This Manhattan-based stock exchange is the second-largest in the country.
When stock market forces fall — and everyone in the market is losing money — it’s called a bear market. During a bear market, a lot of investors discover that their stockbrokers over-exposed their portfolios to risk. In these difficult times, investors may find out that broker misconduct — like overconcentration, unsuitable investments or other wrongdoing — caused the dramatic declines in their investment accounts.
Blue chip companies have long-standing reputations. Consumers around the country tend to recognize and respect the products and services of blue chip companies. Blue chip company stocks tend to pay dividends to investors reliably.
That said, investing in only blue chip stocks can be dangerous and risky. A 100 percent stock portfolio (no matter how “safe” the stocks appear to be) is not a suitable strategy for a conservative investor. Even a 100 percent blue chip stock portfolio could lose tremendous value in the event of an economic downturn.
These are laws created and enforced by individual states to protect investors from stock market fraud. Investor fraud lawyers must consider state-specific blue sky laws before pursuing any action on behalf of an investment fraud victim.
A bond refers to money loaned to a company, government or institution. When you buy a bond, you’re lending money to an organization under precise terms. According to these terms, the bond issuer must pay you a specific amount of interest on the bond at specific times.
Essentially, bondholders are creditors who loaned money to an organization, and the organization must eventually pay the bondholders back. Bonds have ‘maturity’ dates when the organization must pay the bondholder the original amount invested.
Investors can purchase and sell bonds on the bond market, and the market value of bonds can rise and fall. Regardless of market fluctuations, however, if you hold your bonds to maturity, you will receive the original amount invested — if the issuer has enough money to pay you back. It’s important to remember that a bond is only as secure as the organization that sold it to you.
A broker completes investment transactions on your behalf and receives fees and commissions for the service. Brokers may recommend investments for you to buy. However, the recommendations must be suitable to your financial situation, goals, and needs. A broker cannot recommend an unsuitable investment just because it pays him or her a big commission.
Unfortunately, unscrupulous stockbrokers sometimes mislead investors about the risks and drawbacks of unsuitable investments. Investors who lost money because of this kind of deception might have a claim to get their money back.
During a bull market, almost everybody is making money in the stock market. Stockbrokers and investment advisors may get overconfident during bull markets, throw common sense out the window, and lead consumers down a dangerous road of risk.
Over-concentrating conservative investors into unbalanced portfolios – while misrepresenting or omitting the risks involved – is common during bull market conditions. When the bull market turns into a bear market, massive investment losses may reveal the highly unsuitable strategies of “overconfident stockbrokers.” Fortunately, those who suffer from bad investment advice like this may be able to file a claim for financial damages in court.
When selling an investment, you will have a capital gain or capital loss. If there’s a capital gain, you may be liable to pay taxes on the profit. An investment advisor must consider capital gains taxes whenever he advises you to make a sale.
Sometimes, taxes involved with an investment sale are so great that the transaction is unsuitable. It’s not uncommon for stock fraud negligence claims to arise from an investment advisor’s failure to consider capital gains taxes.
This is the document that certifies you own a piece of stock, a bond or some other kind of investment. In the past, investors held these certificates themselves. Now, they only tend to exist electronically. Investors who want a physical stock certificate may not be able to get them, or they’ll need to pay a fee to get them.
Certificates of deposit are some of the safest investments that exist. Banks issue them. They offer a guaranteed interest rate in return for locking away your money for a given time. Investors who want to withdrawal early may do so, but they will suffer a penalty. If you require access to your money, a CD may not be the suitable option.
Stockbrokers and brokerage firms often make their money via commissions. They receive fees for buying and selling you investments. Sometimes, brokers recommend unsuitable transactions (that harm customers) because they will earn a large commission from the exchange. When investors lose money because of this kind of fraud, they can pursue claims to get their money back.
Owning common stock is the same as owning a percentage of a company. It’s different from holding a bond, which means you made a loan to a company. When you buy common stock, you’re sharing in the risks and liabilities of a corporation. Therefore, if the company suffers financial setbacks, you could lose some or all of your investment money. It’s unwise, unsuitable and a violation of securities laws for an investment advisor to over-concentrate a large percentage of a conservative investor’s portfolio into common stocks.
When your investment advisor buys and sells investments without consulting you, the advisor must have “discretionary authority” over your account. Accounts with discretionary authority are called discretionary accounts or managed accounts.
