Clarification on Stock Information by Javahaa

Hi Everyone,

Thanks to Javahaa who clarified a lot of details and issues I can’t really answer. He warns against people who are not sophisticated in the art of investing to try short selling. That was my feeling but I don’t know how complicated it is to learn so, I’m just a freak, what can I say. Please read his very informative post. It answers many questions about shorting and other issues.

Thanks again to Javahaa!

javahaaa

Denise, something you said needs to be clarified, for the benefit of your readers, re ETrade/FDIC/stock holdings, because I know you do not want to give wrong information. I’ll also address, briefly, the ’short’ issue for regular folks. I am a professional investor (and read you out of curiousity and respect for intuitives, though I don’t base my work on it). You are right, that investment assets (stocks, bonds, mutual funds) in brokerage accounts aren’t FDIC insured. This goes for mutual funds held at a mutual-fund company, too. But, your assets are covered by “SIPC” insurance, are kept separate from the investment firms’s own assets, and can’t be seized by the government or creditors if the firm goes under. For example, anyone with an account at Lehman didn’t lose it -their money was separate from the firm. Any reputable brokerage firm, and any you’ve ever heard of is, like ETrade or Schwab or Merrill Lynch, etc., has “SIPC” insurance that covers your brokerage/mutual fund assets up to $500K, and has private insurance (often from Lloyds) to a much higher amount than that. If it’s a firm you’ve never heard of, always verify that a firm has SIPC and additional insurance before giving your money to them. Private “pooled” investments, like hedge funds, usually don’t. SIPC insurance does _not _protect your investments from market fluctuation or investment loss just because the stock/fund has gone down in value. It just protects their value on the day a firm goes under, like Lehman on Sept 16, until they can be transferred to another brokerage firm. That transfer happens ASAP, but it may take a few days, which means you can’t buy or sell anything during that time. SIPC protects the value until the transfer is complete. Eveyone should know, too, that if they opened an account at a bank that has stocks or mutual funds, or purchased an annuity there, it’s a _brokerage_ account, not a bank account. The only thing an FDIC-insured bank account will have is cash or CDs. Also, a brokerage account at ETrade, etc., may actually have cash assets that are FDIC insured – this is different from a “money-market fund”, which is not. Ask the firm. A CD, whether bought at a local bank or in your brokerage account, is always FDIC insured, since banks create these (and sell them on the “open market”, not just your local branch). As for “shorting”: For those who think the market is going down and is not already a sophisticated investor, they should _not_ take a crash course in shorting stocks. Shorting is dangerous – you can lose a lot more than you started with – and should be left to professionals. However, the regular investor can easily purchase an “inverse” fund, which goes the exact opposite of the market. I won’t name any, but there are 2 mutual-fund companies that offer them, and a whole lot of ETFs that do; Google to find (I caution anyone against using leveraged funds when inversing. ..and if you don’t already know an ETF is, or what a leveraged fund is, then you shouldn’t get into these in the first place). If you want to understand these more you can always interview an experienced, local financial advisor for education and help (I am remaining anonymous and will not answer questions on this or any other blog). Never do anything you don’t understand, or don’t understand the downside risk of, even if someone is helping you. Again, while the average investor can easily purchase funds that inverse the market, only sophisticated, experienced investors should actually “short” stocks or get involved in futures or options. Unless, of course, you don’t mind losing lots of money. And, Denise, I would caution you in any advice you allow to be posted on this subject.

Clarification on Stock Information by Javahaa