A ROADMAP TO YOUR JOURNEY TO FINANCIAL SECURITY | 1

Saving and Investing

A Roadmap To Your Financial Security 

Through Saving and Investing

Information is an investor’s best tool
2 | SAVING AND INVESTING
A ROADMAP TO YOUR JOURNEY TO FINANCIAL SECURITY | 1

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!

U.S. Securities and Exchange Commission

Office of Investor Education and Advocacy

100 F Street, N.E.

Washington, D.C. 20549-0213

Toll-free: (800) SEC-0330

Website: www.investor.gov
2 | SAVING AND INVESTING
A ROADMAP TO YOUR JOURNEY TO FINANCIAL SECURITY | 3

Don’t Wait to Get Started

YOU CAN DO IT! 

IT’S EASIER THAN YOU THINK.

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!

KEYS TO FINANCIAL SUCCESS

1. Make a financial plan.

2. Pay off any high interest debts.

3. Start saving and investing as soon as you’ve paid off your debts.
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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 

YOUR FINANCIAL GOALS

If you don’t know where you are going, you may end up somewhere you don’t want 

to be. To end up where you want to be, you’ll need a roadmap, a financial plan.

What do you want to save or invest for? By when?

1. ____________________________ _______

2. ____________________________ _______

3. ____________________________ _______

4. ____________________________ _______

5. ____________________________ _______
A ROADMAP TO YOUR JOURNEY TO FINANCIAL SECURITY | 5

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 at www.investor.gov.

KNOW YOUR CURRENT FINANCIAL SITUATION

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. 

YOUR NET WORTH STATEMENT

Assets Current Value Liabilities Amount

Cash __________ Mortgage balance __________

Checking accounts __________ Credit cards __________

Savings __________ Bank loans __________

Cash value of life 

insurance __________ Car loans __________

Retirement accounts __________ Student loans __________

Real estate __________ Other __________

Home __________ __________

Other investments __________ __________

Personal property __________ __________

TOTAL __________ TOTAL __________
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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 into 

a positive position, you’re doing the right thing.

KNOW YOUR INCOME AND EXPENSES

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. 

PAY YOURSELF OR YOUR FAMILY FIRST

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 

employer-sponsored 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 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.
A ROADMAP TO YOUR JOURNEY TO FINANCIAL SECURITY | 7

FINDING MONEY TO SAVE OR INVEST 

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. 

KNOW YOUR INCOME AND WHAT YOU SPEND

Monthly Income ________________

Monthly Expenses

Savings ________________

Investments ________________

Housing ________________

Rent or mortgage ________________

Electricity ________________

Gas/oil ________________

Telephone ________________

Water/sewer ________________

Property tax ________________

Furniture ________________

Food ________________

Transportation ________________

Loans ________________

Insurance ________________

Education ________________

Recreation ________________

Child care ________________

Health care ________________

Gifts ________________

Other ________________

TOTAL ________________
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Small Savings Add Up 

to Big Money

How much does a cup of coffee cost you?

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 spare 

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

those nickels and dimes add up!

PAY OFF CREDIT CARD OR OTHER HIGH INTEREST 

DEBT

Speaking of things adding up, few investment strategies pay 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 
A ROADMAP TO YOUR JOURNEY TO FINANCIAL SECURITY | 9

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.

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?
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Making Money Grow

THE TWO WAYS TO MAKE MONEY

There are basically two ways to make money.

1. You work for money.

 Someone pa ys you to work for them or you have your own 

business.

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.
A ROADMAP TO YOUR JOURNEY TO FINANCIAL SECURITY | 11

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. Some deposits in these products may be 

insured by the Federal Deposit Insurance Corporation or the 

National Credit Union Administration. 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.” The money you invest in securities, mutual funds, and other similar investments typically 

is not federally insured. You could lose your “principal”—the 

amount you’ve invested. But you also have the opportunity to 

earn more money.
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THE BASIC TYPES OF PRODUCTS

Savings Investments

Savings accounts Bonds

Certificates of deposit Stocks

Checking accounts Mutual funds

Real estate

Commodities (gold, silver, etc.)

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 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 
A ROADMAP TO YOUR JOURNEY TO FINANCIAL SECURITY | 13

“ 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 

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.
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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 example below 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.

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.
A ROADMAP TO YOUR JOURNEY TO FINANCIAL SECURITY | 15

THE MAIN DIFFERENCES BETWEEN 

STOCKS AND BONDS

Stocks Bonds

If the company profits or is perceived as The company promises to return money 

having strong potential, its stock may go plus interest. 

up in value and pay dividends. You may 

make more money than from the bonds.

Risk: The company may do poorly, and Risk: If the company goes bankrupt, 

you’ll lose a portion or all of your invest- your money may be lost. But if there is 

ment. any money left, you will be paid before 

stockholders. 

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.
16 | SAVING AND INVESTING

•	 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.

•	The br okers 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.

MUTUAL FUNDS

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 
A ROADMAP TO YOUR JOURNEY TO FINANCIAL SECURITY | 17

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.

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 www.investor.gov

or order for free by calling the Federal Citizen Information Center 

at (888) 878-3256. 

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.
18 | SAVING AND INVESTING

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 aftertax 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.
A ROADMAP TO YOUR JOURNEY TO FINANCIAL SECURITY | 19

WARNING!

Before You Invest Always Check with the SEC and Your State’s 

Securities Regulator:

Is the investment registered?

Have investors complained about the investment in the past?

 Have the people who own or manage the investment been in trouble in the past?

 Is the person selling me this investment licensed in my state?

 Has that person been in trouble with the SEC, my state, or other investors in the past?

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.

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. 
20 | SAVING AND INVESTING

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. 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.

OPENING A BROKERAGE ACCOUNT

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 
A ROADMAP TO YOUR JOURNEY TO FINANCIAL SECURITY | 21

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 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. 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 
22 | SAVING AND INVESTING

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.

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. 
A ROADMAP TO YOUR JOURNEY TO FINANCIAL SECURITY | 23

How Can I Protect Myself? 

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?

•	 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 products?

•	 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, 
24 | SAVING AND INVESTING

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 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. 

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

confirmation slip from your broker. Make sure each trade was 
A ROADMAP TO YOUR JOURNEY TO FINANCIAL SECURITY | 25

IMPORTANT CONTACTS

SEC NASAA

100 F Street, N.E. 750 First Street, N.E., Suite 1140

Washington, D.C. 20549-0213 Washington, D.C. 20002

Toll-free: (800) SEC-0330 Phone: (202) 737-0900

Website: www.investor.gov Website: www.nasaa.org

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. The good 

news is you can avoid potential problems by protecting yourself. 
26 | SAVING AND INVESTING

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 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 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.
A ROADMAP TO YOUR JOURNEY TO FINANCIAL SECURITY | 27

•	 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.

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.
28 | Saving and inveSting

Keep in Touch With Us

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 Advocacy

100 F Street, N.E.

Washington, D.C. 20549-0213

Toll-free: (800) SEC-0330

Website: www.investor.gov

To order a copy of this publication, please visit www.pueblo.gsa.gov. 

To order by phone, call the Federal Citizen Information Center at 

(888)878-3256 Monday-Friday 8am to 8pm ET.

OFFICE of INVESTOR

EDUCATION and ADVOCACY

1-800-732-0330

www.investor.gov

SEC Pub. 009 (06/11)