February 12, 2006

There is something really basic that people forget and I thought I’d take a few minutes to discuss it. It sometimes seems to be overlooked that when you are buying a stock, you are investing in a company. Probably at this point there are folks moving on to their next e-mail or clicking off the site thinking, “I don’t need to hear this” or “No kidding.” I would recommend reading this one through, because it may impact how you invest, and how you look at stocks in the future.

If you look at a stock purchase as merely a “stock purchase” you are doing yourself a disservice and also overlooking a basic premise of the market. When you invest you should do it because a company and its industry are doing well and you believe the company will increase in value and/or give you return on your money.

When it comes to stocks there are two ways to get return on your investment (ROI.) The first way is to hold on to your share of the company and hope the company makes money and gives you and other shareholders part of the profit. This is called a dividend.

The second way to make money is for the value of the company to go up, either through producing more goods or services without adding cost (thus increasing the bottom line) or by perceived value on Wall Street. Perceived value moves on hype from brokers or analysts, or articles in newspapers or magazines, or people seeing investment firms buying a stock. Many other things can affect the price, but hopefully you get the idea. How you make money in this situation is by buying your stock at one price and selling when the stock price rises.

If the price goes up and you hold the stock, you have not made money on it. (Except on paper) Money is only made when you actually sell the stock. People get the wrong idea about this sometimes. You can be a millionaire on paper, but when the rubber hits the road, you don’t have that money in hand. (nor do you necessarily want to sell just because you can profit.)

Dividends make you money when you hold the stock on the payout date. Potentially you can make money two ways at the same time; first through cash payout on the dividend, and second, through ‘paper’ gains on the stock price.

A point needs to be made (another obvious one, but still needs to be said) stocks don’t always gain, and dividends are only paid when the company makes money.

Getting back to the main topic of this week’s article, you are investing in a company, not just “buying stock.” Look at the company. What do they do or make? What is the service or good they provide? Is this in demand? Will it continue to be in demand in the future? How is the overall industry doing?

For example, if you want to invest in a steel company, what do they make? Nuts and bolts for Erector sets ®, or for Ford ®? In the first case, is Christmas coming up, in the second, how are new car sales? These might tell you how your steel company might do in the near term. The point I’m trying to make is this; if you overlook what you are investing in, just looking at the numbers, you might miss out on signs that would tell you to buy, sell or run for the hills.

Closing thought – Look at the panoramic view, not just a snapshot.

Until next time.

Thanks

The columns, articles, message board posts and/or any other features provided on Wealth Training Source are provided for personal finance and investment information and are not to be construed as investment advice. Under no circumstances does the information in this content represent a recommendation to buy, sell or hold any security. The views and opinions expressed in an article or column are the author’s own and there is no implied endorsement by Robert Britt of any advice or trading strategy

copyright Robert E. Britt 2006