Tuesday, February 28, 2012

Buying Stock in a Company

There are lots of way to invest your money, but the most common way, the one most investors take part in, and follow, is to invest in common stocks.  The simple definition of a share of common stock:  Equity in a publicly traded company.  A single share of stock is a piece of ownership of a company, and affords the same rights as other owners. 

The problem is that a single share of the company gives an almost infinitesimal share of a company traded on the stock market.  For instance, at this time, Bank of America has 10.54 billions shares outstanding.   So, a single share has an ownership percentage of                                                                         0.0000000000949, or 9.49E-11 in scientific notation. 

An ownership percentage such as this, or even 100 or 1000 times that isn’t going to give you much leverage in how the company is run.  So, we can discount any ownership advantages that shares might bring the small investor. 

Therefore, the reasons for owning a publicly traded stock are pretty much limited to the ability to make money off of the investment.  There are two main ways of accomplishing this:

  • Selling the stock to someone else at a higher price than you paid.
  • Receiving cash dividend payments
Sounds simple, right?  In concept, it is.  Making it happen consistently is beyond the reach of most small investors.  It is, studies show, even beyond many professional investors. 

The reasons why this is so difficult will be explored in the first section of this book.  If this gets too depressing, feel free to put the book down, (or more accurately, shutdown the computer or e-reader) and take a break.  Be sure to come back, though.  Knowing the downside of investing in stocks might save your financial fortune.   

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