1. What is a security?
  2. What is a prospectus?
  3. What is a dealer?
  4. What is a broker or agent?
  5. What is an investment adviser?
  6. What is a suitability requirement?
  7. What is fiduciary responsibility?
  8. What is an appropriate investment?
  9. What factors about my financial position should I consider before I invest in securities?
  10. How do I open an account at a brokerage firm?
  11. What questions should I ask a person offering me an investment opportunity?
  12. What are common stocks?
  13. What are bonds and debentures?
  14. What does it mean when a stock is preferred?
  15. What is a mutual fund and why would I want to invest in it?
  16. What is a money market bank account, and how is it different from other money market accounts?
  17. What are certificates of deposit?
  18. What is an annuity?
  19. What are commodities?
  20. What are life settlements?
  21. What are some red flag warnings to securities fraud and investment scams?
  22. What are the best ways to prevent being a victim of securities fraud or investment scams?

What is a security?

In Texas, the term "security" is defined very broadly to include a wide array of investments such as stocks, bonds, notes, debentures, limited partnership interests, oil and gas interests, and investment contracts. Generally, if an investment of money is made with a person or business with the expectation of a profit to come through the efforts of someone other than the investor, it is considered a security. 

What is a prospectus?

A prospectus is a document given to potential investors in connection with an offering of securities. It is intended to provide investors with a written statement of all relevant information about the company -- its history, operations, financial condition and key personnel. A prospectus is required by law; it provides information but not an endorsement. 

What is a dealer?

In Texas, a dealer is defined very broadly and includes a person or company who engages in selling, offering for sale, or soliciting subscriptions for any security in this state. Typically, dealers are organized as corporations, limited liability companies, limited partnerships, or sole proprietors. 

What is a broker or agent?

Generally speaking, a broker or agent is a person who is authorized by a dealer to sell, offer for sale, or solicit subscriptions to, or orders for, or deals in any other manner, in securities within this state. A commission is generally paid to the agent for selling the security. Typically, a broker is an individual agent who is affiliated with a dealer. 

What is an investment adviser?

In Texas, an investment adviser is defined very broadly and includes a person who, for compensation, provides investment analyses or advises others with respect to the value of investing in, purchasing, or selling securities. An investment adviser representative is an individual who provides these services on behalf of an investment adviser. 

What is a suitability requirement?

A requirement wherein brokers or agents must recommend investments that are suitable for you based on their knowledge of your financial status, needs and risk tolerance.

What is fiduciary responsibility?

A responsibility wherein investment advisers must put your interests ahead of their own when providing advice and recommendations.

What is an appropriate investment?

The type of investment you should have depends in large part on your financial situation and investment objectives. Take into account the risk you are willing to assume, the length of time you can afford to leave the funds invested, and your fixed obligations. If you plan to use investment income to put children through college, then you probably want an investment that will grow steadily and safely and that will be liquid when tuition bills are due. If you want to buy a new car or travel next summer, you may be willing to take some risk for the chance to see your money grow substantially in six months. Finally, recognize that no investment is truly risk-free.

Here are some appropriate guidelines for investing:

  • DO have money reserve set aside for emergencies before you invest.
  • DO remember to select your securities according to the risk you can assume.
  • DO ask for facts and advice from a licensed broker-dealer or investment adviser, and be honest with your broker or adviser about your finances, aims and knowledge on the subject.
  • DO be sure you know, before buying, the terms and quality of the investments that interest you and that you understand the type of order your broker intends to place for you.
  • DON'T invest money you may need on short notice.
  • DON'T disregard quality for the lure of higher yield.
  • DON'T invest in a company merely because it is in a successful industry. Each company should be considered on its own merits.
  • DON'T invest on the basis of tips or rumors. They are usually untrustworthy.
  • DON'T be afraid to say "no" to a broker or to ask your broker or adviser to explain. 

What factors about my financial position should I consider before I invest in securities?

Investors should first make sure that they are sufficiently protected against a financial crisis. Adequate life insurance and emergency funds are among the most important protections. Other financial resources such as Social Security payments, pensions or savings accounts may be used to support you. An emergency fund for three to six months of expenses should consist of easily accessible sources of money. Most emergency funds are placed in savings bonds or savings accounts. Only after you have provided for the unexpected should you think of investing in securities.

How do I open an account at a brokerage firm?

The first step in becoming a securities investor is to select a broker and open an account. In a brokerage firm, a registered representative or account representative handles buy and sell orders and sometimes provides generalized investment advice. Many investors now conduct business with their brokerage firm online and execute buy and sell orders on the Internet. The broker or registered representative at the firm will need to know your name, address, age, Social Security number, occupation and citizenship, your investment objective and your liquid net worth. This information is required under the federal securities laws, stock exchange rules, and Texas regulations.

What questions should I ask a person offering to sell me investments?

  • Are you registered with the Texas State Securities Board? (If “yes,” call the TSSB to confirm that the person is registered to sell securities in Texas.)
  • Is the product registered as a security for sale in the State of Texas?
  • Has a client ever filed a complaint against you? If so, how was it resolved?
  • Can you provide me with a prospectus with all the details, costs and risks of the investment?
  • Is this investment guaranteed? (Most are not. Investing in securities involves risk.)
  • Is this investment traded on a regulated exchange?
  • What are the ongoing commissions and fees that you and your company will make on the investment?
  • Can I withdraw my money at any time? If not, how much will it cost to get my money out of the investment?
  • How much money have you invested personally in this deal?
  • Will you please call my stockbroker (or banker, lawyer, or trusted financial adviser) with the same deal so I can ask them for another opinion?
  • How long will I have to decide whether to invest? Are there circumstances under which I would have to make up my mind immediately?
  • May I see a sample account statement, and can you explain it to me clearly?