Investment advisors in charge of discretionary accounts must make transactions that reflect the specific objectives and needs of the investor. Sometimes an advisor or brokerage firm makes unsuitable investments that result in financial damages in a discretionary account. In these situations, the harmed investor can file an action to hold the broker or investment firm liable.
The fact that an account is discretionary could strengthen an investor’s case. Courts hold stockbrokers with discretionary authority to a higher standard of fiduciary care and due diligence.
Diversification boils down to never putting all of your nest eggs in one basket. A diversified brokerage account holds a variety of investments types from different market sectors (like stocks and bonds from various sectors of the economy).
An over-concentrated account is heavily-weighted into one or few investments, or it’s concentrated into one or few market sectors. When the over-concentrated investments or sectors become unstable, the account will suffer investment losses. In some situations, investors can hold brokerage firms liable failing to diversify their accounts.
Dividends are payments received by investors who own stock. Preferred stock dividends are usually a fixed amount, but depending on the prospectus, which describes the terms of the investment, preferred stock dividends are not necessarily guaranteed. Common stock dividends will vary based on how well the company performs. Common stock dividends also depend on the level of earnings the board of directors decides to re-invest into the business.
This is an investment strategy in which consumers buy an exact dollar amount of an investment on a recurrent basis. For example, an investor buys $100 of gold each month instead of buying 1/10 an ounce of gold each month. Supposedly, this strategy will lessen the effects of market volatility, as the rise and fall of market prices will average out over time.
Although dollar-cost-averaging makes sense on paper, it isn’t guaranteed to work. There is no way to eliminate the risks associated with a volatile investment.
An investor holds equity in a company when he or she owns part of the company, usually through stock purchases. An investor may also hold equity in a company through a limited partnership agreement.
Face value relates to the money received when a bond investment matures. Bonds can be bought and sold, and they increase and decrease in value based on the performance and volatility of the bond markets. That said, bondholders can count on receiving the face value of bonds on the bond’s maturity date — that is if the issuer of the bond is still financially viable.
The Financial Industry Regulatory Authority is a “self-governing body” that polices the activities of stock brokerage firms, securities firms, financial institutions and their employees. FINRA receives its self-regulating authority via the Securities and Exchange Commission. The SEC largely uses FINRA as its investment industry “watchdog,” charged with policing Wall Street and other investment-related activities.
In the vast majority of cases, investors must resolve investment disputes via FINRA arbitration proceedings. That’s because your investment firm (and its employees) are likely FINRA members, and FINRA requires its members to include an arbitration clause in new account opening documentation. Therefore, when you opened your investment account, you agreed to resolve any disputes via FINRA arbitration. In most cases, your arbitration agreement will be legally binding.
At one time, there were two main arbitration forums for investment-related disputes. They were: 1) the New York Stock Exchange (NYSE) and 2) the National Association of Securities Dealers (NASD). In 2007, both forums consolidated into the Financial Industry Regulatory Authority.
A fiscal year is the beginning and ending of a company’s yearly bookkeeping. While most companies begin and end their fiscal years from Jan. 1 to Dec. 31, some companies choose a different date out of convenience. For example, a tourism company might end their fiscal year during the slow season, when they have more time to consolidate their bookkeeping.
These are bonds issued by governments. Investment analysts tend to consider bonds issued by developing nations to be risky because their governments might go bankrupt. Numerous investors have filed lawsuits against their stockbrokers, who recommended the purchase of foreign “junk” bonds issued by financially insolvent nations. United States government bonds, on the other hand, are among the safest and securest investments available.
When a business grows in value quickly, investors refer to the company’s equity shares as “growth stocks.” Growth stocks are risky because a company might fall in value just as quickly as it rose. Growth stock investors expose themselves to a significant amount of risk in the hopes that their “gamble” will pay off. Conservative investors should not have investment portfolios heavily weighted with growth stocks.
A holding company is a business that owns the stock or securities of different companies. Most holding companies seek to own the controlling share of the firms into which they invest. Warren Buffet’s business, Berkshire Hathaway, is a holding company.
Indexes measure the value and performance of different stock market sectors. Analysts calculate indexes as a percentage figure, using the prices of specific stocks. Investors and financial managers like use indexes to describe market conditions and performance. They also use indexes to calculate the success of investment returns compared to the rest of the market, or compared to others investments in the same industry.
An initial public offering, or IPO, represents the first time a corporation issues investment securities. IPO’s of wildly successful companies often come with a lot of fanfare (and risk)
An institutional investor is a large organization that manages the investment of its own assets. It could also be an organization that invests trust assets on behalf of others. Pension funds, insurance companies, and universities – among other large organizations – might qualify as institutional investors.
