SEC Pub. 009 (10/04)
Dear Reader:

While money doesn’t grow on trees, it can grow when you save 

and invest wisely. 

Knowing how to secure your financial well-being is one of the 

most important things you’ll ever need in life. You don’t have 

to be a genius to do it. You just need to know a few basics, form 

a plan, and be ready to stick to it. No matter how much or little 

money you have, the important thing is to educate yourself 

about your opportunities. In this brochure we’ll cover the 

basics on saving and investing.

At the SEC, we enforce the laws that determine how 

investments are offered and sold to you. These laws protect 

investors, but you need to do your part, too. Part of this 

brochure tells you how to check out investments and the 

people that sell them so you do not fall victim to fraud or costly 

mistakes.

No one can guarantee that you’ll make money from 

investments you make. But if you get the facts about saving 

and investing and follow through with an intelligent plan, you 

should be able to gain financial security over the years and 

enjoy the benefits of managing your money.

Please feel free to contact us with any of your questions or 

concerns about investing. It always pays to learn before you 

invest. And congratulations on taking your first step on the 

road to financial security! 

Offi ce of Investor Education and Assistance

U.S. Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, D.C. 20549-0213

www.sec.gov/investor.shtml
Don’t Wait to Get Started 

No one is born knowing how to save 

or to invest. Every successful investor 

starts with the basics—the information 

in this brochure.

A few people may stumble into financial security—a wealthy 

relative may die, or a business may take off. But for most 

people, the only way to attain financial security is to save and 

invest over a long period of time. 

Time after time, people of even modest means who begin the 

journey reach financial security and all that it promises: buying a home, educational opportunities for their children, and 

a comfortable retirement. If they can do it, so can you!

You Can Do It! 

It’s Easier Than 

You Think.
2

What Are Your Thoughts on Saving and Investing? 

• “I know that I will have a far better chance of 

having more money in the future if I start setting 

goals and planning now.”

• “I can start small and watch my money grow. After 

all, even the tallest tree starts growing from a seed I 

can hold in the palm of my hand.”

 So, let’s get started. By the end of this brochure, 

you’ll be on your way to reaching your financial 

goals.

Imagine what you could accomplish if you had these 

thoughts running through your head instead—
3

Your First Step—Making a Financial Plan 

What are the things you want to save and invest for?

• a home

• a car

• an education

• a comfortable retirement

• your children

• medical or other emergencies

• periods of unemployment

• caring for parents

Make your own list and then think about which goals are the 

most important to you. List your most important goals first.

Decide how many years you have to meet each specific 

goal, because when you save or invest you’ll need to find a 

savings or investment option that fits your time frame for 

meeting each goal.

Many tools exist to help you put your financial plan together. 

You’ll find a wealth of information, including calculators and 

links to non-commercial resources, on the SEC’s website at 

www.sec.gov/investor.shtml.
4

Your First Step—Making a Financial Plan

Sit down and take an honest look at your 

entire financial situation. You can never take 

a journey without knowing where you’re 

starting from, and a journey to financial 

security is no different.

You’ll need to figure out on paper your current situation—

what you own and what you owe. You’ll be creating a “net 

worth statement.” On one side of the page, list what you 

own. These are your “assets.” And on the other side list 

what you owe other people, your “liabilities” or debts.

Subtract your liabilities from your assets. If your assets are 

larger than your liabilities, you have a “positive” net worth. 

If your liabilities are greater than your assets, you have a 

“negative” net worth.

You’ll want to update your “net worth statement” every year 

to keep track of how you are doing. Don’t be discouraged 

if you have a negative net worth. If you follow a plan to get 

Know Your 

Current 

Financial 

Situation
5

Your First Step —Making a Financial Plan

into a positive position, you’re doing 

the right thing.

The next step is to keep 

track of your income 

and your expenses for 

every month. Write 

down what you and 

others in your family 

earn, and then your monthly 

expenses.

