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Investor Alert: Stocks

The Financial Industry Regulatory Authority (“FINRA”) recently issued an investor alert about investing in individual stocks. Over 20,000 companies trade on a U.S. stock exchange (e.g., NASDAQ, NYSE, AMEX), or over-the-counter. With so many companies and trading symbols, it is easy to understand how an investor could become confused about what they are actually buying. The plethora of information and misinformation on the internet only adds to the confusion.

Investors considering adding individual stocks to their portfolios should do their homework first.

Research the company

  • Does the company have any information on file with the Securities and Exchange Commission (“SEC”)? If it is a publicly traded company, the SEC’s Edgar database should contain registration statements, prospectuses, and other informational filings, such as Form 8-K filings. A Form 8-K is a form used to notify investors of any material event that is important to shareholders, such as a bankruptcy, change in director, or asset purchase or sale.
  • Many companies have information for investors located on the company’s website. Typically, they include the company’s most recent SEC filings, such as annual reports (Form 10-K) and quarterly reports (Form 10-Q).
  • Verify any information you have heard about the company through online or media sources against the company’s SEC filings.

Find out where the stock is listed

Stocks that do not trade on a registered securities exchange are considered as trading over-the-counter (“OTC”). Typically, this is because it is a small company that cannot meet the exchange listing requirements. Many OTC securities are infrequently traded and may be volatile. OTC securities may be more difficult to sell than those traded on a large exchange.

Make sure what you want is what you get

Stock symbols, also called ticker symbols, may resemble the name of more than one company. Symbols can also change or be reassigned. Make sure the stock symbols matches the company you want to invest in.

Case in point: an elderly investor thought she was purchasing Citigroup, Inc. stock, when she was actually buying CIT Group, Inc. stock – two totally unrelated companies with very similar names that both trade on the NYSE. She was none-the-wiser until CIT Group, Inc. filed for Chapter 11 bankruptcy protection in 2009, and the value of her investment plummeted.

Decoding stock symbols

A letter “Q” at the end of a company’s stock symbol is an indication that the company is involved in bankruptcy proceedings.

An “E” or “LF” at the end of a company’s stock symbol means that the company is not in compliance with its SEC reporting obligations.

As with any investment decision, what you don’t know can hurt you. A copy of FINRA’s alert Stock Up on Information Before Buying Stock can be read here.

Investors should be extra cautious before investing in an initial public offering (“IPO”) or a private placement. You can find out additional information about IPO and private placement investing by reading FINRA’s publications Private Placements – Evaluate the Risks Before Placing Them in Your Portfolio and What to Do If a Broker Calls to Pitch an IPO.

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