Originally created 08/03/97

Worthless stock can have value



Q: Eight years ago, I bought 777 shares of Rooney Pace Group Inc. for $3 a share. The stock subsequently dropped to 12 cents a share. A June statement from my broker stated that the shares were worth $93.24.

My July brokerage statement reported zero shares of Rooney Pace. I called the brokerage to find out what happened. I was told that the stock was "notorious" and it had been dropped because it's worthless. Have you ever heard of "notorious stocks?" Can the brokerage do this to a customer without permission?

A: I've never heard of a "notorious" stock. Nor have the half-dozen or so investment professionals I asked.

Perhaps, your stock broker was referring to the company itself. Rooney Pace was a notorious investment firm that was expelled from the National Association of Securities Dealers in October 1988 for trading violations. You may have owned stock in the brokerage firm's parent company.

Anyway, as to your second question, the brokerage firm probably can discontinue listing a defunct stock on your account statement, said Marilyn Davis, NASD regional director in Atlanta.

But even if the stock is truly worthless, it may still have value to you. Your investment loss could be used to offset gains on the sale of another stock.

Q: I'm 64 years old and recently inherited $10,000. I have a $48,000 mortgage that comes due in two years. Would it be better to use the money to pay off some of the mortgage or should I invest it?

A: To pay off or not to pay off is one of the most commonly asked questions, say financial planners.

Not to confuse the issue too much, but there are two answers to the question, each as correct as the other.

One answer depends on financial considerations, while the other hinges on social aspects.

When you get right down to it, buying a home is an investment. As such, you need to decide whether you'll get a better return sinking that $10,000 windfall into your home or investing it elsewhere, say, in the stock or bond market.

Contrary to conventional wisdom, paying off a mortgage early isn't necessarily a good investment decision, said Hank Madden, a Jacksonville, Fla., financial planner.

One way of determining whether to use your money to pay down a mortgage or invest it in the stock market is to compare the after-tax cost of your mortgage against the potential return of stocks.

Let's say you're in the 28 percent tax bracket and the interest rate on your mortgage is 7.5 percent. Because you can deduct mortgage interest costs on your federal tax return, your after-tax rate is only 5.4 percent.

If you can find an investment that returns more than 5.4 percent Ä and historically the stock market has returned 10 percent a year Ä you might want to go for it. However, given the short-term market risks associated with stocks and bonds and your two-year time horizon, you might be better off using the money to pay down the mortgage.

The other consideration is more personal.

If paying off your mortgage and owning your home outright has always been your dream, or if you'd sleep better at night without a mortgage, then by all means you should use the $10,000 to pay down the debt, Mr. Madden said.