You have surplus funds with you and you want to park your money in some good investment vehicle. You think that you can take a risk to see your money growing. You don't want to invest your money in a new business and would rather buy some shares of a profit-making company. Then investing in the stock market is a good decision; but investing without proper knowledge of share trends may prove hazardous. This is where a stock broker comes into picture. Any individual trading in stocks cannot directly go to the stock exchange and quote a price for a stock from the seller. He/she has to do it through a ?middleman? known as the stock broker. These brokers may work individually, form a small firm, or become associated with bigger brokerage companies. The stock brokers operating in any particular stock exchange have to get themselves registered with that stock exchange.
Making profits from your investment depends more than 80% on the choice of a good stock broker with a strong acumen of the market. There are many brokers or brokerage firms that only carry out stock transactions for their clients without providing financial advice; they charge discounted rates from the clients. However, this is not the case for most. Stock brokers rather act as financial and investment advisors for individuals. They have a good understanding of the fluctuations in the market and are the most learned and professional people to make speculations about the market. For example, a good broker can speculate the price of tomorrow's stocks by studying today's market trends of countries that are at a different time zone. This is the most powerful trait of a stock broker. Before choosing any broker you should consider investigating his/her track record. His/her qualification also plays an important role. A broker advising you to short-sell your shares may not be the right option for you. He/she should be able to segregate your investment into low-, medium-, and high-risk stocks so that when the market tumbles your low- and medium-risk stocks don't get affected much.
It is sometimes difficult to find a broker who understands the financial needs of an individual. Only profit-making attitude does not take a broker too far in career; he/she should love the financial market. Some individuals take decisions and carry out trading on their own. However, it is always advisable to engage the services of a stock broker for a new investor. With a broker in service, your financial tensions may well be of someone else!!
The remuneration of a broker is the salary paid by the brokerage firm and the commission paid by the stock transaction made by the clients. Thus, a broker makes money not out of the volume or number of transactions made by a client, but the profit arising from that trading. The stock brokers spend their days in a very competitive environment trying to learn as much as possible about the market and its trends, building up a huge clientele of successful investors, and trading stocks. Some brokers also provide online trade options, where individuals can trade 24 hours a day, but mostly without personal interaction with their agents. Most, however like to have a real stock broker providing them financial advice, teaching them why and how to invest in specific shares of specific companies, and acting as an advisor on when to carry out stock transactions to gain maximum profit out of each investment.
Why? Because annuities typically pay handsome commissions to the salespeople. But does this mean that annuities are always bad? Given the right circumstances, fixed annuities and variable annuities could be the right financial vehicle for you.
What Are Annuities Anyway?
Annuities are life insurance products designed to provide supplemental income, mostly for retired people. The term "annuity" literally means "annual payment of allowance or income."
Basically, annuities tend to work like this: Someone pays a set monthly premium, as with life insurance, for so many years. Then, when he's done paying, he waits for a while. A few years later, he begins receiving monthly income.
The amount he is to receive, usually for the rest of his life, is generally much greater than the total amount of premiums he paid in.
Fixed Annuities - The Original Version
Fixed annuities work much like the example above. The key thing is that with fixed annuities, investors are guaranteed a set pay-out. Almost no other investment product guarantees anything, and that's why fixed annuities are actually a form of insurance, not securities.
The big problem with fixed annuities is inflation. While the money you pay in premiums is generally less than you're guaranteed to receive, when you adjust for inflation, you might be losing out. This is one of the reason annuities have gotten so much bad press recently.
Variable Annuities - New and Improved?
Variable annuities protect you against inflation risk by investing your premiums more aggressively. The downside? While variable annuities guarantee lifetime income, they do not guarantee how much that income might be. In fact, you could even lose money by investing in variable annuities.
For this reason, many of the more ethical financial advisors recommend that you buy a modest life insurance policy and invest the premiums you save into solid mutual funds.
To Be Fair - The Upside of Annuities
Theoretically, annuities could be a great investment vehicle. Rather than "throwing away" life insurance premiums, annuities can provide for a death benefit while simultaneously allowing your money to grow.
Also, when compared to mutual funds, annuities offer several advantages. For one, the money you invest grows tax deferred. This means that you will not be required to pay income tax on the funds invested into an annuity until you begin withdrawing money.
Secondly, variable annuities do guarantee lifetime income, while theoretically at least, you could lose all of your money invested into mutual funds.
In practice, this is unlikely, but at least with an annuity you will be able to plan for the worst case scenario of a guaranteed lifetime benefit. The worst case scenario for mutual funds is $0.
Mutual Funds and Variable Annuities - A Side-by-Side Comparison
Maximum sales load: Mutual fund, 8.5 percent; variable annuity, no maximum. This means that unethical brokers can charge unsuspecting clients any sales charge that they want.
Pricing: Mutual fund, net asset value (NAV) calculated once per day; variable annuity, unit value calculated once per day. Mutual funds have the major advantage of being liquid - you can buy or sell them any business day of the year. A variable annuity is a life insurance product and is not liquid at all.
Share value: Mutual fund, depends on performance of the fund; variable annuity, depends on the performance of the "separate account," in which a portion of premiums paid are invested.
Make Sure That Your Financial Advisor is Looking Out for Your Interests
If you feel that your financial advisor is more concerned with her own commission revenue than your financial well-being, head for the door and never look back.
Financial advisors are supposed to be professionals, not cheap salespeople. Like doctors and lawyers, their duty is to those whom they serve, not to the company that employs them or to their own paychecks.
Older individuals are especially susceptible to hotshot young brokers who think they can score a quick buck by unloading a junk product with a big commission.
Your best defense against this is to become as fully educated as you can about each investment product that's recommended to you, and to find a financial advisor with references from people you know you can trust.
A Few Questions to Ask Your Advisor
If you're ever dubious of a product your advisor is recommending, be sure to ask him how much commission he receives for selling it. Come right out and ask if he would recommend the product if the commission were half or one-third what it is.
Ask him what are some products that he recommends that do not provide such high commissions. And if you really want to rattle your advisor, ask him what score he received on the Series 7 exam. Ask him to show you his certificate proving his score.
Tell him that you're considering a variety of advisors, and these are the criteria you're using to determine which one is right for you. It's important that he remembers that you are his boss, and that he is to put your interests ahead of his own. That's what being a professional is all about.
Both Amit Malhotra & William Smith are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
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