When investors buy bonds, they’ll later receive interest on the money they paid to acquire the bonds. Bond issuing organizations pay interest according to a set distribution schedule.
An investment banker is the underwriter of a new security. The underwriter is the middleman between the investors that purchase the security, and the company that offers the security. Usually, the investment banker buys the entire offering of a bond or stock, then sells the individual shares to individuals and institutional investors.
An investment company is a business that invests in other businesses. Commonly, investors call investment companies “mutual funds.”
An IRA provides tax advantages. IRA holders can invest in stocks, mutual funds, bonds and other investments and the money contained in the IRA will benefit from special tax deferments and exemptions. Investors do not need to pay income taxes on money saved within an IRA. After reaching retirement age, the IRA holder can withdrawal a certain amount of money tax-free each year.
Leverage refers to the amount of outstanding bonds or stocks owned by a company’s investors. Leverage is the amount of debt assumed by a business to finance its operations. If a company’s debt is higher than its assets, then it is a highly leveraged company.
When an investor places an order to buy or sell a security when it reaches a certain price point, it’s called a limited order. If a broker fails to follow a customer’s limited order — and the customer loses money as a result — it can lead to a securities negligence claims.
Liquidation refers to the selling of property or investments to convert them into cash.
Investments with a high level of liquidity are easy to sell. Most stocks have a high liquidity, and they can be bought and sold on the stock market with ease. Annuities, however, have a low liquidity. Investors can only liquidate an annuity after a specific date. If investors sell annuities early, they incur substantial fees.
A listed stock refers to equity shares of a company that investors can purchase and sell on the stock market.
Investors become “locked in” to an investment if they have earned significant profits, but cannot sell because the sale will trigger massive capital gains taxes.
Market manipulation happens when an investor buys an enormous amount of one investment to create the illusion of active trading in the investment. Market manipulation may result in the artificial inflation (or deflation) of an investment because it inspires others to purchase or sell the same investment too.
Margin trades involve the purchase of investments on credit. Essentially, you’re taking out a small loan to buy an investment. If the margined investments lose value, it could spell disaster for the investor, who will need to deposit money to pay off his or her margin loan.
This is what happens when stocks on margin lose a certain amount of value. When the value declines to a certain level, the investor will be required to pay back money that was borrowed to purchase the failing investment.
The market price or “current quote” is the latest sales price of a particular bond or stock.
This is when your bond comes due, i.e., when — as long as you still own the bond — you will receive the original money you paid for it.
A mutual fund comprised of high-yield money market investments, like certificates of deposit, commercial paper, and federal securities. Money market funds are generally safe, and they’re a highly liquid way to maintain cash holdings in a brokerage account.
A “muni bond” is ordinarily issued by a state government, state agency, state authority or local government. They are considered safe investments, and interest paid tends to be tax exempt. Nevertheless, the alternative minimum tax (AMT) could apply to these investments.
The National Association of Securities Dealers Automated Quotations offers price quotes and information regarding currently traded investments.
The net change refers to the shift in the closing price of a security today, compared to its closing price at the end of the day yesterday. Usually, the last figure in the newspaper stock listing is the net change. It might look like this +1 ½. This number means that the stock price increased by $1.50 since yesterday’s closing price.
The New York Stock Exchange is the biggest securities market in America. It has been in operation since 1792. The prices of investments sold at the NYSE are dictated by supply and demand. At this time, the NYSE is a non-profit company with 1,366 members who trade there.
This refers to the price movements relating to every common stock that listed for trade on the NYSE. The NYSE composite index continually updates itself. Point changes read as dollar and cent figures, which is a way to provide an easy-to-understand measurement of fluctuating market conditions. Other “averages” or “indexes” are available for four industry groups, including: transportation, industrial, finance and utility.
This is a profit or loss that has yet to be “realized” because the investor still holds the investment, and has yet to sell it. Once the investor realizes the profit or loss by selling the investment, then income taxes in the case of a profit (or tax deductions in the case of a loss) may apply.
These are relatively inexpensive stocks that can be bought cheaply and sold for under $1 per share. They tend to be highly speculative and risky investments because they fluctuate significantly in price on a daily basis. Did your broker recommend you buy penny stocks? That might have been a very unsuitable recommendation on your broker’s part.
This refers to the entire group of investments owned by an institutional or individual investor. Inside your portfolio might be stocks, bonds, preferred stocks, mutual funds and other kinds of investments.