Include a category 

for savings and 

investing. What are 

you paying yourself 

every month? Many 

people get into the habit of saving 

and investing by following this 

advice: always pay yourself or your 

family first. Many people find it 

easier to pay themselves first if they 

allow their bank to automatically 

remove money from their paycheck 

and deposit it into a savings or 

investment account. 

Likely even better, for tax purposes, 

is to participate in an employersponsored retirement plan such 

as a 401(k), 403(b), or 457(b). 

These plans will typically not only 

automatically deduct money from 

your paycheck, but will immediately 

Know Your 

Income 

and 

Expenses

Pay Yourself 

or Your 

Family First
6

reduce the taxes you are 

paying. Additionally, in 

many plans the employer 

matches some or all of your 

contribution. When your 

employer does that, it’s 

offering “free money.”

Any time you have 

automatic deductions 

made from your paycheck 

or bank account, you’ll 

increase the chances of 

being able to stick to your 

plan and to realize your 

goals.

“But I Spend Everything 

I Make.”

If you are 

spending all 

your income, 

and never 

have money 

to save or invest, you’ll need to look for 

ways to cut back on your 

expenses. When you watch 

where you spend your 

money, you will be surprised how small everyday expenses 

that you can do without add up over a year. 

Your First Step —Making a Financial Plan

Finding 

Money to 

Save or 

Invest

“But I Spend Everything 
7

Small Savings Add Up to Big Money

How much does a cup of coffee 

cost you?

Would you believe $465.84? Or 

more?

If you buy a cup of coffee every day 

for $1.00 (an awfully good price for 

a decent cup of coffee, nowadays), 

that adds up to $365.00 a year. If you 

saved that $365.00 for just one year, 

and put it into a savings account or 

investment that earns 5% a year, it 

would grow to $465.84 by the end of 

5 years, and by the end of 30 years, 

to $1,577.50.

That’s the power of “compounding.” With compound 

interest, you earn interest on the money you save and on the 

interest that money earns. Over time, even a small amount 

saved can add up to big money.

If you are willing to watch what you spend and look for little 

ways to save on a regular schedule, you can make money 

grow. You just did it with one cup of coffee.

If a small cup of coffee can make such a huge difference, start 

looking at how you could make your money grow if you 

decided to spend less on other things and save those extra 

dollars.

If you buy on impulse, make a rule that you’ll always wait 

24 hours to buy anything. You may lose your desire to buy 

it after a day. And try emptying your pockets and wallet of 
8

spare change at the end of each day. You’ll be surprised how 

quickly those nickels and dimes add up!

Speaking of things adding up, there is 

no investment strategy anywhere that 

pays off as well as, or with less risk than, 

merely paying off all high interest debt 

you may have.

Many people have wallets filled with credit cards, some 

of which they’ve “maxed out” (meaning they’ve spent up 

to their credit limit). Credit cards can make it seem easy to 

buy expensive things when you don’t have the cash in your 

pocket—or in the bank. But credit cards aren’t free money.

Most credit cards charge high interest rates—as much as 

18 percent or more—if you don’t pay off your balance in 

full each month. If you owe money on your credit cards, 

the wisest thing you can do is pay off the balance in full as 

quickly as possible. Virtually no investment will give you 

the high returns you’ll need to keep pace with an 18 percent 

interest charge. That’s why you’re better off eliminating all 

credit card debt before investing savings.

Once you’ve paid off your credit cards, you can budget your 

money and begin to save and invest. Here are some tips for 

avoiding credit card debt:

• Put Away the Plastic

Don’t use a credit card unless your debt is at a 

manageable level and you know you’ll have the 

money to pay the bill when it arrives.

Small Savings Add Up to Big Money

Pay Off Credit 

Card or Other 

High Interest 

Debt
9

• Know What You Owe 

It’s easy to forget how much you’ve charged on your 

credit card. Every time you use a credit card, write 

down how much you have spent and figure out how 

much you’ll have to pay that month. If you know you 

won’t be able to pay your balance in full, try to figure 

out how much you can pay each month and how 

long it’ll take to pay the balance in full.

