| What are HOLDRS?
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HOLDRS are securities that represent an investor's ownership in the common stock or ADRs of specified companies in a particular industry, sector or group. HOLDRS allow investors to own a diversified group of stocks in a single investment that is highly transparent, liquid and efficient.
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| Why own HOLDRS instead of individual stocks?
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HOLDRS provide investors with an easy, cost-effective way to trade and invest in a group of stocks. In order to gain the same diversified exposure that HOLDRS provide, an investor would have to execute a separate trade in each company represented in a particular HOLDR. Executing so many separate trades in order to gain exposure to a group of individual stocks can be a time-consuming process that may carry significant transaction costs.
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| Why own HOLDRS instead of other diversified investments?
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Like many other investments, HOLDRS can provide diversified exposure to a particular industry, sector or group. However, with HOLDRS you keep ownership benefits related to the underlying stocks. You retain the right to vote shares, to receive dividends and to sell the stock when you want to. HOLDRS also offer tax benefits. With other diversified investments, you typically pay taxes on gains when a stock is sold (even if the gains are attributable to appreciation that took place before you owned the investment). But with HOLDRS you are not subject to taxes based on someone else's investment decision. Other diversified investments also tend to have higher ongoing expenses (e.g., management fees) than the eight cents per share annual custody fee associated with most HOLDRS. Additionally, most other diversified investments are priced only once a day while HOLDRS trade throughout the course of the day.
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| How are the underlying stocks selected?
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When a new HOLDR is developed, an industry, sector or group of securities is identified and the underlying stocks to be included in the HOLDR are then selected for inclusion on the basis of objective criteria such as market capitalization, liquidity, P/E ratio or other measures. Once determined, these stocks may be weighted equally or on a modified market cap basis.
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| Do the underlying stocks change?
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The specific underlying stocks and the respective share amounts represented in each round-lot of 100 HOLDRS are established on a date prior to the HOLDRS initial public offering. Absent a corporate event undertaken by an issuer of an underlying stock, these share amounts will not change. However, because the relative weightings of the stocks are a function of market prices, these weightings will change substantially over time.
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| Why can I only buy and sell HOLDRS in round lots of 100 HOLDRS?
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A round-lot of 100 HOLDRS is designed initially to represent whole share interests in each of the underlying securities. This is designed to facilitate the issuance and cancellation of HOLDRS. Odd-lots generally would not represent whole share amounts of the underlying companies.
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| Why do I sometimes receive stocks in my brokerage account that were not included as part of a HOLDRS?
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The underlying stocks included in a HOLDR do not change except for changes due to corporate events (such as spin-offs) or reconstitution events (such as mergers and acquisitions). When Spin-Offs and Changes occur, the owner of a HOLDR is treated exactly as if he or she owned the underlying stock directly. Thus, when an issuer spins off a new security, an owner of a HOLDR will receive that security in their brokerage account outside of their HOLDRS investment.
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| Why do I receive annual reports and proxies?
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HOLDRS represent an investor's undivided beneficial ownership in the common stock or ADRs of specified companies. Accordingly, owners of HOLDRS have the right to receive all shareholder disclosure materials and proxy materials distributed by the issuers of the underlying securities. The issuers of the underlying securities included in HOLDRS have legal obligations to forward these materials to the beneficial owners of their securities - held through HOLDRS or otherwise.
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| How do I cancel my HOLDRS to receive the underlying stocks?
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To cancel your HOLDRS, you simply instruct your broker to deliver your HOLDRS to the HOLDRS trustee and pay a cancellation fee of up to $10 per round-lot of 100 HOLDRS to the trustee. The trustee will transmit ownership of the underlying shares to your account. Canceling your HOLDRS is not a taxable event (i.e., you will not recognize any capital gains or losses in the component stocks because you have converted your HOLDRS into the underlying stocks).
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| What risks are associated with an investment in HOLDRS?
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When you own a HOLDR, you take the same risks entailed in direct stock ownership. Because the value of your HOLDRS is directly related to the value of the underlying securities, it is important to remember that you could lose a substantial part of your original investment in HOLDRS. You should read the entire prospectus carefully before you purchase HOLDRS, especially the risk factors set forth in the prospectus for the HOLDRS you may purchase. Some of the general risks of HOLDRS are listed below:
- Market risk
Your investment's value may rise or fall because of broad market movements caused by changes in the economy, the political climate, the capital markets or investor psychology.
- Underlying stock risk
The stocks in your HOLDRS may increase or decline in value because of events affecting the specific companies that you have invested in.
- Sector risk
Because your HOLDRS may be concentrated in the stocks of a particular industry, trends in that industry may have a dramatic impact on the value of your HOLDRS.
- Trading risk
Trading in any HOLDRS may be interrupted if any of its component stocks' trading is halted, even though the other stocks in your HOLDRS continue to trade.
- Lack of management
Investors in HOLDRS cannot expect to benefit from the involvement of an active portfolio manager who seeks out opportunities and avoids risk in a sector. The underlying stocks in HOLDRS were selected without regard for their value, price performance, volatility or investment merit. They may or may not have been recommended by Merrill Lynch.
- Sector changes
The composition of a HOLDR doesn't change after issue, except in special cases like corporate mergers, acquisitions or other specified "Reconstitution Events". As a result, stocks selected for those HOLDRS with a sector focus may not remain the largest and most liquid in their industry. They may even leave the industry altogether. If this happens, your HOLDRS may not provide the same targeted exposure to the industry that was initially expected.
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