A preferred stock is a special kind of stock that pays investors dividends. These dividends are paid to preferred stockholders before any profit sharing is passed on to the holders of common stock.
Investor advisors sometimes sell preferred stocks to consumers as “bond alternatives,” but they are not as safe as bonds, and you should never see them as an alternative to bonds.
Be sure to understand the particular preferred stock shares you’re dealing with before investing. The terms, conditions and l dividend payouts associated with preferred stock shares will vary depending on the issuance. Some preferred stock shares could be much riskier for investors than others.
The amount of money that a preferred stock or bond sells for over the “par” value. The term premium may also be the redemption price for a bond share or preferred stock share when an investor sells it for a price above its initial value.
This is a standard figure used during the analysis of a particular stock. To arrive at the P/E ratio, divide the price of one share of stock over its per-share earnings figure.
The prospectus is an important document because it offers the buyers of newly registered securities information about the securities. For example, the prospectus of a Real Estate Investment Trust (REIT) will provide information about the specific rules that apply to the REIT — rules that determine under what conditions the REIT could stop making distribution payments, how much distribution payments will be, etc.
A quote refers to the top “bid to buy” and the bottom “offer to sell” on a security for a given moment in a particular market. For example, when asking a stockbroker what the quote is on a stock share, the broker might say it’s 70 ½ to 70 ¾. These figures mean that the highest bid from any buyer is $70.75 and the lowest bid from any buyer is $70.50 on the exchange floor at that particular time.
These investment companies buy real estate property, manage it, and generate rental income. A REIT will own one or more real estate properties, and sell shares of itself to investors.
On the surface, purchasing shares of a REIT appear like an attractive idea. REITs pay high percentage yields (compared to CDs, money market funds and other options). They look like an easy way to earn investment income by putting a small amount of money into the real estate market. Nevertheless, REITs are complicated investments and they come high levels of risk — far higher than CDs and money market funds.
In spite of the high risk, brokers may unlawfully downplay the hazards of REITs and misrepresent them as safe alternatives to CDs and money market funds. For the average investor, however, the risks of a REIT far outweigh the potential reward of higher income.
REITs present multiple challenges to the average investor. Some are “nontraded,” which means that investors might not be able to sell out of the investment. Also, REIT income distributions are not guaranteed. If a REIT is unprofitable, it can stop making payments to investors. Sometimes, the managers of REITs are negligent, make bad business decisions, and the REIT will go bankrupt, causing the investors massive financial losses.
Investors especially conservative investors who require safety and liquidity in their portfolios — can hold unscrupulous stockbrokers financially liable for their unsuitable recommendation of REITs.
The redemption price for a bond refers to the amount of money a bond investor will receive if he or she redeems the bond before its maturation date. Nevertheless, the bond issuer does not always have to redeem its bond early. The redemption price also refers to the amount of money that a company must pay to “call in” its preferred stock shares. Investors can find the rules governing redemption prices in the prospectuses of a bond or preferred stock.
This term refers to the representative of an investment firm. The registered rep communicates with broker/dealer customers. Also called stockbrokers and financial advisors, these individuals need to pass a series of tests and exams before dispensing investment advice and selling securities to the public.
Registered representatives have a fiduciary duty that legally obligates them to hold the best interests of their customers above their own. Registered reps must also adhere to FINRA rules, state investment laws and SEC laws.
Before a company can issue an IPO (initial public offering) of new securities, the company must register the securities under the Securities Act of 1933. This involves the submission of a registration statement to the SEC needs. The submission must disclose vital data relating to the securities, management structure, and operations of the company. The submission must also explain the reason for the IPO.
The company must also register the security under the Securities Exchange Act of 1934 before selling it on a national securities exchange. This involves submitting the applications for registration to the appropriate exchange, and to the Securities and Exchange Commission.
SEC is an abbreviation for the Securities and Exchange Commission. The SEC enforces federal securities laws contained in the Securities Act of 1933, the Securities Exchange Act of 1934, the Securities Act Amendments of 1975, and other important pieces of legislation.
The settlement is the completion of an investment transaction once the customer transmits payment to a broker/dealer for securities bought. Alternatively, the settlement refers to the moment the seller receives payment for securities sold.
Investors make short sale transactions when they expect an investment to fall in value. Interestingly, the security is never actually owned by the person.
Here’s how it works: an investor asks a broker to sell 100 shares “short” on a particular security. If the value declines, then the investor’s profit is the difference between the original value of the stock and its new value. If the value rises, then the investor’s loss will be the amount it has increased. The gains and losses will be realized at the prescheduled moment when it’s time “to cover the sale.”
