Investing in Stocks For Dummies
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Traditionally, brokerage reports have been a good source of information for investors seeking informed opinions about stocks. And they still are, but in recent years some brokers have been penalized for biased reports. Brokers should never be your sole source of information.

The good

Research departments at brokerage firms provide stock reports and make them available for their clients and investment publications. The firms’ analysts and market strategists generally prepare these reports. Good research is critical, and brokerage reports can be very valuable. What better source of guidance than full-time experts backed up by million-dollar research departments? Brokerage reports have some strong points:

  • The analysts are professionals who should understand the value of a company and its stock. They analyze and compare company data every day.

  • Analysts have at their disposal tremendous information and historical data that they can sift through to make informed decisions.

  • If you have an account with the firm, you can usually access the information at no cost.

The bad

Well, brokerage reports may not be bad in every case, but at their worst, they’re quite bad. Brokers make their money from commissions and investment banking fees (nothing bad here). However, they can find themselves in the awkward position of issuing brokerage reports on companies that are (or could be) customers of the brokerage firm that employs them (hmmm — could be bad).

Frequently, this relationship results in a brokerage report that paints an overly positive picture of a company that can be a bad investment (yup, that’s bad).

The ugly

During 1998–2000, an overwhelming number of brokerage reports issued glowing praise of companies that were either mediocre or dubious. Investors bought up stocks such as tech stocks and Internet stocks. The sheer demand pushed up stock prices, which gave the appearance of genius to analysts’ forecasts, yet the stock prices rose essentially as a self-fulfilling prophecy. The stocks were way overvalued. Analysts and investors were feeling lucky.

Investors, however, lost a ton of money. Money that people painstakingly accumulated over many years of work vanished in a matter of months as the bear market of 2000 hit. Of course, the bear market that hit in 2008–2009 was equally brutal. Retirees who had trusted the analysts saw nest eggs lose 40 to 70 percent in value. Investors lost trillions during these major downturns, much of it needlessly.

During that bear market of 2000-2002, a record number of lawsuits and complaints were filed against brokerage firms. Wall Street and Main Street learned some tough lessons. Regarding research reports from brokerage firms, the following points can help you avoid getting a bad case of the uglies:

  • Always ask yourself, “Is the provider of the report a biased source?” In other words, is the broker getting business in any way from the company he’s recommending?

  • Never, never, never rely on just one source of information, especially if it’s the same source that’s selling you the stock or other investment.

  • Do your research first before you rely on a brokerage report. Check out annual reports and other documents.

  • Do your due diligence before you buy stocks anyway. Make sure your portfolio includes diversification, risk tolerance, and so on.

  • Verify the information provided to you with a trip to the library or websites.

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