINRA, or your state securities regulator for help in a crunch.

A final piece of advice: Don’t be afraid to ask questions, of the person offering the investment and others.

Any broker or advisor who fears questions, or deflects without actually answering them, either doesn’t understand the investment or doesn’t want you to understand it. The most successful Ponzi scheme of all time (excepting Social Security), was run by Bernie Madoff. A large part of his success was found in his practice of scaring investors away from asking questions by implying that if they didn’t trust him they could take their money elsewhere.

Don’t be afraid to ask your questions, and don’t be afraid to leave if you don’t get, don’t understand – or don’t like – the answers.

February 8, 2022 – Mike Spillan, Editor