(MONEY Magazine) – This rollicking bull market has caused the army of U.S. stockbrokers to swell 16.5% in the past four years. As a result, many brokers have been in the business only two years or less--and you know what that means: You're enjoying a quiet family dinner at home when the phone rings. As your food gets cold, a total stranger urges you to listen to some potentially lucrative investment information.

You could, of course, say that Warren Buffett is your brother-in-law and that you're extremely happy with his investment advice. Click! But some very profitable client/broker relationships have started with cold calls, and there's no reason why yours can't be one of them.

In fact, cold-calling is perfectly acceptable to the National Association of Securities Dealers (NASD), which regulates the activities of 540,639 registered brokers. But NASD has laid down specific rules for cold calls. For instance, they may not be made before 8 a.m. or after 9 p.m. A broker must tell you his or her name, the name of the firm, its address and phone number, and the purpose of the call.

Even if a broker has followed those rules, you should take a few precautions before you act on any of his or her ideas. Ask these questions:

--Where did you get my name? A reputable broker will describe how she obtained your name and be willing to acknowledge she's making a cold call. She should also be willing to explain why the investment she's recommending is appropriate for someone like you. If what you hear instead is, "This is a once-in-a-lifetime opportunity, and if you don't grab it you'll be the loser," go into your Warren Buffett routine and hang up.

If the idea seems to make sense, however, tell the broker that you're not ready to buy now. "You don't buy stocks over the phone from someone you've never met before," advises Nancy Smith, director of the Securities and Exchange Commission's office of investor education and assistance. Suggest that the broker call you again when she gets other ideas that she thinks might interest you. If she wants you as a client, you'll hear from her. In the meantime, you can track how her recommendations perform. Then, if she continues to impress you, make an appointment to meet her in her office.

--What's your professional background? Some brokers are more highly qualified than others, but there are basics they all must meet. They and their firms must be licensed with state securities regulators and registered with the NASD, which administers a series of tests that qualify brokers to sell securities. Ideally, you want someone who has at least five to 10 years' experience and has been with his or her firm for at least two years, says financial planner Paul Westbrook of Ridgewood, N.J. If your meeting is the result of a cold call, however, the broker isn't likely to have had much experience, so look for a college degree in a financial field as well as the appropriate registrations.

Don't be shy about inquiring if the broker has ever been disciplined by the SEC, a state securities regulator or any other organization. Next, double-check whatever the broker tells you. Donald J. Reis, Nevada deputy secretary of state for securities regulation, recommends that you ask for the broker's CRD (Central Registration Depository) number, which will identify him in NASD's database. Call NASD's public disclosure number (800-289-9999) for background information on the broker, including education, where he or she has worked and his or her disciplinary history. State regulators also track brokers by CRD number, and their databases may have more detailed information. To get the phone number of your state's authority, call your state government's central number or use your computer to visit the North American Securities Administrators Association Internet directory (http://www.nasaa.org/regulator/index.html). If your search turns up allegations of churning, making unauthorized trades or failure to execute trades, take your business elsewhere.

--Why do you think this investment is appropriate for me? Any security the broker recommends should suit your age, financial circumstances and risk tolerance. For example, if you are three years from retirement and unable to bear the thought of losing any principal, you don't want to invest in flighty tech stocks. To help guide you to suitable investments, the broker should inquire about your income, financial obligations, assets, debts and investment experience. If the broker doesn't ask probing questions about your finances and your investment objectives, don't open an account. "The broker must understand who you are and why you are investing before recommending a stock to you," says Gail Wickes, a senior vice president at PaineWebber. "It's like a doctor needing to know what other medication you're taking before giving you a new prescription."

--Are there any ulterior motives behind this recommendation? This is an awkward question, and you won't get a straight answer from a dishonest broker. So you'll have to watch for signs of hidden motives. For instance, if the broker recommends that you buy shares of a company's initial public offering or of a secondary offering, he may be in line for an extra commission. Moreover, brokers are sometimes more highly compensated if they sell securities the firm owns. The stock might be an excellent investment even though the broker receives a bigger commission for selling it, but you should know whether that is influencing his or her judgment.

Unfortunately, brokers are not required to tell you anything about how they are compensated, nor do they have to reveal normal and standard business dealings their firms may have with a recommended company, such as an investment banking relationship. Thus Michael Jones, NASD vice president of the office of individual investor services, suggests that you ask flat out whether the broker is in line for any special financial incentive or is involved in any sales contest--say, Win a Week in Waikiki! If you doubt the answer, check with the broker's branch manager or compliance officer. Consider special sales incentives as potential conflicts of interest and excellent reasons to turn down a recommendation. If the stock is so great, why does the firm have to pay its brokers extra to sell it?

For any securities you buy through a full-service broker, expect to pay a regular commission, generally 1% to 3% of the amount you invest. The commission is usually added to the price of the stock or bond when you buy and deducted when you sell. Many brokerage houses offer customers the option of paying a flat annual fee for account management instead of a commission each time they trade. Such so-called wrap fees typically range from about 0.5% to 3% of the assets in the account. There are many variations of wrap programs, so if you're interested, be sure to ask your broker to explain exactly how the fee structures work. Because account minimums start at $100,000 and often come with 10 to 15 free trades a year, wrap accounts usually benefit only large or active investors.

--What's the story about this security? Now that you and the broker are comfortable with each other, it's time to get into the specifics about what he's urging you to buy. Ask the broker for the company's most recent two or three annual reports. In addition to looking at the trends in revenues and profits, read the CEO's letter in each. Of course, the Big Cheese will put the best face on the company's prospects, but you can see how well his optimistic views panned out in subsequent years. Be sure to read footnotes to the financial summaries; they can alert you to potential problems, such as proposed government regulations that might affect the company's profitability.

Also ask the broker for the company's annual 10-K and quarterly 10-Q reports for the current year. The reports, which must be filed with the SEC, contain more detailed information than the annual reports. For instance, a 10-K or 10-Q would include information on pending litigation.

Be sure the broker gives you his firm's research reports on the company. They will tell you how well the outfit has been performing relative to its competitors and include projections of future earnings. Both pieces of information can help you understand the competitive pressures a company may face. For a second opinion, consult the Value Line Investment Survey, which provides regular updates on about 1,700 stocks. Available at most public libraries, Value Line's reports provide earnings projections, historical data and commentary on current operations and future prospects.

If you decide to buy the security, expect to receive a written confirmation of your trade within three or four business days. You'll need it to establish the purchase price so that you can calculate the capital gain or loss when you sell. Call your broker if a week goes by and you haven't received the confirmation.

Finally, there are forces influencing the stock market that neither you nor your broker can control. Among them are corporate earnings reports, inflation and political turmoil. That's why it's important to make sure both you and your broker are equally motivated to make you a successful investor.