Brainy's Share Market Toolbox Brainy's
Share Market Toolbox

Questions for your
financial adviser



Here are some important questions that you might want to ask your
financial advisor, share broker, or accountant.

Interesting questions

Interesting comments

Try asking your financial advisor, or share broker, the following questions, and see how they respond: Here are some corresponding comments and replies to the questions on the left:
1 Guarantee investment increase in value?
You might recommend that I purchase
some shares in a company, or units in a managed fund.
Can you guarantee that the value of the investment will not fall by more than 10% while I hold it?
A brave person might try to guarantee that shares or managed fund units will not fall in value; but most would not guarantee this (see Capital Guarantee notes below).
2 Capital Guarantee?
Do you offer a capital guarantee on the investment? That is, regardless of the actual performance of the underlying investment, my invested capital will not fall in value. If so, what is the extra cost to me? 
Some companies do offer a "Capital Guarantee".
BUT this costs money and they often have fine-print terms and conditions which are not very favourable.
3 Share price fall?
Let's say that my shares are falling in value.
And let's say that they might continue to fall
(like Telstra did from $9 in 2000 to $2.60 in 2010).
Would you ever suggest that I sell my shares
to avoid a bigger capital loss?
If a company's share price is falling, and confirmed to be in a "down trend", then it is likely to continue falling (basic technical analysis theory). Some stocks can fall by up to 90% over several weeks or months, and then wind up resulting in a loss of funds. Why would we hold a stock that might fall to zero value? It is very useful to have, and to implement, a Stop Loss. See more information on Exit strategies and Stop Loss concepts.
4 Catch a falling knife?
When a company's share price falls, are you likely to recommend to me that it is cheap, so I should buy some? And if I am already holding them, perhaps I should buy more?
When someone says to you that the shares are cheap, and you should buy some, what they are not telling you is that the share price might get even cheaper. And in fact it might continue to get cheaper and cheaper and cheaper. There might be a sound underlying reason why the stock is being sold off. Don't forget that this is what the institutional investors do to retail investors - sell over-priced stock to unsuspecting investors while they can get away with it.
5 Share price valuation?
You have told me that company "xyz" is worth "X" amount. How did you arrive at that valuation? And why is your valuation correct when other brokers and advisors have a different valuation?
It is important to remember how an analyst or broker arrives at a share price valuation. They take a lot of known factual information about the company and it's past performance, and the company's operating conditions and environment. Then they apply some assumptions for global economic conditions, local economic conditions, competitors' likely performance, the customers' likely purchasing habits, the weather, and a whole lot of other things. All of this information is fed into a spreadsheet model, and out pops an answer for the current value of the company's shares, and a value in 6 or 12 months time. That is, the resulting price valuation is their "opinion", based on the assumptions in their model.
See more information about intrinsic value and value investing.
6 Buy / Hold / Sell recommendations
Your broking company has allocated a buy recommendation to a specific company that I follow. But I notice that another broker has allocated a sell recommendation. One of you must know something that the other doesn't know (but that would be inside information, wouldn't it?).
Firstly, is their recommendation based on their price target in one month's time? or 6 months? or 12 months? or longer? The usefulness of their recommendation will depend on your own investing horizon, and investing time frame.
Secondly, see the comments above regarding share price valuation to understand that their recommendation is only an opinion, and many people are entitled to arrive at different opinions. 
7 Down trends?
Why should I buy shares that are falling in value? Shares such as Telstra fell in the years 2000 to 2010 when a weekly price chart showed a downtrend in place. During the GFC, Babcock and Brown, and ABC Learning Centres (just to name two) fell in value, then stopped trading, and liquidated. 
If you follow classical technical analysis principles, then a share price which is falling is likely to continue falling, so you might be treading on thin ice by buying them. Many traders will wait until the downtrend is confirmed to have finished, and an uptrend is inevitable. This is one of the basic tenets of Dow Theory.
8 Is the investment liquid?
Okay, you have recommended that I buy some shares in company "xyz". If I want to sell in a hurry, will I be able to do that? That is, are the shares liquid?
Of the 2,000+ shares on the Australian market, less than 500 of them are deemed to be "liquid". That is, if you want to sell them in a hurry, you might find there are no buyers who want to buy them, so you will be left with a share parcel that no one wants to buy at your asking price. You could then reduce your asking price and offer them at a discount. But even then you might have trouble selling them. Especially if there is a stampede of sellers wanting to do likewise. See more information about Stock liquidity.

The information presented herein represents the opinions of the web page content owner, and
are not recommendations or endorsements of any product, method, strategy, etc.
For financial advice, a professional and licensed financial advisor should be engaged.


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Last revised: 22 September, 2014.