• Pay Off the Card with the Highest Rate

If you’ve got unpaid balances on several credit cards, 

you should first pay down the card that charges the 

highest rate. Pay as much as you can toward that debt 

each month until your balance is once again zero, 

while still paying the minimum on your other cards.

The same advice goes for any other high interest debt (about 

8% or above) which does not offer the tax advantages of, for 

example, a mortgage.

Now, once you have paid off those credit cards and begun 

to set aside some money to save and invest, what are your 

choices?

The Two Ways to Make Money

There are basically two ways to make money.

 

1. You work for money.

Someone pays you to work for them or you have your 

own business. 

Making Money Grow
10

Making Money Grow

2. Your money works for you.

You take your money and you save or invest it. 

Your money can work for you in two ways:

Your money earns money. When your money goes to work, 

it may earn a steady paycheck. Someone pays you to use 

your money for a period of time. When you get your money 

back, you get it back plus “interest.” Or, if you buy stock 

in a company that pays “dividends” to shareholders, the 

company may pay you a portion of its earnings on a regular 

basis. Your money can make an “income,” just like you. You 

can make more money when you and your money work.

You buy something with your money that could increase 

in value. You become an owner of something that you hope 

increases in value over time. When you need your money 

back, you sell it, hoping someone else will pay you more 

for it. For instance, you buy a piece of land thinking it will 

increase in value as more businesses or people move into 

your town. You expect to sell the land in five, ten, or twenty 

years when someone will buy it from you for a lot more 

money than you paid.

And sometimes, your money can do both at the same time—

earn a steady paycheck and increase in value.
11

Making Money Grow

The Differences Between Saving and Investing 

Saving

Your “savings” are usually put into the safest places, or 

products, that allow you access to your money at any 

time. Savings products include savings accounts, checking 

accounts, and certificates of deposit. At some banks and 

savings & loan associations your deposits may be insured 

by the Federal Deposit Insurance Corporation (FDIC). But 

there’s a tradeoff for security and ready availability. Your 

money is paid a low wage as it works for you.

After paying off credit cards or other high interest debt, most 

smart investors put enough money in a savings product to 

cover an emergency, like sudden unemployment. Some 

make sure they have up to six months of their income in 

savings so that they know it will absolutely be there for them 

when they need it.

But how “safe” is a savings account if you leave all of your 

money there for a long time, and the interest it earns doesn’t 

keep up with inflation? What if you save a dollar when it 

can buy a loaf of bread. But years later when you withdraw 

that dollar plus the interest you earned on it, it can only 

buy half a loaf? This is why many people put some of their 

money in savings, but look to investing so they can earn 

more over long periods of time, say three years or longer. 

Investing 

When you “invest,” you have a greater chance of losing 

your money than when you “save.” Unlike FDIC-insured 

deposits, the money you invest in securities, mutual 
12

Making Money Grow

funds, and other similar 

investments is not federally 

insured. You could lose your 

“principal”—the amount 

you’ve invested. But you 

also have the opportunity to 

earn more money. 

What about risk?

All investments involve 

taking on risk. It’s important 

that you go into any 

investment in stocks, bonds 

or mutual funds with a full 

understanding that you 

could lose some or all of your 

money in any one investment. While over the long term the 

stock market has historically provided around 10% annual 

returns (closer to 6% or 7% “real” returns when you subtract 

for the effects of inflation), the long term does sometimes 

take a rather long, long time to play out. Those who invested 

all of their money in the stock market at its peak in 1929 

(before the stock market crash) would wait over 20 years to 

see the stock market return to the same level.

However, those that kept adding money to the market 

throughout that time would have done very well for 

themselves, as the lower cost of stocks in the 1930s made for 

some hefty gains for those who bought and held over the 

course of the next twenty years or more.

