The last time you spoke with your broker did he use any of the following words? Diversification, Price-to-earnings ratios, discretionary trading, lifting a leg (he’s talking to you not your dog), leverage, divergence, fee-based compensation, escalator clause, tactical asset allocation and other mesmerizing words to place you in stupefying shock.
Brokers do that to let you know that you don’t know anything about the market and you must allow them to make decisions for you. You don’t know the language. You are just too dumb. Another mushroom.
Wadda ya’ mean mushroom? Didn’t you know? Most customers are considered mushrooms. A mushroom is grown in the dark and fed horse manure. Now you understand why they treat you that way.
Then try to get him to explain commission structures of mutual funds. Oh, you’re not allowed to ask that. You might want to read page 35 in the January 31, 2005 issue of Newsweek magazine for an excellent breakdown of this Wall Street scam. Maybe you better not. You will get mad at your broker.
Another one of those big words they don’t want to discuss is redemption fees. This is an extra charge of as much as 2% of the amount that is deducted from your check if you sell within a certain period of time. Brokerage companies tell you it is to discourage frequent short-term trading which adds to their cost of doing business and increases the expenses that are charged to you every year. Having owned a brokerage company I can tell you this is more of that brown stuff they feed to the mushrooms.
The reason for redemption fees is to discourage you from selling. You might take money out of your account and that must be restricted in every way possible.
Some of the biggest words are associated with those special limited partnerships. These are definitely brain twisters. You can get these in real estate, hospital construction, oil and gas pipe lines and the most confusing one of all is technology. And they are all guaranteed. That word I understand, but be sure you read the fine print to see what is guaranteed. You remember the old one that they give it to you in the big print and take it away in the fine print.
How about placing a limit bid on a secondary distribution of a special claim on residual equity certificates? You didn’t understand that? Believe me you don’t want to.
When you are solicited by your broker, financial planner or anyone to buy any equity you must clearly understand what you are buying.
If you don’t understand it don’t buy it.