Chapter 14

Stocks and Bonds

In This Chapter

Setting up a brokerage account

Describing the securities in a brokerage account

Transferring cash to and from a brokerage account

Buying stocks and bonds from a brokerage account

Recording income from securities held in a brokerage account

Recording margin interest, miscellaneous income and expenses, and return of capital

Updating securities prices

Adjusting your brokerage cash balance and account shares

After you understand how Quicken handles tax-deferred investments, working with a regular taxable brokerage account (and the extra complexity that such an account typically includes) is a snap.

If you haven’t yet used Quicken for tax-deferred investment record keeping or read Chapter 13, I recommend that you at least skim Chapter 13. That chapter provides some useful information about the fundamentals of investment record keeping with Quicken.

Setting Up a Brokerage Account

Setting up a brokerage account is similar to setting up a regular tax-deferred account. Because I describe this process in painstaking detail in Chapter 13, I don’t repeat the discussion here.

The one bit of information that I will note is this: During the investment account setup process, when Quicken asks you what kind of account you’re setting up, specify that you’re setting up a standard brokerage account.

Recording your initial share balances

If you’ve already read or skimmed Chapter 13 (which talks about using Quicken to track tax-deferred investments), you may remember a section titled “Recording your initial investment.” That little section explains how to tell Quicken what you paid for the mutual fund shares, stock shares, and so forth, held in your tax-deferred investment account.

Okay. So here’s the deal. Just as you need to describe your starting share balances when you set up a tax-deferred investment account, you need to describe your starting share balances when you set up a standard brokerage investment account. In other words, if you own three stocks in your brokerage account — IBM, GE, and Boeing — you need to describe how much you paid and when you purchased your IBM, GE, and Boeing shares.

Rather than copy that earlier discussion (I’d literally be copying and pasting material from Chapter 13), let me refer you to the “Recording your initial investment” section in Chapter 13. Go through the nine-step process described there for each stock you hold.

Working with brokerage accounts

Brokerage accounts work like tax-deferred accounts, which I describe in Chapter 13, except for a handful of minor differences.

Essentially, only three general differences exist between tax-deferred investment accounts and brokerage investment accounts:

• Brokerage accounts typically use more extensive security lists (whereas tax-deferred investment accounts don’t).
• Brokerage accounts have cash accounts (whereas tax-deferred investments usually don’t).
• Brokerage accounts let you record a handful of goofy transactions that tax-deferred investment accounts don’t (because they don’t make sense in the context of conventional tax-deferred investments).

I spend the next few paragraphs of this chapter describing features that are unique to brokerage accounts.

Setting up security lists

Typically, a brokerage account probably contains more than one type of security. You may have shares of Boeing, General Motors, or Google. You name it, and someone owns it.

Therefore, a brokerage account uses a list of securities — and you, as the investor, need to create and maintain the list of securities (stocks, bonds, and so on) that your account holds.

To do so, set up the brokerage account (as described in the first part of this chapter) and then complete the following steps:

1. Choose the Security List command.

   Display the Investing tab, click the Tools button, and choose the Security List command. Quicken displays the Security List window, shown in Figure 14-1. Note that any mutual funds you’ve already set up appear in the list as securities.

2. Click the New Security button in the Security List window.

   Quicken displays the first Add Security to Quicken dialog box, shown in Figure 14-2.

3. Enter the stock symbol for the security in the Ticker Symbol text box.

   If you don’t know the symbol, make sure that you have the name of the security correct and then click the Look Up button to search for the ticker symbol at Quicken.com.

   

   

4. Click Next to continue.

   Quicken retrieves information about the stock whose ticker symbol you entered and displays it in another Add Security to Quicken dialog box.

5. Click Done.

   Quicken adds the security to the security list and redisplays the Security List window. If you have additional securities, you can add them by repeating Steps 2–4. Also, you can add securities on the fly while you’re recording the purchase of a security for the first time. When you do this, Quicken starts this little “Oh, let’s add another security to the list” process for you at Step 3.

Before I quit this discussion of the security list, let me just make a couple of observations. See those buttons along the right top edge of the Security List window? (Go ahead and flip to Figure 14-1 for a peek.) You can use them to do useful stuff. Click Edit to change security information. Click the Report button to display a report of transactions for the security. Click the Delete button to remove the selected security from the list. Finally, use the Watch List and Hide check boxes to add a security to your watch list or to hide the selected security. Just thought you’d want to know.

Working with cash

One of the big differences between a brokerage account and a traditional tax-deferred investment account is that a cash management, or money market, account is always, always attached to the brokerage account — and is actively used.