It is often said that the greater the risk, the greater the 

potential reward in investing, but taking on unnecessary risk 
13

Making Money Grow

is often avoidable. Investors best protect themselves against 

risk by spreading their money among various investments, 

hoping that if one investment loses money, the other 

investments will more than make up for those losses. This 

strategy, called “diversification,” can be neatly summed up 

as, “Don’t put all your eggs in one basket.” Investors also 

protect themselves from the risk of investing all their money 

at the wrong time (think 1929) by following a consistent 

pattern of adding new money to their investments over long 

periods of time.

Once you’ve saved money for investing, consider carefully 

all your options and think about what diversification 

strategy makes sense for you. While the SEC cannot 

recommend any particular investment product, you should 

know that a vast array of investment products exists—

including stocks and stock mutual funds, corporate and 

municipal bonds, bond mutual funds, certificates of deposit, 

money market funds, and U.S. Treasury securities.

Diversification can’t guarantee that your investments won’t 

suffer if the market drops. But it can improve the chances 

that you won’t lose money, or that if you do, it won’t be as 

much as if you weren’t diversified. 

What are the best investments for me?

The answer depends on when you will need the money, 

your goals, and if you will be able to sleep at night if you 

purchase a risky investment where you could lose your 

principal.

For instance, if you are saving for retirement, and you have 

35 years before you retire, you may want to consider riskier 
14

investment products, knowing that if you stick to only the 

“savings” products or to less risky investment products, 

your money will grow too slowly—or, given inflation and 

taxes, you may lose the purchasing power of your money. 

A frequent mistake people make is putting money they will 

not need for a very long time in investments that pay a low 

amount of interest.

On the other hand, if you are saving for a short-term goal, 

five years or less, you don’t want to choose risky investments, 

because when it’s time to sell, you may have to take a loss. 

Since investments often move up and down in value rapidly, 

you want to make sure that you can wait and sell at the best 

possible time.

What are investments all about?

When you make an investment, you are giving your money 

to a company or enterprise, hoping that it will be successful 

and pay you back with even more money. 

Stocks and Bonds

Many companies offer investors the opportunity to buy 

either stocks or bonds. The following example shows you 

how stocks and bonds differ. 

 

Let’s say you believe that a company that makes automobiles 

may be a good investment. Everyone you know is buying 

one of its cars, and your friends report that the company’s 

cars rarely break down and run well for years. You either 

have an investment professional investigate the company 

and read as much as possible about it, or you do it yourself. 

Making Money Grow
15

After your research, you’re 

convinced it’s a solid company 

that will sell many more cars in 

the years ahead.

The automobile company offers 

both stocks and bonds. With 

the bonds, the company agrees 

to pay you back your initial 

investment in ten years, plus pay 

you interest twice a year at the 

rate of 8% a year.

If you buy the stock, you take 

on the risk of potentially losing 

a portion or all of your initial 

investment if the company does 

poorly or the stock market drops 

in value. But you also may 

see the stock increase in value 

beyond what you could earn 

from the bonds. If you buy the 

stock, you become an “owner” of 

the company.

 

You wrestle with the decision. If you buy the bonds, you will 

get your money back plus the 8% interest a year. And you 

think the company will be able to honor its promise to you 

on the bonds because it has been in business for many years 

and doesn’t look like it could go bankrupt. The company 

has a long history of making cars and you know that its stock 

has gone up in price by an average of 9% a year, plus it has 

typically paid stockholders a dividend of 3% from its profits 

each year.

Making Money Grow
16

You take your time and make a careful decision. Only time 

will tell if you made the right choice. You’ll keep a close eye 

on the company and keep the stock as long as the company 

keeps selling a quality car that consumers want to drive, and 

it can make an acceptable profit from its sales.

Why Some Investments Make Money and Others Don’t 

You can potentially make money in an investment if:

• The company performs better than its competitors.

• Other investors recognize it’s a good company, so that 

 when it comes time to sell your investment, others want 

 to buy it.

• The company makes profits, meaning they make enough 

 money to pay you interest for your bond, or maybe 

 dividends on your stock.

