“You recently wrote: ‘There are some things everyone knows, so no one explains them, and you somehow know you’d look stupid asking, so you never find out.’ How true! For someone who’s never bought stock before, there’s really nowhere I can go to find out how the whole thing works. Say I open up an account at a brokerage firm. There’s a minimum amount of say, $5,000. Does that money have to stay there all the time, like a minimum in a bank account?”
[No. It’s more like a casino that requires you to show $5,000 at the door, but won’t kick you out as long as you have anything left to bet.]
“What if I only want to buy $2,000 worth of stock?”
[That’s fine. You’ll have a $3,000 cash balance — hopefully with a broker that pays some modest money-market rate on cash balances or sweeps your cash into a money-market fund.]
“Then you call in to buy 200 shares of Widget Co. at $10 each. They take a commission of $50. OK. So what happens? What do they do with the $2,950 you have left in your ‘account’?”
[See above. Only I would point out that $50 is 2.5% of $2,000, and another 2.5% if you ever go to sell, which doesn’t sound like much but — in percentage terms, anyway — is a huge handicap. I know you were just using $50 as an example, but especially with such a small stake, you should try to find a broker that charges a very low minimum commission. One day, when you’re making $40,000 trades, it won’t much matter whether you’re paying $15 or $50 or $150 to do it (though at $150, it does begin to mount up — why throw money out the window?).]
“Do they mail you 200 certificates that look like high school diplomas stamped with ‘Widget Co.’ on it?”
[Well, if they sent you any certificate it would be one, not 200 — one for the whole shebang, with the numeral 200 stamped on it. (When you want to pay someone $200, do you send 200 checks?) And yes, they used to send certificates if you insisted — it may still be possible to get them — but the only time I see stock certificates these days is at “scripophily” auctions. “Scrip” is a word like “voucher” that means “sort-of-money,” and “ophily” you know is Greek for “likes to collect,” which is why stamp collecting is philatophily, or would be if I got to decide these things. I have some wonderful old certificates with mermaids outspreading their arms, and all manner of pioneering scenes to conjure up railroads and steamboats. But no: you will not get a certificate, you will get a “confirm” — a computerized report confirming the details of your transaction. It will arrive in the mail a couple of days after the trade. There is not a hint of artistry to it. And don’t worry about losing it. It has no actual value. I don’t even save them anymore. You will also get a monthly statement, like your bank statement, showing every asset this broker is holding for you, your transactions for the month, your cash balance, any money you may owe the broker. (Brokers love to lend to you “on margin,” letting you buy more than $5,000 worth of stock, in this example, and charging you interest. For them it is a risk-free loan, because they are sitting on your collateral — the stock — and will “sell you out” if the stock falls far enough to jeopardize the security of the loan.) You should keep the monthly statement, just as you would your bank statement. Your shares will be held “in street name,” meaning the name of the Wall Street brokerage house, even if it is located in San Francisco or Omaha. Widget Co. will not know you own it unless you give the broker permission to disclose your name (or perhaps it’s the other way around — they will know unless you tell the broker not to disclose your name — but the point is you get to specify this when you set up the account), and your broker will forward to you Widget quarterly and annual reports, along with “proxy statements” asking you to vote your shares for the directors Widget recommends. Buy shares in several companies, and pretty soon you will need a larger mailbox. Should your broker go broke, meanwhile, you will be protected by the $500,000 of government-backed SIPC insurance meant to allay this fear plus, typically, $9.5 million more, privately bought. But of course the risk in all this is not that your broker will go broke, though that can happen (at which point your securities and cash will ultimately be made available to you, but you could suffer great inconvenience and possible additional losses as the prices dropped in the meantime), but rather that YOU will go broke buying the wrong stocks or getting the bug to play the “options” market or, God forbid, the commodities or futures markets. Of course, brokers are expected to “know their customers” and shouldn’t permit you to make some of the more insanely speculative bets without at least having you sign something saying that you understand the risks.]
“Or do they keep some kind of records for them and for you? I know I have money in the bank because they send me a statement every month, but what does owning stock look like?”
[It looks like Paris on a beautiful spring day, with young lovers smiling at you warmly on every corner — when your stock is up. Duluth in December when your stock is going down.]
[Incidentally, especially when you get a bit more money, you may decide to have your broker, in effect, be your bank. Most offer checking accounts and debit cards linked to your brokerage account, and this can be quite convenient.]
“What if you decide to switch brokerage firms?”
[You probably won’t. Not that you shouldn’t or that it’s hard — you just fill out a form the new firm gives you, and it takes care of sucking your assets out of the old account. But the inertia is just too great. If you’re with a full-service firm — a human you’ve gotten to know — it will make you feel yucky to fire her, so you won’t. If you’re with a discounter, you still won’t. For example, I don’t have an account at Ceres, even though it would save me money. I have had an account at Ceres’ older brother, Accutrade, owned by the same parent firm, since long before either Ceres or this web site was established. At Accutrade, the minimum commission is $48 [editor’s note: minimum commission on equities is $28 + 2 cents per share] instead of $18 — and my friends will tell you I am not exactly loose with a dollar. But you know what? Forms to fill out . . . new account numbers to memorize . . . I guess I ought to get around to it someday. If I traded actively, as some of you do, the difference would really mount up. But I’m a buy-and-hold kind of guy, by-and-large.]
“This is by no means all the questions I will have, just those that I can think of right now. Can you do a New-Investor 101? I feel silly asking, because it feels like if I have to ask, I have no business buying stock.”
[Ahem. Well, you said it, not me. Actually, nothing is more American than learning about the capital markets and building your own portfolio. It can also be fun. The prudent thing for someone like you to do is almost surely to make periodic investments in one or two no-load, low-expense mutual funds instead. It’s easy, and you’re likely to do better than if you did this yourself. But who said all this had to be logical?]
“Please leave my entire name and e-mail address out of your column if you decide to write about this. Please, decide to write about it!! Thanks. — XXXXXXXXX”
[OK, Ann_Honomuss@aol.com — oops! — I will.]
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