When you initially set up a brokerage account, your money goes into this account. (The broker bought you a muffin and coffee in this meeting, remember?)

You purchase your first shares with the cash from this account. And when you sell shares, all cash proceeds go into this account.

Transferring cash to and from an account

Because you work with cash in a brokerage account, you need to know how to record the cash that flows into and out of the account.

To transfer cash to an account, follow these steps:

1. Display the investment account’s window.

   You can do this in more than one way, as luck would have it, but one easy way is to click the investment account on the Accounts bar. The investment account window should look something like the one shown in Figure 14-3 (if you’re lucky).

   

2. Indicate that you’re transferring money.

   Click the Enter Transactions button. Quicken displays the dialog box shown in Figure 14-4. Choose Cash Transferred into Account from the Enter Transaction drop-down list box.

   

3. Record the transaction date, amount, and account.

   To record the amount of a cash transfer, confirm the transaction date (shown in the Transaction Date text box), enter the dollar amount in the Amount to Transfer text box, and then specify the checking account supplying the cash in the Transfer Account drop-down list box. Then click the Enter/New or Enter/Done button. (If you click Enter/New, Quicken records the transaction but leaves the dialog box open so you can record some more transactions.)

To transfer cash from an account, follow these steps:

1. Display the investment account window.
2. Indicate that you’re transferring money from an account.

   Click the Enter Transactions button. Quicken displays the dialog box shown in Figure 14-5. Choose Cash Transferred out of Account from the Enter Transaction drop-down list box.

3. Record the transaction date, amount, and account.

   To record the amount of a cash transfer, again confirm the transaction date (using the Transaction Date text box), enter the dollar amount in the Amount to Transfer text box, and specify the checking account receiving the cash in the Transfer Account drop-down list box. Then click either the Enter/New or Enter/Done button.

Recording other cash-related transactions

The Enter Transaction drop-down list box supplies five other cash-related transactions: Write Check, Deposit, Withdraw, Online Payment, and Other Cash Transaction.

I could write up step-by-step instructions for recording these types of transactions. But you know what? You won’t have any trouble working with these babies. When you choose one of these other transactions from the Enter Transaction drop-down list box, Quicken displays a dialog box that lets you collect and enter the same sorts of information you enter in the regular Quicken register.

All I want to do here, then, is point out to you that Quicken does provide these transaction types for its cash accounts.

Buying near and selling dear

Buying and selling securities in a brokerage account is very similar to buying and selling shares of a tax-deferred investment. You fill in the same fields in almost exactly the same way:

1. Display the investment account window.
2. Click the Enter Transactions button.
3. When Quicken displays the dialog box, choose Buy – Shares Bought from the Enter Transaction drop-down list box.

   Quicken, ever responsive to your needs, displays the Buy – Shares Bought dialog box (shown in Figure 14-6).

4. When Quicken displays this dialog box, provide the transaction date and select the security from the Security Name drop-down list box.
5. Describe the purchase details.

   Use the Number of Shares, Price Paid, and Commission text boxes to describe your purchase. (You can get this information from your order confirmation slip.)

6. Click the Enter/New or Enter/Done button when you’re finished.

   Pretty simple, right?

Selling a security works the same basic way as buying a security:

1. Display the investment account window and then click the Enter Transaction button.
2. When Quicken displays the dialog box, choose Sell – Shares Sold from the Enter Transaction drop-down list box.

   Quicken displays the Sell – Shares Sold dialog box (shown in Figure 14-7).

3. Use the Transaction Date list box to provide the sales date.
4. Use the Security Name drop-down list box to identify the stock, bond, or mutual fund you’re selling.
5. Use the Number of Shares, Price Received, and Commission text boxes to describe your sale.
6. Select the option button To This Account’s Cash Balance or the To option button to specify whether Quicken should adjust some bank-account balance for this transaction.
7. Click the Specify Lots button.

   If you purchased share lots at different prices or at different times, you can click the Specify Lots button to open the Specify Lots for Investment dialog box, where you can pick and choose which lots to sell so that you can minimize the capital gains taxes you’ll owe. (Good idea, huh?) A lot is simply a batch, or set, of shares that you purchase at one time. If you sell the most expensive lots, you reduce your capital gains and the taxes on those gains.

   • To pick an entire lot: Double-click it. (You need to double-click the date field, by the way.)
   • To pick a portion of a lot: Select it; then, in the Selected text box, type the number of shares from the lot you want to sell.
   • To clear your selections and start over: Click the Reset button.