You can lose money if:

• The company’s competitors are better than it is.

• Consumers don’t want to buy the company’s 

 products or services.

• The company’s officers fail at managing the business 

 well, they spend too much money, and their expenses are 

 larger than their profits.

• Other investors that you would need to sell to think the 

 company’s stock is too expensive given its performance 

 and future outlook.

• The people running the company are dishonest. They 

 use your money to buy homes, clothes, and vacations, 

 instead of using your money on the business. 

• They lie about any aspect of the business: claim past 

 or future profits that do not exist, claim it has contracts 

 to sell its products when it doesn’t, or make up fake

 numbers on their finances to dupe investors.

Making Money Grow
17

 • The brokers who sell the company’s stock manipulate 

 the price so that it doesn’t reflect the true value of the 

 company. After they pump up the price, these brokers 

 dump the stock, the price falls, and investors lose their 

 money.

• For whatever reason, you have to sell your investment 

 when the market is down.

Because it is sometimes hard for 

investors to become experts on various 

businesses—for example, what are the best steel, automobile, 

or telephone companies—investors often depend on 

professionals who are trained to investigate companies and 

recommend companies that are likely to succeed.

Since it takes work to pick the stocks or bonds of the 

companies that have the best chance to do well in the future, 

many investors choose to invest in mutual funds.

What is a mutual fund?

A mutual fund is a pool of money run by a professional or 

group of professionals called the “investment adviser.” In a 

managed mutual fund, after investigating the prospects of 

many companies, the fund’s investment adviser will pick 

the stocks or bonds of companies and put them into a fund. 

Investors can buy shares of the fund, and their shares rise or 

fall in value as the values of the stocks and bonds in the fund 

rise and fall.

Investors may typically pay a fee when they buy or sell their 

shares in the fund, and those fees in part pay the salaries and 

expenses of the professionals who manage the fund.

Mutual Funds

Who Can Help Me Invest? 
18

Even small fees can and do add up and eat into a significant 

chunk of the returns a mutual fund is likely to produce, so 

you need to look carefully at how much a fund costs and 

think about how much it will cost you over the amount of 

time you plan to own its shares. If two funds are similar 

in every way except that one charges a higher fee than the 

other, you’ll make more money by choosing the fund with 

the lower annual costs. 

For more information about mutual fund fees and expenses, 

be sure to read our brochure entitled “Invest Wisely: An 

Introduction to Mutual Funds”—which you can read online 

at http://www.sec.gov/investor/pubs/inwsmf.htm or order 

for free by calling 1-800-SEC-0330. To compare mutual fund 

costs, try using our online mutual fund cost calculator at 

http://www.sec.gov/investor/tools/mfcc/mfcc-int.htm.

Mutual Funds Without Active Management

One way that investors can obtain for themselves nearly the 

full returns of the market is to invest in an “index fund.” This 

is a mutual fund that does not attempt to pick and choose 

stocks of individual companies based upon the research of 

the mutual fund managers or to try to time the market’s 

movements. An index fund seeks to equal the returns of 

a major stock index, such as the Standard & Poor’s 500, 

the Wilshire 5000, or the Russell 3000. Through computer 

programmed buying and selling, an index fund tracks the 

holdings of a chosen index, and so shows the same returns 

as an index minus, of course, the annual fees involved in 

running the fund. The fees for index mutual funds generally 

are much lower than the fees for managed mutual funds.

Who Can Help Me Invest? 
19

Who Can Help Me Invest? 

Historical data shows that index funds have, primarily 

because of their lower fees, enjoyed higher returns than the 

average managed mutual fund. But, like any investment, 

index funds involve risk.

Watch “Turnover” to Avoid Paying Excess Taxes

To maximize your mutual fund returns, or any investment 

returns, know the effect that taxes can have on what 

actually ends up in your pocket. Mutual funds that trade 

quickly in and out of stocks will have what is known as 

“high turnover.” While selling a stock that has moved up 

in price does lock in a profit for the fund, this is a profit 

for which taxes have to be paid. Turnover in a fund creates 

taxable capital gains, which are paid by the mutual fund 

shareholders.

