Archive for Sunday, September 10, 2000

The Motley Fool

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September 10, 2000

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Name That Company

Last Week's Question and Answer:

I was born in 1994 when two candidates in electrical engineering at Stanford developed a guide to their favorite Web sites. They soon began finding and classifying information on the Internet with customized software. (Supposedly, they thought of their development as yet another hierarchical officious oracle.) Their oracle first lived on a computer named "Akebono," after a famous Hawaiian sumo wrestler. In 1995 their files were moved to Netscape's computers. Today, I serve more than 156 million customers worldwide and am one of the most well-known Internet brands. My stock has surged more than 5,000 percent in four years. Who am I? (Answer: Yahoo!)

Know the answer? Send it to us with Foolish Trivia on the top and you'll be entered into a drawing for a nifty prize! The Journal-World's address is P.O.Box 888, Lawrence, Kan. 66044.

Shares outstanding and float

What's the difference between a company's outstanding shares and its "float"? F.W., Detroit

"Shares outstanding" are all the shares a company has issued. Some may be held by company insiders, while the rest are owned by the public. Insider shares are usually held for a long time and traded infrequently, while shares in public hands trade more often. The shares owned by the public represent the "float."

Consider Rubber Chicken Catering Co. (ticker: CHEWY), which has 50 million shares outstanding. If insiders own 40 percent of them, then the float is the remaining 60 percent, or 30 million shares.

It's good to pay attention to this number with smaller companies, as stocks with small floats (referred to as "thinly traded") can be extra volatile. Any kind of demand will send the stock price soaring, as supply is so limited. And vice versa.

Do you recommend investing through 401(k) accounts over investing directly in individual stocks? C.R., Chicago

We like both. Individual stocks offer you more control and opportunity for rapid appreciation. Still, ignoring 401(k)s can be costly. As they're tax-deferred, they are one of the best ways to save for retirement, and if your employer matches any part of your contribution, that represents free money. You should at least learn more about your company's 401(k) or 403(b) plan. As with any investing process, it's best to start contributing as early as possible. Also, consider plunking most or all of your 401(k) contributions into an index fund. If your plan doesn't offer one, ask for it.

Learn much more about retirement topics, tax strategies and investing basics via our free weekly e-mails. See if any interest you at www.email.fool.com.

Use due diligence

While traveling in Florida in the early 1990s, I was impressed by Shoney restaurants. At that time, newspaper articles reported that the company had just settled a class-action lawsuit. Without further study, I bought 100 shares at $17 each. Unfortunately, I found out later that Shoney's liabilities exceeded its assets. Being a long-term investor, I held them until 1999 when I sold them for $3 each. This was an expensive lesson that taught me not to buy without thorough investigation. David Connelly, Mesa, Ariz.

The Fool Responds: That's a costly but valuable lesson. Buying and holding is a great way to build wealth, but it doesn't mean you should hold absolutely everything you buy indefinitely. It's important to research companies before you buy and also to keep up with them after you buy. If things start falling apart, selling can be much smarter than holding. At least you sold when you did Shoney shares are trading for under a dollar each these days.

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