Purchasing shares of stock is a lot like buying a business.
That’s the way Warren Buffet, one of the world’s most successful investors, views it—and his philosophy is certainly worth noting. When you buy stock, you’re actually buying a portion of a corporation. If you wouldn’t want to own the entire company, then you should think twice before you consider buying even a piece of it. You are, indeed, buying a proportional share of the business when you purchase shares of stock. If you think of investing in these terms, you’ll probably be a lot more cautious when singling out a specific company.
Most people wouldn’t buy a business without conducting a thorough investigation of every aspect of the company. It’s important to become acquainted with all of the details. What are all of the products and services the company offers? Which part of the business accounts for the greatest revenue? Which part of the business accounts for the least revenue? Is the company too diversified? Who are its competitors? Is there a demand for the company’s offerings? Is the company an industry leader? Are any mergers and acquisitions in the works? Until you understand exactly what the company does and how well it does it, it would be wise to postpone your decision to rush into an investment.
Let’s say you wanted to buy a convenience store in your hometown. You’ve reviewed such factors as inventory, the quality of the company’s employees, and customer service programs. In addition to selling staple grocery items, the company also rents videos and operates a gas pump. The grocery side of the business may only account for a small percentage of the overall revenue. It would be in your best interest to value each part of the business separately in order to get a complete and accurate picture of the company’s profit potential. Many companies may have traditionally been associated with a specific business, yet that same company may have expanded into totally new venues.
Disney, for example, has historically been associated with the Disneyland and Disney World theme parks. The reality is that Disney is also involved in a host of other ventures. Among other things, the multifaceted company also has interests in television and movie production, including Miramax Film Corp. and Buena Vista Television. Disney’s ABC Inc. division includes the ABC TV network, as well as numerous television stations and shares in various cable channels like ESPN.
Philip Morris is commonly associated with tobacco products. The company also profits from food and beer subsidiaries, including Kraft (featuring popular brands like Jell-O, Oscar Mayer, and Post) and Miller Brewing.
Just like any other career, making money via investing requires work. The more research and thought you put into your strategy, the more likely you are to reap rewards. Although there are no guarantees in the world of investing, the odds will be more in your favor if you make educated and well-informed investment decisions.
When you make an investment, you will be putting your money into a “public” company, which allows you—as part of the public—to become an owner or to have equity in the company. That’s why stocks are often referred to as equities.
What kinds of stocks can you buy? That's the subject of our next blog.