All mutual funds are now mandated by the SEC to show 

both their before- and after-tax returns. The differences 

between what a fund is reportedly earning, and what a fund 

is earning after taxes are paid on the dividends and capital 

gains, can be quite striking. If you plan to hold mutual funds 

in a taxable account, be sure to check out these historical 

returns in the mutual fund prospectus to see what kind of 

taxes you might be likely to incur.

Do I Need an Investment Professional?

Are you the type of person who will read as much as possible 

about potential investments and ask questions about them? 

If so, maybe you don’t need investment advice. But if you’re 

busy with your job, your children, or other responsibilities, 

or feel you don’t know enough about investing on your own, 

then you may need professional investment advice.
20

Investment 

professionals offer a 

variety of services at 

a variety of prices. It 

pays to comparison 

shop. You can get 

investment advice 

from most financial 

institutions that sell 

investments, including 

brokerages, banks, 

mutual funds, and 

insurance companies. 

You can also hire a 

broker, an investment 

adviser, an accountant, 

a financial planner, 

or other professional 

to help you make 

investment decisions.

Some financial 

planners and 

investment advisers 

offer a complete 

financial plan, assessing every aspect of your financial 

life and developing a detailed strategy for meeting your 

financial goals. They may charge you a fee for the plan, 

a percentage of your assets that they manage, or receive 

commissions from the companies whose products you buy, 

or a combination of these. You should know exactly what 

services you are getting and how much they will cost.

Who Can Help Me Invest? 
21

Remember, there is no such thing as a free lunch. 

Professional financial advisers do not perform their services 

as an act of charity. If they are working for you, they are 

getting paid for their efforts. Some of their fees are easier to 

see immediately than are others. But, in all cases, you should 

always feel free to ask questions about how and how much 

your adviser is being paid. And if the fee is quoted to you 

as a percentage, make sure that you understand what that 

translates to in dollars.

In contrast to investment advisers, brokers make 

recommendations about specific investments like stocks, 

bonds, or mutual funds. While taking into account your 

overall financial goals, brokers generally do not give 

you a detailed financial plan. Brokers are generally paid 

commissions when you buy or sell securities through them. 

If they sell you mutual funds make sure to ask questions 

about what fees are included in the mutual fund purchase.

Brokerages vary widely in the quantity and quality of the 

services they provide for customers. Some have large 

research staffs, large national operations, and are prepared 

to service almost any kind of financial transaction you may 

need. Others are small and may specialize in promoting 

investments in unproven and very risky companies. And 

there’s everything else in between.

A discount brokerage charges lower fees and commissions 

for its services than what you’d pay at a full-service 

brokerage. But generally you have to research and choose 

investments by yourself.

Who Can Help Me Invest? 
22

A full-service brokerage costs more, but the higher fees and 

commissions pay for a broker’s investment advice based on 

that firm’s research.

The best way to choose an investment professional is to start 

by asking your friends and colleagues who they recommend. 

Try to get several recommendations, and then meet with 

potential advisers face-to-face. Make sure you get along. 

Make sure you understand each other. After all, it’s your

money.

When you open a brokerage account, whether 

in person or online, you will typically be asked 

to 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, investment experience, and how much risk you 

are willing to take on. Be honest. The broker relies on this 

information to determine which investments will best meet 

your investment goals and tolerance for risk. 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 recommending an 

Who Can Help Me Invest? 

Opening a 

Brokerage 

Account 
23

Who Can Help Me Invest? 

investment to you that 

meets your needs. 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.

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.
24

Be aware of the risks involved with buying stocks on 

margin. Beginning investors generally should not get started 

with a margin account. 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.

3. How much risk should you assume?

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 age, experience 

and investment goals. Be sure that the investment products 

recommended to you reflect the category of risk you have 

selected. 