   The Specify Lots for Investment dialog box also provides nifty command buttons for automating the process of selecting lots. If you click the Maximum Gain or the Minimum Gain button, Quicken picks lots for you in a way that produces the largest possible or smallest possible capital gain, respectively. Alternatively, you can click the First Shares In or the Last Shares In button to sell the oldest shares or newest shares first, respectively. This business about picking the lots you sell is rather arbitrary, of course. By letting Quicken pick lots, you can manipulate the capital gain you’ll have and the capital gains taxes you’ll pay. But it’s all legal (as long as you specifically tell the brokerage company which lots you’re selling) and honorable. And it can save you money because you can time your capital gains so that they occur when they’ll cost you the least.

   If you’re someone who has large capital loss carryforwards — as many investors do after the brutal years of the previous decade — your capital loss carryforwards may totally wipe out any gains you have to recognize over the next few years (or decades; gulp). In this case, you may not get much benefit from fooling around with this specific identification business. Consult your tax advisor for details.

8. Click the Enter/New or Enter/Done button.

Recording dividends, capital gains, and other goodies

Taking care of this stuff is easy. Any time you receive investment income, click the Enter Transactions button and choose Inc – Income (Div, Int, Etc.) from the Enter Transaction drop-down list box. When Quicken displays the dialog box used to record income, use the Security Name drop-down list box to confirm the stock, bond, or mutual fund producing income. Then use the Dividend, Interest, Short-Term Cap Gain Dist, Mid-Term Cap Gain Dist, and Long-Term Cap Gain Dist text boxes to record the amount and type of income, as shown in Figure 14-8.

Note: You use the Transfer Account drop-down list box to identify the account into which income amounts are deposited when you don’t use the investment account’s regular cash account.

To record dividends, capital gains, and other income when you reinvest the money you receive, click the Enter Transaction button and choose Income Reinvested from the Enter Transaction drop-down list box. When Quicken displays the dialog box, describe the amounts received and how you’ve reinvested.

Recording other not-so-tricky transactions

Quicken lets you record all sorts of transactions in a brokerage account. You can do not only reminder and stock-split actions (which I describe in Chapter 13), but also a bunch of other things.

I briefly describe these other transactions here and explain how to record them because you’re more likely to encounter them when you’re working with a standard brokerage account.

Bonds … James Bonds …

If you invest in bonds, you know that a bond’s price is actually quoted as a percentage of its face value. A bond that sells for $950 with a face value of $1,000, for example, is quoted as 95 because the $950 price is 95 percent of the $1,000 face value. Quicken, however, doesn’t let you describe a bond’s price as a percentage. You must enter the bond price as its price in dollars and cents.

Going for the gold

You can use Quicken to record precious-metal investments. Suppose that you’re hoarding Krugerrands (1-ounce gold coins minted in South Africa). For this investment, the price is the price per Krugerrand, and the shares figure is actually the number of ounces (equal to the number of Krugerrands). Because Quicken doesn’t supply price-per-ounce or number-of-ounces fields, you insert the information into the Price and Shares fields of the Investment list.

Recording margin interest expenses

To record margin interest expense, click the Enter Transactions button and select Margin Interest Expense from the Enter Transaction drop-down list box. When you do, Quicken displays the margin interest expense version of the investment transaction entry dialog box, which you use to describe the cost of your financial adventure. Only the most sophisticated investors should be using margin interest expense, anyway. If you’re one of these financial cowboys or cowgirls, I assume that you’re smart enough to figure out this stuff on your own.

Paying a miscellaneous expense

Sometimes you need to pay an expense. One rarely sees expenses occur for stock or bond investments. Expenses sometimes do arise, however, for real estate partnership interests (which can be treated like common stock shares) or precious-metal investments (which can also be treated like common stock shares).

If you need to pay a fee for account handling or for storing your stash of Krugerrands, for example, you can record such an expense by clicking the Enter Transaction button and then choosing Miscellaneous Expense from the Enter Transaction drop-down list box. When Quicken displays the dialog box, fill out the boxes in the miscellaneous expense version of the investment transaction entry dialog box.

Recording a return of capital

Ah, yes, the old return of capital trick… Sometimes the money you receive because you own a security isn’t really income. Rather, it’s a refund of part of the purchase price.

Consider this example. You buy a mortgage-backed security — such as a Ginnie Mae bond — for which the mortgagee (the person who borrowed the mortgage money) pays not only periodic interest, but also a portion of the mortgage principal.

Obviously, you shouldn’t record the principal portion of the payment you receive as income. You must record this payment as a mortgage principal reduction or — in the parlance of investment record keeping — as a return of capital.

As another example, suppose that you invest in a limited partnership or real estate investment trust that begins liquidating. Some of the money that the investors receive in this case is really a return of their original investment, or a return of capital.

