When it comes to investment, many are not sure what to do and how to do it. Usually, when a customer assigns a brokerage firm to handle the investment, the basic procedure is to sign a new account agreement. However, before all the signing process, the most important procedure is to cautiously review the written information on the black and white since it will affect the legal rights associated to the registered account. Sales representative also might present other additional account documentation; however before fully understanding the noted agreement, no signature should be plastered onto that document. The verbal representation and illustration cannot be relied on as it was not jotted down in the agreement.

Many people are ignorant when it comes to investment and its operation. When a would-be investor engages a brokerage firm to undertake his investment, the fundamental requirement is for him to first establish an investment account with the firm. To this end, he is required to sign an account opening agreement and other related forms associated to the operation of the account. However, before a would-be investor “pens” his signature on the dotted lines, he should review carefully all the documents and information presented and be clear of his rights associated to the account. In this regard, he should bear in mind that any verbal promises and representations made by the agent of the firm has no legal basis whatsoever in future disputes.

When the signing process is done, information regarding the investment objectives, personal financial condition which includes monthly income, net worth and investment experience has to be conveyed to the sales representative for recommendation purposes. To complete the new account agreement, three basic essential decisions have to be considered:-

In most cases, the agent of the firm is required to conduct a “know your client” procedure to satisfy the compliance rules and regulations imposed by the brokerage firm. This is in line with the proper protocol of most of the brokerage firms especially when some form of margin financing facility is offered in conjunction with the creation of the new account. Prior to the decision to enter into such an agreement with the firm, a would-be investor should carefully consider the following；

1. Who will have final authority in the operation of the account.

Usually, the decision making process will fall on the investors himself, unless he gave permission or discretionary authority to his sales representation to make the decision for him. Discretionary authority is when sales representative is given the ability to make investment on what he think is best for the investor without needing to consult the investors on the price; type of security or investment; amount invested and when to buy or sell that investment. However, before choosing this decision, do consider whether this is the best and most appropriate step to take.

Under normal circumstances, the would-be investor or the client shall have final authority on its operation. However, in certain circumstances, the agent is vested with discretionary authority to operate the account (may include certain pre-set limit). Under such event, the agent may operate the account in a manner he deems fit and best for the interest of the client. Before deciding on which mode of operation, the would-be investor shall evaluate his own situation like his own professional knowledge of the investment, the time required to monitor market price fluctuations prior to sale, adverse changes in key financial indicators that may affect his investment, etc and he should then choice the best option that is most suitable for him under the circumstances.

1. Payment Mode or Method

The common payment for a security purchase will be in cash terms, therefore many investors opt for this payment method to minimise any hassle. However, there is another payment alternative that is through margin account. Making investment through margin account suggest that investors are able to borrow from the brokerage firm to do any security purchases, but investors will have to pay the interest on the rented amount.

Prior investment, a margin agreement that disclose all possible interest term will have to be sign. However, bear in mind that if trading under margin account, the brokerage firm has full authority of selling any securities in the investment account without needing to notify the investors; as to overwrite any deficits resulting from a decrease in security value. Also, if the value of the investment account is below the outstanding loan, investors will be held liable. In other words, the margin account allows brokerage firm to manoeuvre the investment accounts anytime without proper notice or compensation.

A brokerage firm is a licensed member of the securities exchange and securities exchange outlined clear purchase and sale rules and regulations which must be strictly followed by its members. In normal circumstances, all investment contracts must be transacted in cash in compliance with rules and regulation governing transaction of such nature. A would-be investor may fully settle a purchase contract entirely with his own cash or through a margin trading account. In the case of a margin trading account, certain portion of the contract is settled by way of a loan extended by the brokerage firm to its client with the purchased securities being pledge to the firm as security. The loan carries a pre-agreed rate of interest and there are strict rules as to when the firm is entitled to “make a margin call” on its client and when the firm is entitled to “force sell” the securities to recover the loan in the event if the client fails to rectify the margin “back to the required limit after the “call”.

1. The risk factors

Normally, in the new investment account or account agreement, the overall investment objectives along with risk terms have to be incorporated. The risk term can be categorised as ‘income’, ‘growth’ or ‘aggressive growth’. Before deciding on the terms, be sure to understand the distinction between those three categories and pick the one that can reflect the required goal.

Normally, an account agreement is a standard printed form to be signed by the client. Additionally, a client may clearly define his investment objective and risk tolerance level in a separate written instruction to the agent.

It is also essential for some brokerage firm to ask investors to sign a legally binding contract as to mediate any future disagreement between the investor, sales representative and brokerage firm. But under the federal securities law, such agreement is not a necessity, because signing such agreement suggests that investors are giving away his authority to sue the sales representative and firm in court if there is a dispute in the future. Therefore, be mindful when being faced with such agreement.

In some cases, the brokerage firm may require the client to execute what is called an “indemnity agreement” to absorb itself of any legal liability in the event of disputes between the client and its agent. However, such an “indemnity agreement” is not obligatory on the part of the client.

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