What are common stocks?

Common stock is an equity interest in a corporation (equity means that you actually own a bit of the company). Generally, each share represents pro rata ownership of the corporation. The owner of the share is entitled to: equal dividends with all other shares of the same class, one vote per share for the election of directors or for the approval of major corporate decisions, and equal participation with other owners of common shares in the event of liquidation of the business.

What are bonds and debentures?

Bonds and debentures are evidences of loans made to a business in return for a promised rate of return (interest) and a promise to repay the principal or "face" amount of the loan at a fixed date. Some bonds and debentures are “callable,” meaning the issuer can redeem them before they mature. 

What does it mean when a stock is preferred?

Preferred stock is given certain "preferred" treatment over the company's common stock. This preferential treatment usually includes: The right of the owners to receive a fixed dividend before the common stockholders receive any dividend and the rights of the owners to a prior claim on assets of the company after all debts have been paid, should the company ever be dissolved. Sometimes a preferred dividend is not paid in a given year because the company doesn't earn enough to cover it. If the stock is "cumulative" preferred and the company misses a dividend, the amount due for that year accrues to the preferred stock owners, and is paid the following year or whenever the company has sufficient earnings to pay it. If the company cannot make the payments on the preferred stock for a number of years, dividends continue to accrue during that time and will have to be paid in full before the common stockholders receive any dividend payments. If the stock is not cumulative, however, any unpaid dividend may be lost. Because of these advantages, preferred stockholders are usually limited in their participation in company affairs. They generally have no voting privileges (except when a specified number of preferred dividends are defaulted) and they can usually expect to receive no more than their specified dividend, regardless of how well the company may be doing.

What is a mutual fund and why would I want to invest in it?

A mutual fund (technically known as an investment company) is a corporation or other business entity that uses the money contributed by its shareholders to invest in securities of many different companies, usually with the goal of increasing capital or providing income. Each fund has its own investment strategies and objectives, dividend policies and shareholder services. An investment company can provide a broad diversification of portfolio and professional management. Many investment companies also provide investors considerable liquidity. A mutual fund is managed by a professional investment adviser. In return for its services, the adviser is paid a "management fee," which is most often calculated as a percentage of the fund's average daily assets. Mutual funds are generally recommended for investors who prefer not to worry about trading securities. If you are thinking about a mutual fund investment, be sure to read the fund's prospectus to see what it intends to do with your money and how much it charges to invest your money.

What is a money market bank account, and how is it different from other money market accounts?

A money market bank account is like an interest-bearing savings account. Money in the fund is invested in short-term securities such as Treasury bills and corporate bonds. These accounts are usually FDIC-insured, but be sure to check with your financial institution. A money market mutual fund is similar to a money market bank account, but it is a mutual fund and pays dividends instead of interest. Investors buy or sell money market mutual funds at $1 per share and the price does not fluctuate. Another important difference: A money market mutual fund is not FDIC-insured.

What are certificates of deposit?

Certificates of deposit (or CDs, as they are commonly called) are fixed maturity debt securities with a set rate of interest. They are sold primarily by commercial banks and savings associations as an alternative to other forms of savings instruments and accounts. Maturities range from 30 days to several years. A certificate of deposit is not automatically renewable, although you may generally buy another CD upon maturity. Most CDs are subject to a substantial interest penalty if cashed prior to maturity.

What is an annuity?

There are three types of annuities: variable, fixed, and equity indexed. An annuity is an agreement under which an insurance company will receive a certain amount of money from a person in return for promising that person a retirement income after a certain age, usually for the remainder of their life. An annuity is the opposite of life insurance. You buy life insurance to provide for those left behind when you die. You buy an annuity to provide for yourself for as long as you live after retirement. For more detailed information on annuities, visit the Texas Department of Insurance.

What are commodities?

Commodities, in the investment sense, include sugar, wheat, cattle, cotton, tin, gold, various industrial raw materials and many other items. For the commodities speculator, the term refers also to a type of investment called a commodity futures contract, which offer the speculator the possibility of a profit on market price fluctuations. Commodity futures contracts are standardized contracts to purchase a particular quantity of some commodity on a particular date at a particular price. These contracts are traded by hedgers and speculators at prices reflecting the supply of, and demand for, the underlying commodity. Commodity futures are generally considered highly speculative. They provide no income and no guarantee of future value. For more information on commodity futures trading, please visit the Commodity Futures Trade Commission.

What are life settlements?

Life settlements, sometimes called viaticals, allow life insurance policy holders to sell their policies to investors for an immediate cash benefit. In return, the purchasers of the viatical settlement assume responsibility for paying the remaining premiums and become the beneficiaries of the life insurance policy.

As an investor, you may have been approached by a viatical company or broker to invest in a viatical settlement. Before putting your savings into this type of investment, it is critical that you understand the risks involved, know how your investment will be used, and what the likely return will be. 

What are some red flag warnings of securities fraud and investment scams?

These are some of the most common warnings of potential investment scams. However, these are not all inclusive. There may be other warnings unique to an individual situation. If you ever feel that something just does not seem right concerning the promotion, sale, or managing of a security, contact the Texas State Securities Board.

  • Guaranteed returns
  • High return with low risk
  • Promise of quick profit
  • High pressure tactics
  • Unregistered broker and/or investment
  • Insider information
  • Unusual arrangement for payment
  • Absence of prospectus information
  • No clarification of the commission or fees associated with the security

What are the best ways to prevent being a victim of securities fraud or investment scams?

Being able to recognize red flag warnings will be the first line of defense when protecting you and your family. Checking with the Texas State Securities Board on the investment itself, and on the broker or investment adviser, will give you information pertinent to your investment decision. This background check could potentially save you from years of grief and losing money.