To record a return-of-capital action, click the Enter Transaction button. When Quicken displays the return-of-capital version of the investment transaction entry dialog box, choose Return of Capital from the Enter Transaction drop-down list box and describe the security that’s returning capital.

Special investment transactions

Quicken also supplies some special investment transactions to record the receipt of stock options, exercise of stock options, and repricing of stock options. It also supplies investment transaction types for short-selling and investment transactions for dealing with corporate mergers, spinoffs, and reorganizations. To use these special investment transactions, you follow the same general approach described in the preceding sections.

More Quick Stuff about Brokerage Accounts

Let me tell you a couple of other quick things. You’ll almost certainly find these tidbits helpful.

Monitoring and updating securities values

Regardless of whether you’re working with a mutual fund account or with securities in a brokerage account, you can collect current market prices and store them with the Quicken account information.

To record the current market price for a security manually, click the Investing tab (so that your investments show up), and use the up- and down-arrow keys to select the security (or use the mouse to click the security’s name). Then move the cursor to the Quote/Price field and enter the current price.

To grab current market prices automatically (electronically), click the Investing tab’s Update button and choose the One Step Update command.

Adjusting errors

You can adjust the cash balance in a brokerage account and the shares balance in brokerage accounts if (for some reason) the figures are incorrect.

Oops, my brokerage cash balance is wrong

How you adjust the cash balance in a brokerage account depends on how you set up the account.

To adjust an investment account’s cash balance, when the cash balance information isn’t tracked in a separate linked cash account, click the investment account’s name on the Accounts bar, click the Actions button, and choose Update Cash Balance from the resulting menu. When Quicken displays the Update Cash Balance dialog box, shown in Figure 14-9, specify the correct cash balance and the date as of when the figure you enter is correct.

To adjust an investment account’s cash balance (or cash management account, as some brokerage houses call it), click the account name on the Accounts bar, click the Actions button, and choose Reconcile from the resulting menu. You reconcile a brokerage cash account the same way that you reconcile a regular old checking account. For information about how to reconcile a checking account, refer to Chapter 8. That chapter describes how to reconcile a bank account, but reconciling a brokerage cash account works the same way.

Oops, my brokerage account shares balance is wrong

To adjust the shares balance for a security in a brokerage account, click the brokerage account on the Accounts bar, click the Actions button, and choose Update Share Balance from the resulting menu.

Quicken next displays the Adjust Share Balance dialog box, shown in Figure 14-10, where you specify the security, the correct number of shares, and the date for which you’re entering the balance. Fill in the text boxes and then click either Enter/New or Enter/Done. Quicken adjusts the shares balance for the security you specified.

A few words on the Investing tab’s other tools

If you’ve read this whole chapter, you know that I mostly describe how you get information in the windows and dialog boxes of the Investing tab. But before I stop talking about the Investing tab, I want to give you a little more information on how you work with the tab’s commands and buttons to monitor your investments.

The first thing to notice is that the Investing tab provides different views (available when you click Portfolio, Performance, or Allocations), each of which provides its own information:

• Portfolio view (see Figure 14-11) lists the investment accounts you’ve set up within Quicken, the securities on your watch list, and the major stock market indexes. In addition, the view provides a bit of high-level information about each of these items.
• Performance view (see Figure 14-12) graphs your investment account values and cost bases over a selected time period, and lets you compare these values with some external benchmark, such as the S&P (Standard & Poor’s) 500.
• Allocations view (see Figure 14-13) provides charts and tables of information that let you see how your overall investments are allocated and how you’ve said they should be allocated. (To see your portfolio allocation, you need to have identified which asset category your individual investment securities fall into — and to have used the first Options button’s Change Target Allocations command to set your allocations.)

The other thing I want to mention in passing are the asset allocation and portfolio analysis tools that are available when you click the Investing tab’s Tools button. Through the Tools button, Quicken provides several useful commands:

• Asset Allocation Guide displays a web page that provides lots of solid information you can use to think smartly about how you allocate your investments between stocks and bonds and other choices. (This command is definitely worth a few minutes of exploration on your part.)
• Buy/Sell Preview lets you estimate the financial effect on your portfolio of buying and/or selling specific investments.
• Capital Gains Estimator calculates the unrealized capital gains and losses in your investment portfolio using the most current prices available to Quicken.

Asset allocation represents one of the best tactics you and I have to protect ourselves from crazy gyrations in the capital markets and from emotion-driven investment decisions. So let me throw out a random idea here. If you’re interested in developing greater expertise about this asset allocation — expertise that goes beyond what’s available from Quicken — I heartily recommend David F. Swensen’s outstanding book Unconventional Success: A Fundamental Approach to Personal Investment (Free Press).