Questions to Ask Your Broker


FIRST select your industry. Ask the banker or broker who suggests a stock for investment: ‘In what line of commercial or industrial activity does the company engage?' No wise investor has all his investment eggs in one basket or all his holdings in one industry. Every new investment should be undertaken with the idea of rounding out a programme varied enough to be safe and sufficiently diversified to cover the major lines of endeavor.

It is essential, therefore, to ask the foregoing question of the broker, since a stock which might offer rich possibilities for one buyer might not suit the requirements of another at all, despite its soundness and prospects of profit.

Having determined that the stock covers the scope of industry desired, further information is necessary. It may he highly advantageous to have one’s banker or broker suggest certain stocks for investment, but the mere injunction, ‘Buy Bethlehem Steel,’ or ‘ Buy American Typefounders,’ or any other issue, is not enough. Ask the broker: ‘ Why?'

His replies should give, among other points of information, the ratio of earnings to the price level of the stock. For example, in 1928 Sears, Roebuck and Company earned on its common stock $6.28, not counting stock dividends, while the stock ranged in price from 821, to 197½ In the state of the market in recent years a price ratio of fifteen times earnings is regarded as thoroughly and entirely conservative for most companies, although it should be lower, according to some judges, for concerns where deterioration and depletion are big factors.

Another point to be made plain to the investor is the equity which the stock of a corporation has in the business. That simply means that the investor should know approximately what assets there are which would be split up among the common stockholders in event of liquidation after the debts and the claims of bondholders and preferred-stock holders are satisfied.

Prospective buyers should know whether the stock pays a dividend or not, the present rate, and the regularity with which payments have been maintained in the past. This will show them the yield they may expect from the stock as an investment. Obviously if a stock is paying $6 annually and is selling for $100 it is yielding 6 percent. It is still yielding 6 per cent to an investor who bought at $100 even when it advances to $200 a share, although it yields the purchaser at the latter price but 3 per cent.

Perhaps the most important question of all to be answered is: ‘What are the prospects of the stock?' This involves acquiring information not only about the corporation in question, but about the industry in which it is engaged. It is seldom indeed that all industries are riding a wave of prosperity at the same time. In recent months ihe steel companies, the electrical-equipment manufacturers, and public utilities were increasing their profits steadily. The oil industry has been in a state of depression. So have coal, paper, and sugar. This does not necessarily mean that all the companies in the first class made money or that all those in the second failed to make it. But the trend in one list was upward and in the other far less promising.

It is a cardinal principle of all business to buy low and sell high. Obviously it will be more profitable to buy and hold a stock in an industry which is depressed, if time is not a factor, provided the corporation and the indestry itself show adequate signs of improvement, than to buy a slock, already high, in an industry whose immediate future possibilities seem to have been pretty well measured.

An illustration may serve to make plain this point. After the war, the coppers went through a period of low earnings and depression. In 1920 American Smelting and Refining dropped as low as 29¼ share. From 1921 to 1923 no dividends were paid. Then copper commenced to look up. Those who foresaw this trend in the general industry and in this stock were able to sell their shares as high as $293 a share for the old stock. If they wished to hold their securities, they received three new shares for one of old stock, and hv the end of 1028 the new shares roselo08f. Moreover the dividend rate was made $4 a share annually on the new stock.

Wall Street tries to discount what it can see. That is, it bases its price levels not on the immediate present but on the developments which it can anticipate in the future. It is this tendency which sometimes accounts for a recession in price on publication of news favorable to a concern. One should ask the broker, therefore, whether the near-time possibilities of a stock have been fully discounted.

It is what Wall Street cannot sec and therefore cannot discount which counts in the purchase of common stocks for investment.

Information of all kinds usually can be best obtained by asking for it. The up-todate broker has a mine of information at command. It can do the investor no harm to ask: (1) the type of stock recommended; (2) ratio of earnings to market price; (3) book value; (4) dividend rates and history; (5) yield at current prices; ((5) conditions in the industry involved; (7) potentialities of the corporation in question; (8) the trend of the market in general. The last item, ’How the market looks, is important and pertinent, since it may determine when to buy. There is as much profit in buying low as in selling high, and it pays to know whether to defer purchases determined on in advance or to make them instantly.

It can do no harm to the legitimate broker to check his answers to some of these questions. The investor’s long-distance eye for potentialities may be more farsighted than the broker’s if it is pointed in the right direction.