More About Full Service Brokers

Full service brokers are usually large and provide many types of services. They will allow you to select an individual account advisor, who can act as financial advisors providing guidance on which investment might be right for you. These firms have their own research departments and they recommend stocks to you, to buy or sell. Commissions vary according to the number of shares and dollar amount, but average is from 1% - 2%. This type of brokers offer two types of an accounts:

• Asset-based fees: An asset-based fee is one where the broker charges a fee based on the size of your portfolio (assets under management - AUM), which could be from 1.5% to 0.75%, instead of per transaction commission fee. This is good option if you want to hold a diversified portfolio of stocks and bonds.

• Wrap account fees: An account in which a brokerage manages an investor's portfolio for a flat quarterly or annual fee. This fee covers all administrative, commission, and management expenses. The advantage of a wrap is that it protects you from overtrading. This is when your broker trades your account excessively to make more commission. So, because the broker gets a flat annual fee, they only trades when it is advantageous to you. A traditional wrap typically requires an initial investment of at least $50,000 to $100,000. The initial intent, and probably the major continuing aspect of such accounts, is to allay the fears of stock and bond purchasers that a single broker would merely be trying to sell products solely for the commission. Wrap accounts charge the overall account an annual fee irrespective of how often the stocks within the account are bought or sold. Commissions are not charged to the investor. As one adviser stated, by removing the firm's vested interest in commission based products, its advisers would retain more objectivity and flexibility in structuring and moving client investments. Fees generally range from 1% to 3% (100 to 300 basis points) of the account value- perhaps 2% to 3% for equity accounts and from 1.25% to 1.75% for income accounts.

RISKS OF USING A FULL SERVICE BROKER AND ADVISOR?

• Unauthorized Trading: Trades that are made without your permission. If a broker asks you to sign a discretionary authority over your account (meaning that they can do whatever they want), do not sign it!. If you see a trade you did not authorize, bring it to their attention immediately. Keep a list of all trades you authorized, and if/when you see a unauthorized trade, if it occurred, this will help you to explain them where error has occurred an to correct an error.

• Churning: This is when brokers trade excessively in order to run up their commission, but bring no benefit to their clients. Churning is illegal under the SEC rules, but it is difficult to prove.

• Failure to execute: Brokers are supposed to execute your orders and in a timely manner. If the brokers fails to execute your order (and it was executable!) or caused a lengthy delay you should complain.

• Misrepresentation of risk: If they are making a recommendation, they should provide you accurate information about potential risks.

• Inappropriate investment recommendations: One reason you are paying the big bucks for a financial advisor or a full service broker is that they are supposed to know your investment goals and help you try to reach them. If, I know it is a long way off, if you are about to retire, and your broker suggests you put most of your money in a speculative stock, then take your money out.

WHAT IS SHORT SELLING AND HOW CAN I BENEFIT FROM IT?

Traditionally people understand investing in stocks in way that you buy an stock and hold it until it rises enough to make a sizable profit, and sell it after that. But what about the times you come across a stock that you wouldn't invest in, and you think that it is only a matter of time when it will collapse? Well you can profit from the decline of a stock and although it sounds easy, the mechanics of a short sale are little complicated and the investor's risks are high so it is important that you understand the transaction before getting into it.

PROCESS OF SHORT SELLING:

First, let's describe what short selling means when you purchase shares of stock. In purchasing stocks, you buy a piece of ownership in the company. Short selling is the selling of a stock that the seller doesn't own, so it’s the sale of a security that isn't owned by the seller, but that is promised to be delivered. When you short sell a stock, your broker will lend it to you. The stock will come from the brokerage's own inventory, from another one of the firm's customers, or from another brokerage firm. The shares are sold and the proceeds are credited to your account. Sooner or later, you must close the position by buying back the same number of shares and returning them to your broker. If the price drops, you can buy back the stock at the lower price and make a profit on the difference. If the price of the stock rises, you have to buy it back at the higher price, and you lose money. So the risk is that stock prices can theoretically rise indefinitely but fall down only to zero.

So short selling or "shorting" or "going short" is the practice of selling assets, such as stock, futures, options etc. that have been borrowed from a third party ie. a broker, and buying identical assets back at a later date to return it to whom lend it to you. In other words, you take a "negative" position in the market, because you bought a negative amount of assets. If you short a stock, you expect price to fall to profit form your position, and to be able to buy back the shares you nee to close a position, at a lover price that you paid for. So going short is a contrast of going long.

WHERE DOES BROKER GET THE STOCKS?

Short selling is a marginable transaction. You must open a margin account to sell short. This is the same account you would use if you want to use your stocks as collateral to by stock on margin (more about that in the future posts). The general rule is that the value of your portfolio must equal at least 50% of the size of the short sale transaction, so if you have $25,000 worth of stock/cash in your margin account, you can borrow $50,000 of stock to sell short.

HOW DO I SELL SHORT?

Short selling, unlike a normal stock transaction where we have buyer and a seller, here we have the original owner, the short seller, and the new buyer. Short seller borrows shares from the original owner, and then sells them on the open market to any willing buyer. To close his position, he (short seller) must buy the same amount of shares as he sold so that the broker can return them to the original owner.

While you have an open short sale position, your broker will charge you overnight interest on the value of the short position. If the stock you shorted goes up or down in price your collateral will be higher or lower, and if it is lower by certain amount you may be required to place more money in your brokerage account, or buy back the stock that you sold short. Also, you must pay any dividends issued by the company whose stock you sold short, because that person is still the real owner of the shares you hold.

WHY SELL SHORT? SPECULATION AND PORTFOLIO PROTECTION:

The two primary reasons for selling short are speculation and and portfolio protection. Occasionally investors see a stock that they believe has been hyped to a ridiculously high level, and they believe that the stock price will fall. A short sale provides the opportunity to profit from the overpriced stock.

Another reason is that short sales can protect your portfolio against a market downturn. An investor can diversify a long portfolio by adding some short positions. The portfolio will then have positions that make money both when prices rise and when they fall. This reduces the volatility in the portfolio's returns and helps protect the value of the portfolio when prices are falling. This is know as a hedging. More about that I'll caver in future posts.

Welcome To My Stock Market & Forex Blog!

Who Am I And What Is This Blog About?

Hi, my name is Dusan Kovacevic and welcome to my blog! I became interested in the markets since 2004, and since then I'we been trading in stocks, forex, CFDs and spread-betting. Also, I have a BA degree in Finance and worked as a junior broker, so I think I have  a solid understanding about financial markets. My intention with this blog is to help people with little or no formal education about financial markets to learn how global financial system works, what is the difference between investing and trading and how to use both to achieve your financial goals.

Here is a list of the main subjects, that in my opinion, are really important to understand before we can move to real trading stuff. Here is the list:

- What is stock market?

- What stock exchanges exist today and how they work?

- Macroeconomic and why is it important to understand?

- Cycles, recession and prosperity.

- Meaning of inflation and deflation.

- What are interest rates

- What is yield curve

- Feds and Fed's chairmen

- Indexes and averages and what are they telling me?

- Types of trading instruments

- Type of stocks

- Bonds, what are they and are they really alternative to stocks?

- Derivatives, what they are and differences and similarities between them

- Options, calls, puts and the greeks

- Futures, forwards warrants and swaps

- Mutual funds and the differences between them

- ETFs and why are they important for investors to achieve their goals?

- Hedge funds

- Trading vs. Investing? What's better?

- Trading strategies

- Investing strategies

- News. Are they important or not, and how to know when are news already priced into the price of   underlying instrument.

- Fundamental and technical analysis.

So let's start with definition of what the is a Stock Market...