Single Stock Investing: Smart, or Stupid?

Single Stock Investing

Single stock investing-just what does that mean?

Single stock investing means buying stock in a single company, such as General Motors-well,  maybe not General Motors exactly-but buying shares of a single  company.

If you buy a share of  a mutual fund-then you are buying a small percentage of the total of the stocks that make up that mutual fund.  The mutual fund company usually owns stock in many different companies.

So with a single company stock purchase-you own a piece of that company-yes you can go tell those folks how to run their business-well let’s not get carried away….

With a share of a mutual fund-you own a percentage of the  stocks that mutual fund company owns.

Now why own stocks or mutual funds?

The purpose of owning stocks or mutual funds is to “GROW” your money.  To help you understand the concept, and why it’s important,  let’s look at three scenarios.

Inflation, a short video discussion:

1. You put $1000 under your gurney mattress-In 20 years-you have $1,000, right-well you may have a bill labeled a 1,000bucks, but it will only buy $553 worth of stuff  if inflation runs three percent per year-decreasing your purchase power.
2. You put $1,000 bucks in a CD paying 3%-in 20 years you will have $1800 bucks in 20 years-which holds the value against inflation-you can purchase the equivalent of 1000bucks of stuff at today’s prices.
3. If you buy a stock or mutual fund that grows 8% per year for 20 years-then you will have $4,460 at that time-outpacing inflation-actually GROWING your money.  And that happened while you were at work, asleep, on vacation, whatever-NEAT HUH!!

Why Simply Saving Money is not really saving money:

So, that simple exercise tells you that saving money is not really saving at all, if  your money is not growing at a reasonable rate of return.  That is why there is all the hoopla about investing.  Why there are several cable networks dedicated to investing, and why people spend billions of dollars trying to figure it all out.

Investing:

Investing is simply a way to make your money work- to be making you more money. Rather than you working to make more money.

Cause, see, your time is limited.  You can only work so many hours per week, right.  So to increase your wealth, your money needs to be working for you 24/7.

Buying Single Stock  Shares:

“So how does buying a single stock share grow my money, while I am sleeping?”  “How does that work?”

When you buy a stock share, you are indeed buying  partial ownership of the company.

If you buy a share of Bank of America-the largest bank in the country right now:

• then the price today is ~18 1/2 bucks.
• There are 18 billion shares of the stock.
• So with your one share, you own 1/18,000,000,000 of the company.

Now you may say, “How can owning one share out of 18 billion make me any money, especially in a huge company?”

When you own a share of stock, any growth in the company (in this case Bank of America, loans money receives interest income, charges you fees for the privilege of banking there)  , is usually rewarded by a higher share price.

So over time, your shares become more valuable.

The problem is that if the company is poorly run, or we have a bad economy, then the value of the share can drop-which means if you sell the share, you have lost part of your money.  That is what is known as “RISK!”

So the Billion Dollar Secret, is buying stocks that go up, not down in value.  Simple, huh.

Of course we all know-it is not easy to  tell which direction a company’s stock will go-up or down.

That, my friends, is the reason why so many financial experts discourage individual investors from buying single company stocks.

You have to be an expert to consistently pick companies that grow and increase the value of your share….  And the number of investors who are able to do that on a consistent basis is pretty small.

Even the average mutual fund manager has a poor track record at picking the right stocks more than 50% of the time.

So does that mean we just quit trying????  NOOOO!, because if you do, inflation will kick your behind, every time!

Now this is a long enough post on this subject today-I will continue this same thread in another post and discuss further the pro’s and con’s of buying single stocks.  This concept is very important to understand- so let’s get the basics down.

Kind of like studying anatomy and physiology, if you are in the health-care profession.  If you don’t know how the body works-how you gonna fix it????

So keep checking with us, here at The Millionaire Nurse Blog, for more information on how to make your money grow!!!!

And ASK QUESTIONS BELOW, IF YOU DON’T UNDERSTAND SOMETHING!!!!

Tags: investing by nurses, investing in mutual funds, single stock investing, the difference between stocks and mutual fund investing

This entry was posted on Wednesday, April 21st, 2010 at 2:24 pm and is filed under Personal Finance 101. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.