Brokerage-Related Warnings

Let's take a moment to salute our friends at the NASD. You know them, right? The organization formerly known as the National Association of Securities Dealers is the primary industry regulator for the securities industry in the United States. Overseeing more than 5,000 brokerage firms, as well as registered representatives numbering nearly two-thirds of a million, the NASD licenses professionals, sets rules for the industry, and oversees their enforcement. The NASD also handles dispute resolution when investors have problems with their brokers; it works on thousands of arbitrations and mediations every year. As the organization itself puts it, "NASD is a world leader in capital markets regulation."

There's a lot of information for investors at the NASD website. Here are a few topics about which it has recently issued alerts:

  • A prevalent new scam targeting investors is the use of faxes, emails, and even cell-phone text messages to hype "low-priced 'China' stocks of companies that often have no affiliation with China or its stock markets." These fraudsters are relying on a common investor tendency to get all excited by the word "China," as we imagine huge profits to be had. (Read our own Seth Jayson on how even legitimate China-related companies may not be the best investment.)
  • Investors are warned to remember that when you're evaluating a company, you should assess not only the risks associated specifically with it and its industry, but also broader risks. Entire markets can slump, for example. The suggested remedy is to diversify across regions (including both domestic and international holdings) and to seek out some holdings that will be less volatile in volatile markets. These would be "defensive" industries, made up of things that people will buy no matter the economic climate -- such as shampoo, medicines, hamburgers, cigarettes, and electricity. Some examples of defensive companies include Procter & Gamble (NYSE: PG  ) , National Grid Transco (NYSE: NGG  ) , Altria (NYSE: MO  ) , and Pfizer (NYSE: PFE  ) .
  • The practice of buying stocks on margin -- borrowing money from your brokerage to buy stocks -- also warranted a warning. The NASD noted that "the amount of debt taken on by investors to buy securities has reached a record high of $321.2 billion in February 2007." Among the specific warnings, the NASD explains that you can lose more money than you have in your margin account and that "margin calls" can force the sale of your holdings at inopportune times. (Read Brian Richards and Tim Hanson on the dangers of margin.)

Finally, here's a last notice I want to share with you from the NASD. It's dated "Marcy 19, 2007," suggesting that perhaps someone in the NASD press room has a crush on a woman named Marcy and was daydreaming while typing. But on to the meat of the matter: "NASD today launched an updated, redesigned version of its popular online service NASD BrokerCheck that not only expands the amount of information about individual brokers and securities firms available to the public, but promises a more user-friendly experience as well." So there you have it. If you'd like to look into a broker or firm, go for it.

Find the best brokerage
Meanwhile, make sure that the brokerage you're using is the best one for your needs. Odds are, you can find a better brokerage for yourself, one that charges you less than you're paying or that offers more services or protections you want. A few minutes in our Broker Center may help you do just that. This article on finding the right brokerage may be helpful. Indeed, some very reputable brokerages now charge commissions of $5 or less per trade. (Our comparison table may be particularly helpful.)

Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. Pfizer is a Motley Fool Inside Value recommendation. National Grid Transco is a Motley Fool Income Investor recommendation. Try any one of our investing services free for 30 days. The Motley Fool is Fools writing for Fools.


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