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U.S. Securities and Exchange Commission

Accounts – Opening A Brokerage Account

When you open a brokerage account, you must sign a new account agreement. You should carefully review all the information in this agreement because it determines your legal rights regarding your account.

Do not sign the new account agreement unless you thoroughly understand it and agree with the terms and conditions it imposes on you. Do not rely on statements about your account that are not in this agreement.

Ask for a copy of any account documentation prepared for you by your broker.

The broker should ask you about your investment goals and personal financial situation, including your income, net worth, and investment experience, and how much risk you are willing to take on. Be honest. The broker relies on this information to determine which investments to recommend to you. If a broker tries to sell you an investment before asking you these questions, that's a very bad sign. It signals that the broker has a greater interest in earning a commission than determining whether the investment is consistent with your investment goals and tolerance for risk.

The new account agreement requires that you make three critical decisions: 

  1. Who will make the final decisions about what you buy and sell in your account? You will have the final say on investment decisions unless you give "discretionary authority" to your broker. Discretionary authority allows your broker to invest your money without consulting you about the price, the type of security, the amount, and when to buy or sell. Do not give discretionary authority to your broker without seriously considering the risks involved in turning control over your money to another person. Note that except on a limited basis, your broker cannot accept discretionary authority unless he or she is also registered as an investment adviser.
  2. How will you pay for your investments? Most investors maintain a "cash" account that requires payment in full for each security purchase. But if you open a "margin" account, you can buy securities by borrowing money from your broker for a portion of the purchase price. For more information about how margin accounts work, read our publication, Margin: Borrowing Money To Pay for Stocks and FINRA's Investor Alert on this subject.
  3. Be wary of buying stocks on margin. Make sure you understand how a margin account works, and what happens in the worst case scenario before you agree to buy on margin. Unlike other loans, like for a car or a home, that allow you to pay back a fixed amount every month, when you buy stocks on margin you can be faced with paying back the entire margin loan all at once if the price of the stock drops suddenly and dramatically. The firm has the authority to immediately sell any security in your account, without notice to you, to cover any shortfall resulting from a decline in the value of your securities. You may owe a substantial amount of money even after your securities are sold. The margin account agreement generally provides that the securities in your margin account may be lent out by the brokerage firm at any time without notice or compensation to you. The firm's lending of securities does not affect the value of your account.

  4. How much risk are you comfortable taking? In a new account agreement, you must specify your overall investment objective in terms of risk. Categories of risk may have labels such as "income," "growth," or "aggressive growth." Be certain that you fully understand the distinctions among these terms, and be certain that the risk level you choose accurately reflects your investment goals. Be sure that the investment products recommended to you reflect the category of risk you have selected.  

When opening a new account, the brokerage firm may ask you to sign a legally binding contract to arbitrate any future dispute between you and the firm or your sales representative. Signing this agreement means that you give up the right to sue the firm or your sales representative in court. For additional information, read Holding Your Securities — Get the Facts.

You may have your securities registered either in your name or in the name of your brokerage firm.

For more information that will help you select a brokerage firm and sales representative, read our brochure, Invest Wisely: Advice From Your Securities Industry Regulators.


We have provided this information as a service to investors.  It is neither a legal interpretation nor a statement of SEC policy.  If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.

Modified: 03/26/2008