Name that company
I trace my roots to 1860, to a gentleman who began supplying Europe with information on its holdings in the emerging market of America. I began rating corporate bonds in 1916, and I pioneered index tracking systems and exchange-traded funds. Today I'm the world's leading credit rater, rating trillions of dollars' worth annually. Investors have plunked a trillion dollars into investments based on my flagship index of America's biggest companies. McGraw-Hill bought me in 1966. Who am I? (Answer: Standard & Poor's)
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 address is Motley Fool, Box 19529, Alexandria, Va. 22320-0529. Send questions for Ask the Fool, Dumbest (or Smartest) Investments (up to 100 words), and your Trivia entries to Fool@fool.com.
Stock buybacks
Companies frequently announce that they're buying back some of their shares. Here's what that means for you. First, understand that when a company buys back stock, it typically does so on the open market it doesn't buy your shares, unless you happen to be selling them. You keep your shares.
The fact that the company is out there buying shares will likely have a small upward effect on the stock price because it means there's more demand for the shares. Generally, the more shares a company buys and retires, the better off you, the shareholder, are. As an extreme example, imagine that Meteorite Insurance Inc. (ticker: HEDSUP) has only 100 shares outstanding, and you own 25 of them. That means you own 25 percent of the company. The company then buys back 50 of its own shares, leaving 50 shares outstanding. You'll still own your 25 shares, though, so you now own 50 percent of the company.
That's extreme, of course, but it's to make a point. The more shares that are bought back, the greater your share of a company's earnings. If Meteorite Insurance earned $100 in income, that would be $1 EPS (earnings per share), pre-buyback. After the buyback, though, the firm still would have the same earnings, but those earnings would be spread among just 50 shares so the EPS would go up to $2. The P/E would fall, and each share potentially would be worth more.
If you've ever thought that a company should use available funds to pay shareholders cash dividends instead of buying back shares, think again. Remember that when a company earns income, it pays taxes on that. Then it pays out any dividend to you, the shareholder. And you get taxed on that. So that income is taxed twice hardly very efficient. By buying back shares, the company still is rewarding shareholders by making existing shares more valuable, but it's doing so in a way that does not trigger taxable events for shareholders.
Buybacks are usually a good thing. Just make sure your companies' earnings aren't increasing solely because they're buying back boatloads of shares.
Sunk costs
Q: What should I do if I bought some stocks at their all-time highs? Just sit tight? Anne Bruhner, Comptche, Calif.
A:Online at Fool.com, community member Vinay Kumar offered a terrific answer to this question: "I think it's irrelevant what you paid for the stocks that you own now. Those transactions were in the past and the purchase prices are sunk costs. It doesn't matter if you paid $70 per share for Cisco Systems; your shares are selling for about $22 now. If you think Cisco is worth more than that, then hold it (or consider buying it); if you think it's worth less, then sell it.
"Your purchase price should have nothing to do with your decision. Well, it has a little relevance, because it has tax impacts. If you sell a stock that's way in the red, you recoup some of the capital loss.
Q: "Use your mistakes in the past to learn lessons (I certainly have), but look at your portfolio today. Don't stubbornly hold onto Cisco (or Yahoo! or anything else) because you can't fetch your original purchase price. Don't sell it just because it's down so much. And certainly don't buy it just because it's worth so much less than its 52-week high. Evaluate each stock on how it looks today."
Where did the word Nasdaq come from? S.R., Reno, Nev.
A:It used to be an acronym for National Association of Securities Dealers Automated Quotation, but it's now a proper noun. Created in 1971 as the world's first electronic stock market, Nasdaq ranks second among the world's securities markets in terms of dollar volume and lists roughly 5,000 companies. You can learn a lot about it at its Web site: www.nasdaq.com.
Flew the Koop
This is one my husband won't let me live down. The day that America Online announced an alliance with the DrKoop.com Web site, I bought 200 shares of KOOP at about $40 each. I figured that everyone knows Dr. Koop, they'll flock to the site and the stock will go up. Wrong. But what did I do? I bought another 200 shares at $30. I should have just taken my losses and exited the stock. B.E., West Palm Beach, Fla.
The Fool Responds: Your instincts were good. Alert, you were looking at companies in the news and companies with which you were familiar. But as has been made even clearer since you sent in this story, not all well known Internet-based companies are destined for greatness. Like many of its peers, KOOP's shares have drooped, down more than 90 percent in the last year. Everyone knowing a company isn't ever enough. Everyone knew PanAm, but it went bankrupt anyway.
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