Question

1. What is your investing risk tolerance today, and how might it change over time?

2. What is short selling and should normal investors use this technique? Defend your answer.

3. What does it mean if your stock broker is "churning" your stocks? Why is that done, and how can you find out when it is being done to you? I bring this up as it has happened to me in the past!

Answer 1

1) My investing risk tolerance is average, not too much high not very low. The investing risk tolerance of a person depends on many factors like his income level, his future earning potential, his age, Financial position and his educational as well as family background. As your income level increases, there is less financial obligation, strong educational background and understanding of the market, high future earning potential, these all factors points towards increasing risk tolerance. As you move from young age to old age, 55 -60, your risk tolerance normally decreases. When you are young you risk tolerance is high but as you move to different age group beyond 45 – 50, risk tolerance normally decreases.

2) Short selling is when you are expecting the stock price to fall and you borrow the stock from the broker and then you buy it later and give it back to him. You profit from the short position when the price fell and you buy at a cheap price. The normal investor should short sell only when he understands the mechanism of it because in the event your position is leveraged and the stock price moved upward it can cause large losses to the investors.

3) Churning means when the broker does a lot of trading activity in the portfolio of a customer to generate commission for himself. Churning is basically done with the aim of generating commission for the brokers where brokers are benefitting at the expense of customer. This normally can be identified by the commission that you have paid to the broker or with the portfolio report or excess buying and selling transaction report.