Questions to Ask Your Broker

Stockbrokers are salespeople, and so they can sell hard. If You feel uncomfortable when a broker urges you to buy a stock, be sure to ask some pointed questions.

One of the first should be: How has that stock done lately? A more important question, particularly if you are a long term investor who plans to buy and hold: What are the long range earnings forecasts for the stock? If your broker doesn't have the answers immediately, tell him that's all right that he can call you back when he gets them. Patience pays.

Did your broker or an analyst at his or her firm do the research on the stock? If it was an analyst, ask to see his or her report on the company. And find out how well other stocks that this analyst has recommended have done.

Is the stock undervalued? One sign that a stock could be a buy is that its price is near the bottom of its trading range of the past few months. But a stock could be cheap because the company faces serious problems. Ask what makes the stock such a bargain.

What is the company's profit margin? If it is above its industry average, the company is probably well run.

Why should you buy this stock now? Obviously you don't want to bother with a concern when its business cycle is about to turn down, Most industries have predictable cycles of earnings declines and recoveries. Ask when to expect the next longer term upswing or downswing and when the stock price is likely to reflect that change.

What are the chances that, near term, the stock will go down instead of up? Ask if the company faces strong competition, is involved in expensive litigation or is laden with debt. Heavy interest payments may cut into earnings. Get your broker to help you set a price at which you might be wise to sell and cut your losses. The price he names will help you gauge the risk he sees in the investment.

How does this stock fit in with your overall strategy? Make sure that your broker knows whether your investment objective is long term growth or high dividend income or a quick killing. Tell him how much risk you are willing to shoulder to achieve your aims. If you are a buy and hold investor and your broker keeps suggesting ideas suited to frequent traders, then trade brokers.

Who are the large shareholders in this company What you would like to hear is that some wealthy private investors have just bought a lot of the stock and are thinking of attempting a takeover. Or that the firm's management owns a sizable portion of the shares. Top managers who are also substantial stockholders have an added incentive to see that a firm does well.

Is this stock better than the one the same broker urged you to buy last week? Most brokers have several stocks to sell, so get yours to compare some of the other issues on his list with the ones he's flogging now.

Remember: if you invest in a stock and its price plummets, you will lose money, but your broker will still pocket a commission. Unlike you, he or she is guaranteed to profit if you follow his or her advice.