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© St. Petersburg Times, published August 25, 2002
Under some conditions, a brokerage may refuse a trade
Q. A stockbroker I've used for over 10 years recently refused to accept a stock purchase order based on what he said was company policy regarding what they defined as a penny stock. This order was for a $500 purchase. I was well aware that it was risky but still willing to gamble on it for the long term. Does a broker have a legal right to refuse a client a purchase? To add to the insult, the value of the stock has more than doubled.
A. Brokerage companies are supposed to know their customers and determine the suitability of any investments they sell them.
"If they see somebody committing what might be called financial suicide, it is their duty not to allow themselves to be used as the means to do it," said Clearwater lawyer Joel Goodman, who often represents investors in cases against brokerages.
He says a brokerage might be compared to a bar, which has an obligation to cut off the flow of liquor to drunken customers. The risk, if the brokerage sells the stock or the bar sells the drink, is that the company will be held liable if the customer crashes his investment portfolio or his car.
But Goodman said that under some conditions, a brokerage company's refusal to sell you a stock could be grounds for a lawsuit.
"The standard is not whether the stock went up or down, but whether at that moment of time it was proper to reject that trade," he said. "The firm does have an obligation to determine whether this would be contrary to the best interests of the investor.
Stocks selling for less than $1 a share, which is one definition of "penny stock," are considered very speculative. But if your brokerage uses a broader definition -- stocks selling for less than $5 a share -- it is eliminating some stocks from consideration that are not nearly so risky. If your brokerage failed to tell you about its policy until it rejected your trade, it delayed your ability to invest. It did not stop you from investing altogether, since you could have taken your business to another brokerage.
Of course, it is not practical to sue your brokerage unless you have suffered substantial damages.
Many brokerage companies tell their brokers not to recommend penny stocks to customers, said Bill Reilly, financial administrator for the Florida Division of Securities. But he says many of them will execute a trade in spite of that policy if customers sign a statement saying the trade was unsolicited.
Q. Some financial radio programs refer to a stock's 200-day moving average. What is this average and how is it computed? Is this available on the Internet?
A. The number you seek is the average of a stock's price over a specified number of trading days. A 200-day average is simply the average of the closing prices for the previous 200 days. You calculate it by adding up all the prices and dividing by 200. It is "moving" because it is recalculated each day, dropping off the oldest closing price from the day at the beginning of the period and adding the most recent closing price.
Some investors like to use a moving average to help them make trading decisions because it smoothes out day-to-day fluctuations in price. Sometimes when a stock price jumps above or below the moving average line, the movement signals the start of a new trend. Some investors pay primary attention to shorter periods, such as a 50-day or 100-day moving average, while others prefer a 200-day average because it is less volatile. Many look at both short-term and long-term averages.
You can find moving averages at Yahoo Finance (finance.yahoo.com). Put in the ticker symbol for the stock you want to research, click on "chart," then on "moving average."
Are you thinking of buying a car to take advantage of incentives such as no-interest financing and cash rebates? Consumer Reports (www.consumerreports.org) offers an online calculator to help you determine whether zero percent interest or a cash rebate is a better deal. Look under "free highlights."
-- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.