Short sale transactions are sophisticated trading strategies and they are not suitable for the typical investor. However, in some cases, conservative investors can use short sales as a profit protection strategy.
Speculation is what a risk-taker does when he or she bets that a penny stock is going to grow in value. When speculation is the goal, safety, security and principal preservation are only secondary goals.
This is when a subsidiary company — or a division of a larger company — separates from its parent company. When a spin-off occurs, individuals who own shares of the parent company will get shares of the new, spin-off company. The shares received will be in proportion to how many shares are held by the parent company. The total value of the spin-off shares plus the parent company shares will remain about the same.
When outstanding stock shares of a company divide into more shares, it’s called a “split.” In a 2-for-1 stock split, each person who holds 200 shares of stock would suddenly have 400 shares. Nevertheless, the amount of equity in the company would still be the same. In other words, the person who’s 200 shares suddenly became 400 shares would still have the same percentage ownership in the company. Also, the value of 400 shares will remain the same as the previous value of 200 shares.
This is a special organization, like the New York Stock Exchange, where investors buy and sell ownership shares in companies. The market allows for prices of securities to go up and down in response to supply and demand.
Companies sometimes pay their investors with corporate stock dividends instead of cash dividends. A stock dividend might be shares of the issuing company, or it could be shares of a subsidiary company.
This is the symbol that is used to represent a particular security listed on the NYSE, AMEX or Nasdaq ticker. The symbol is merely an abbreviation that makes it easier identify the company.
A stop order is an order to purchase at a particular price that is under the current market price. Investors use stop orders to put a limit on their losses in the event of a sudden market downturn. A stop order might not execute at the exact price, but once the stock reaches that price in value, it should trigger the sell order.
This term could refer to a tax-saving strategy where and the investor sells one investment at a loss and uses the proceeds to buy a similar one. The investor might even buy the same security. Investors might use this strategy in order to generate a realized investment loss, which can be claimed as a loss for tax-saving purposes.
This might refer to “mutual fund switching” or “annuity switching.” This is a type of investment fraud where a stock broker recommends that his clients sell out of a mutual fund or annuity (resulting in exorbitant surrender fees). Next, the broker will purchase an equal or similar investment. Annuity switching and mutual fund switching are common types of frauds that brokers use to unnecessarily “churn” client accounts and generate commissions.
This involves researching and analyzing the current condition the financial markets and the performance of stocks. Technical research looks at price patterns, price changes, and available investment shares. The information is used to predict future performance. Sometimes, technical research is manipulated to fraudulently change investors’ perception of the condition of markets and stocks. This is unlawful and investors who suffer losses caused by fraudulent research may have viable claims for damages.
A trader buys and sells investments in his or her own account. A trader might also work for a financial institution and complete buy and sell transactions on behalf of a firm or its clients.
This can refer to the action of transferring ownership of stock shares from one business or person to another. It can also refer to the movement of funds and securities from one account to another one.
Turnover ratio (or turnover rate) is used to calculate whether or not someone has been the victim of a churning scam.
Here’s how to calculate your turnover rate for one year. First, add up the monthly values of your accounts for the last 12 months. Divide by twelve to arrive at your “average account value.” Second, add up the value of all the purchases made in your account for the same 12-month period to get your “total purchases.” Finally, divide the “total purchases” by the “average account value.”
If you arrive at a number that is six or greater, it may be cause for concern. Although rare, turnover ratios lower than six could also be a sign of churning. Ultimately, you will need a stock fraud expert to review your account history to know for sure.
A variable annuity is a life insurance product that locks away your money for an exact period of time. Once the money is inside your annuity, you can invest it into different kinds of mutual funds – like stock funds, growth funds and bond funds — and can also put it into money market funds. As life insurance products, most annuities offer a death benefit to the designated beneficiaries of the annuity holder. Annuities may also offer the payment of a regular retirement income at a certain age.
The problem with variable annuities is that the value of the annuity will rise and fall according to the performance of its selected investment funds. An annuity investor could lose everything if risky funds are selected. Also, annuities are extremely illiquid, and investors cannot withdraw their money early without paying large surrender fees.
Variable annuities pay high commissions to the brokers who sell them. This leads to unscrupulous stockbrokers recommending unsuitable annuities to senior citizens who can’t afford the risk and illiquidity involved.
The yield on a stock is the percentage interest it pays based on its current value. A stock selling for $100 per share that pays a dividend of $3.00 is offering a 3% yield.