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Who gets the money?
THE MOTLEY FOOL
Ask the Fool
Published: December 7, 2021
Q: When I buy a company's stock, does it get the money? And what do I really get? -- L.R., Warren, Ohio
A: You may assume you're buying the shares from the company, but when you buy stock on the open market, you're not. Companies that are publicly traded have already sold shares in themselves when they "went public" via an initial public offering (IPO). Since then, the shares have been traded on the open market between investors. Someone who thinks a stock is a good value will buy shares from someone who is unloading their shares. The company doesn't get the proceeds from the trading.
Companies do care about their stock, though, because a falling stock price looks bad and can make them vulnerable to being bought out by other companies. A rising stock price, meanwhile, means insiders with stock options or shares of stock in the company can get richer. It can also allow the company to buy another company with fewer shares of its stock.
Owning stock in a company means you're an actual part-owner in the business, entitled to share in its success.
Q: What do "tulips" refer to, financially speaking? -- -- C.C., Phoenix
A: Just as we experienced an internet (or "dot-com") stock bubble bursting in 2000, causing many stock prices to plunge, people in Holland in the mid-1600s also experienced a bubble bursting: one tied to tulip bulb prices.
This "tulipmania" is one of the earliest documented cases of a speculative investing frenzy. Supposedly, certain tulip bulbs were worth more than $750,000 (in today's value), and some investors mortgaged their homes to buy tulip bulbs. As you might expect, it didn't end well.
Fool's School
Intelligent Investing
You may not have heard of Benjamin Graham, but he holds a place on the roster of great investors and was Warren Buffett's mentor. So he knew a thing or two about investing -- and he shared his insights. Here are some instructive quotations from his classic book, "The Intelligent Investor" (Harper Business, $25).
"The investor's chief problem -- and even his worst enemy -- is likely to be himself." Many investors jump into the stock market only to quickly bail out as soon as it slumps. There are gobs of other costly mistakes investors make when they haven't taken the time to learn about investing and don't control their impulses.
"The distinction between investment and speculation in common stocks has always been a useful one and its disappearance is cause for concern." This is indeed a critical distinction to understand. If you're buying stocks simply because someone recommended them, without really understanding how the underlying companies make money, you're speculating. You're also speculating if you're jumping in and out of stocks. Savvy investors study companies and know what they're buying into -- and why. They also aim to hang on for a long time to give the companies time to grow.
Graham distilled "the secret of sound investment" into these three words: "margin of safety." Demanding a margin of safety when you invest means aiming to buy stocks at prices well below what you deem them to be worth. As Graham further explained: "The margin of safety is always dependent on the price paid. It will be large at one price, small at some higher price, nonexistent at some still higher price."
"There are no sure and easy paths to riches on Wall Street or anywhere else." Average investors can get rich over long periods by investing in broad-market index funds, but it takes time -- and perseverance.
Buffett has called "The Intelligent Investor" "by far the best book on investing ever written." If you want to improve your investing, you might check it out.
My Dumbest Investment
Ouch, It Hertz
My dumbest investment was investing $10,000 in Hertz after it filed for Chapter 11 bankruptcy protection. Robinhood traders had piled into the stock, driving it higher. I got drawn in and bought; by the next day, it had crashed by 80% or so, at which point I sold. Never again. -- T.D., online
The Fool responds: In general, seeing the words "Chapter 11" near any company's name is a big red flag. Companies file for Chapter 11 when they're in hot water and having trouble keeping the lights on. Many never emerge from it successfully, while others that do emerge typically do so after having reorganized themselves, leaving shareholders with little or nothing.
Hertz's recent experience played out differently, though. The company declared bankruptcy in May 2020, after the pandemic had severely curtailed travel. Savvy investors knew that as the company reorganized and got on firmer footing, it would pay its creditors first, including bondholders, and that holders of common stock would be last in line.
Many investors piled into Hertz shares, though, plenty coming from Robinhood, a stock-trading business with many young and inexperienced investors. Shares were volatile, surging and plunging sharply. A group of investors won a bid to supply Hertz with billions in funding, and the company emerged from Chapter 11 at the end of June 2021 without wiping out existing shareholders. That's not the norm, though.
Foolish Trivia
Name That Company
People doubted me when I started using "mini-mills" to make new steel from post-consumer scrap metal via electricity. But it worked. Today, based in Charlotte, North Carolina, and with a market value recently near $31 billion, I'm North America's most diversified steel and steel products company as well as its largest recycler, employing more than 27,000 people. My offerings include carbon and alloy steel beams, precision castings, fasteners, grating, wire, joists, electrical conduit, metal building systems and much more. My innovations include having only five layers of management between the CEO and front-line workers, who share in profits. Who am I?
Last Week's Trivia Answer
I trace my roots back to 1873, when a used-book business was opened in Wheaton, Illinois. In 1932, I opened a retail store on Fifth Avenue in New York, which in 1974 was named "the world's largest bookstore" by the Guinness Book of World Records. I bought B. Dalton Bookseller in 1987, Doubleday Book Shops in 1990, and Borders and Waldenbooks in 2011. I launched my NOOK e-readers in 2009, and my NOOK store features more than 4.5 million digital books. I'm the world's largest retail bookseller, recently with 632 stores in 50 states. Who am I? (Answer: Barnes & Noble)
The Motley Fool Take
Pricey, but Growing Rapidly
Shares of robotic-assisted surgery specialist Intuitive Surgical (Nasdaq: ISRG) have been on a tear recently, up some 33% so far in 2021, and more than quadrupling over the past five years. After such an epic run, is it too late to buy Intuitive Surgical stock? Well, if long-term growth is what you're after, this proven winner in the health care space is worth considering.
More than two decades into its development of robotic-assisted surgery, Intuitive's management has said that its da Vinci X and Xi models now have over 70 clinical uses, ranging from general procedures to specialty uses such as transoral surgery. Tens of thousands of surgeons use da Vinci surgical systems worldwide, with more than 6,500 systems installed in hospitals and surgery centers. The newer single-port system is starting to be placed in the U.S. and South Korea, while the new Ion machine, used for lung biopsies, has 98 units placed so far.
Intuitive has plenty of room to continue expanding its reach in the next decade, and it's likely to get a lift as the effects of the pandemic continue to ease. Intuitive's recent stock price, with a price-to-earnings (P/E) ratio near 78, reflects high expectations. But given the steady rate of sales growth and an even faster-growing bottom line, it's arguably a reasonable price tag for long-term believers. (The Motley Fool owns shares of Intuitive Surgical and has recommended Intuitive Surgical shares and options.)
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