Why We Buy a Stock
Thursday, May 18th, 2006
By Michael Lombardi, MBA for Profit Confidential
First and foremost, we buy a stock because we want to make money. And how do we make money on a stock? For traditional investors there are two ways.
First, we can make money from the dividend the stock pays. Secondly, the stock can rise in price and we can sell it to the next person who wants it at a higher price.
Could you believe the stocks in Dow Jones Industrial Average once paid an average dividend of 7%? It was at a time when nobody wanted to own stocks. Today, everyone owns stocks, interest rates are low, and the DJIA stocks pay a meager dividend of about 2%. Not quite a bargain, especially if you consider government guaranteed U.S. T-bills pay about 5% now. Hence, I doubt investors are buying stocks for dividend yields these days.
The great majority of investors buy stocks today for capital gains purposes. They buy a bio-tech stock because if that company develops a major drug, the stock will go through the roof. Investors buy internet and hi-tech stocks hoping to discover the next great manufacturer of products like the I-pod, cell phones, computer operating systems and more.
Some investors simply buy stocks to sock away in their retirement plan. They’re not looking for the big kill, just steady growth in value of 10% or more a year. Often, this is achieved through mutual funds that offer expert investment management.
My message to you today is this: investing in small-cap or micro- cap stocks issued by companies that have the potential to discover or develop something, from a new gold mine to new communications device, when well researched, offers you the best chance for capital growth.
In today’s market environment, buying established stocks that are paying a measly dividend of 2%… that are already trading at over twenty times earnings. doesn’t really leave you much room for gain unless you believe interest rates will collapse again.
We buy a stock to make money from it. It’s been six long years and the DJIA still has surpassed its record high reached in early 2000. Will it ever happen? I can’t honestly say.
But I can tell you this: big company stocks are fully valued in this market. And if you own them (I’m taking about the big stocks that make up the major market indices like the Dow Jones Industrial Average) you might want to re-consider why you own them in an environment where stocks are pretty much fully valued. Do they really have the upside worth your investment? If not, there are a lot of other investment alternatives out there these days. If you already own enough gold, oil, and special situations stocks, U.S. T-bills paying 5% are not a bad alternative to big-cap stocks– they’re a lot safer too.
Next Post: Listening to the “Smart Money”
Previous Post: Money to Be Made in Large-Cap
Tags: gold stocks, interest rates, oil stocks, stocks
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Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland.Follow Michael and the latest from Profit Confidential on Twitter
