Formal Broker/Dealer Recommendations:

How does your account executive decide what securities to recommend to you?  What factors does your account executive take into consideration in making buy, hold or sell recommendations to you?  These are simple questions.  However, the answer could have a significant impact on the profitability of your account.

There are two basic methods that can be used.  In the extreme, the recommendations can either be generated by an account executive that is schooled in some type of analytical discipline or the account executive makes his selection from formal research generated by his or her firm.  In recent years, we have seen a migration toward firm generated research.  Consequently, this post focuses on the latter.  Please keep in mind that this information is being provided for education purposes only.  Thus, it is not designed to be complete in all material respects.  It should not be relied upon as providing legal or investment advice.  If you have any questions concerning this post, you should contact a qualified professional.

One of the first questions that you should ask you account executive is how he or she decides what to recommend to you and whether the account executive will agree to monitor the positions that are being recommended to you so that the account executive will recommend appropriate remedial action to you to protect your assets.

In the context of this post, many brokerage firms issue written reports, sometimes called opinions or ratings.  These reports contain buy, sell or hold recommendations, on securities that the firm covers.  Different brokerage firms use different description variations, which are identified in the reports.  Commonly used variations include: strong buy, buy, accumulate, hold, outperform, market perform, underperform, and sell.  Strong buy, buy, hold and sell are self-explanatory.  Accumulate is the weakest form of buy recommendation.  It may have a more negative implication, however, if accumulate represents a downgrade from a previous buy recommendation.  Market perform, outperform and underperform project a 12 month price behavior relative to the overall market as measured by the Standard & Poors 500 Composite Index.

However, please keep in mind that these ratings usually have nothing to do with whether or not the recommendation are in line with your investment objectives.  However, some research reports might provide this information.  For example, does this security, even though it is identified as an outperform, meet you investment objective of income. 

Russell L. Forkey, P.A.

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