 

Who Can Help Me Invest? 
25

When opening a new account, the brokerage firm may ask 

you to sign a legally binding contract to use the arbitration 

process to settle any future dispute between you and the 

firm or your sales representative. Signing this agreement 

means that you give up the right to sue your sales 

representative and firm in court.

Ask Questions!

You can never ask a dumb question about your investments 

and the people who help you choose them, especially 

when it comes to how much you will be paying for any 

investment, both in upfront costs and ongoing management 

fees. 

Here are some questions you should ask when choosing an 

investment professional or someone to help you:

• What training and experience do you have? How long 

have you been in business?

How Can I Protect Myself?
26

How Can I Protect Myself?

• What is your investment philosophy? Do you take a lot 

of risks or are you more concerned about the safety of 

my money?

• Describe your typical client. Can you provide me with 

references, the names of people who have invested with 

you for a long time?

• How do you get paid? By commission? Based on a 

percentage of assets you manage? Another method? Do 

you get paid more for selling your own firm’s proucts?

• How much will it cost me in total to do business with 

you?

Your investment professional should understand your 

investment goals, whether you’re saving to buy a home, 

paying for your children’s education, or enjoying a 

comfortable retirement.

Your investment professional should also understand your 

tolerance for risk. That is, how much money can you afford 

to lose if the value of one of your investments declines?

An investment professional has a duty to make sure that he 

or she only recommends investments that are suitable for 

you. That is, that the investment makes sense for you based 

on your other securities holdings, your financial situation, 

your means, and any other information that your investment 

professional thinks is important.

The best investment professional is one who fully 

understands your objectives and matches investment 

recommendations to your goals. You’ll want someone you 

can understand, because your investment professional 
27

How Can I Protect Myself?

 

 

should teach you about investing and the investment 

 products.

How Should I Monitor My Investments?

Investing makes it possible for your money to work for you. 

In a sense, your money has become your employee, and that 

makes you the boss. You’ll want to keep a close watch on 

how your employee, your money, is doing.

Some people like to look at the stock quotations every day 

to see how their investments have done. That’s probably 

too often. You may get too caught up in the ups and 

downs of the “trading” value of your investment, and sell 

when its value goes down temporarily—even though the 

performance of the company is still stellar. Remember, 

you’re in for the long haul.

Some people prefer to see how they’re doing once a year. 

That’s probably not often enough. What’s best for you will 

most likely be somewhere in between, based on your goals 

and your investments.

But it’s not enough to simply check an investment’s 

performance. You should compare that performance against 

an index of similar investments over the same period of time 

to see if you are getting the proper returns for the amount 

of risk that you are assuming. You should also compare 

the fees and commissions that you’re paying to what other 

investment professionals charge.

While you should monitor performance regularly, you 

should pay close attention every time you send your money 

somewhere else to work. 
28

How Can I Protect Myself?

Every time you buy or sell an investment you will receive a 

confirmation slip from your broker. Make sure each trade 

was completed according to your instructions. Make sure 

the buying or selling price was what your broker quoted. 

And make sure the commissions or fees are what your broker 

said they would be.

Watch out for unauthorized trades in your account. If you 

get a confirmation slip for a transaction that you didn’t 

approve beforehand, call your broker. It may have been 

a mistake. If your broker refuses to correct it, put your 

complaint in writing and send it to the firm’s compliance 

officer. Serious complaints should always be made in 

writing.

Remember, too, that if you rely on your investment 

professional for advice, he or she has an obligation to 

recommend investments that match your investment 

goals and tolerance for risk. Your investment professional 

should not be recommending trades simply to generate 

commissions. That’s called “churning,” and it’s illegal.

How Can I Avoid Problems?

Choosing someone to help you with your investments 

is one of the most important investment decisions you 

will ever make. While most investment professionals are 

honest and hardworking, you must watch out for those few 

unscrupulous individuals. They can make your life’s savings 

disappear in an instant.

Securities regulators and law enforcement officials can and 

do catch these criminals. But putting them in jail doesn’t 

always get your money back. Too often, the money is gone.
29

The good news is you can avoid potential problems by 

protecting yourself.

Let’s say you’ve already met with several investment 

professionals based on recommendations from friends and 

others you trust, and you’ve found someone who clearly 

understands your investment objectives. Before you hire this 

person, you still have more homework.

Make sure the investment professional and her firm are 

registered with the SEC and licensed to do business in your 

state. And find out from your state’s securities regulator 

whether the investment professional or her firm have 

ever been disciplined, 

or whether they have 

any complaints against 

them. You’ll find contact 

information for securities 

regulators in the U.S. by 

visiting the website of the 

North American Securities 

Administrators Association 

(NASAA) at http://www.

nasaa.org or by calling (202) 

737-0900.

You should also find out 

as much as you can about 

any investments that your 

investment professional 

recommends. 

 First, make sure the investments are registered. Keep in 

mind, however, the mere fact that a company has registered 

How Can I Protect Myself?

whether the investment professional or her firm have 
30

How Can I Protect Myself?

and files reports with the SEC doesn’t guarantee that the 

company will be a good investment. 

Likewise, the fact that a company hasn’t registered and 

doesn’t file reports with the SEC doesn’t mean the company 

is a fraud. Still, you may be asking for serious losses if, for 

instance, you invest in a small, thinly traded company that 

isn’t widely known solely on the basis of what you may have 

read online. One simple phone call to your state regulator 

could prevent you from squandering your money on a scam.

Be wary of promises of quick profits, offers to share “inside 

information,” and pressure to invest before you have an 

opportunity to investigate. These are all warning signs of 

fraud.

Ask your investment professional for written materials and 

prospectuses, and read them before you invest. If you have 

questions, now is the time to ask.

• How will the investment make money?

• How is this investment consistent with my investment 

goals?

• What must happen for the investment to increase in 

value? 

• What are the risks?

• Where can I get more information?

Finally, it’s always a good idea to write down everything 

your investment professional tells you. Accurate notes will 

come in handy if ever there’s a problem.
31

What if I Have a Problem?

Some investments make money. Others lose money. That’s 

natural, and that’s why you need a diversified portfolio to 

minimize your risk. But if you lose money because you’ve 

been cheated, that’s not natural, that’s a problem.

Sometimes all it takes is a simple phone call to your 

investment professional to resolve a problem. Maybe there 

was an honest mistake that can be corrected. If talking to 

the investment professional doesn’t resolve the problem, 

talk to the firm’s manager, and write a letter to confirm your 

conversation. If that doesn’t lead to a resolution, you may 

have to initiate private legal action. You may need to take 

action quickly because legal time limits for doing so vary. 

Your local bar association can provide referrals for attorneys 

who specialize in securities law.

At the same time, call or write to us and let us know what 

the problem was. Investor complaints are very important to 

the SEC. You may think you’re the only one experiencing a 

problem, but typically, you’re not alone. Sometimes it takes 

only one investor’s complaint to trigger an investigation that 

exposes a bad broker or an illegal scheme. Complaints can 

be filed online with us by going to www.sec.gov/complaint.

shtml.
32

We hope that you’ve found this brochure helpful. Please let 

us know how it can be improved. 

We’ve only covered the basics, and there’s a lot more to learn 

about saving and investing. But you’ll be learning as you go 

and over your lifetime.

As we said at the beginning, the most important thing is to 

get started. And remember to ask questions as you make 

your investment decisions. 

Be sure to find out if the person is licensed to sell 

investments, and if the investment is registered with us.

So, we look forward to hearing from you.

And in the years ahead, let us know how well your money is 

growing. 

U.S. Securities and Exchange Commission

Office of Investor Education and Assistance

450 Fifth Street, N.W.

Washington, D.C. 20549-0213

Toll-free: (800) SEC-0330

Website: www.sec.gov/investor.shtml

Keep in Touch With Us