Last week’s answer

I was founded in 1983, and my scanner-based technology enables manufacturers and retailers to identify customers based on what they actually buy and distribute customized coupons to them at the point of sale. (Perhaps you’ve received one of my coupons when checking out at your local grocery store?) My system is installed in more than 21,000 grocery stores in the United States and abroad. I also print more than 1 billion condition-specific informational newsletters in thousands of pharmacies each year. I retrieve about 250 million retail transactions per week and manage purchase histories of more than 100 million households. Who am I? (Answer: Catalina Marketing)

Know the answer to this week’s question? 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.

When to sell

How should an investor decide when it’s time to sell a stock? — S.H., New York, N.Y.

Knowing when to sell is critical to successful investing. Consider selling if you’ve found a significantly more promising place to put your money. (If you find only a slightly more attractive place, the tax hit you take on any capital gains might negate the value of moving your money, unless the stock is in an IRA.)

You also might sell if the stock is now significantly overpriced or if the reason you bought the stock is no longer valid. (Perhaps the company has changed direction or its management no longer inspires confidence.) Selling also is smart if you’ll need the money within three to five years. Such short-term money shouldn’t be in stocks in the first place.

Perhaps the best reasons to consider selling, though, are if you simply don’t know much about the company, if you can’t remember why you bought it, if you’re just holding for emotional reasons, or if you can’t explain how the company makes its money. Whenever you buy a stock, consider jotting down the reasons why you did and when you might sell. Then refer to that paper periodically.

Gather more selling tips at old.better-investing.org/ clubs/when-to-sell.html and in our How-to Guides at www.FoolMart.com. And learn about short-term investing options at www.Fool.com/savings.

Where could I learn more about the history of the stock market and business in general? — C. Lewis, Sacramento, Calif.

At your local library or bookstore, check out “Learn to Earn: A Beginner’s Guide to the Basics of Investing and Business” by Peter Lynch and John Rothchild (Simon & Schuster, $14) and Peter Bernstein’s “Capital Ideas: The Improbable Origins of Modern Wall Street” (Free Press, $15).

A slick profit

Although I’ve certainly made my share of mistakes during the years, back in late 1995 I bought 100 shares of obscure Cross Timbers Oil for about $1,400. Its modest dividend indicated to me that it wasn’t some fly-by-night operation. Cross Timbers is now called XTO Energy, and although I’ve sold more than $5,000 worth of shares during the past couple of years, the stock I still hold is now worth more than $13,000. Moral of the story: It is possible to earn impressive gains by investing in small, well-managed companies, even outside the tech sector. — Rick B., Kansas City, Mo.

The Fool Responds: Right you are. Domestic natural gas producer XTO Energy has been doing well. It recently reported record production and earnings for 2003, with revenues of $1.2 billion, up 47 percent over 2002, and net profits of $288 million.

Dividends are a sign that a company has excess income that it can share with its investors, but remember that sometimes dividends get decreased or eliminated. Always examine companies from many angles, to determine how healthy and promising they are.

Bankruptcy 101

If you’re thinking that some companies in or near bankruptcy might make good investments because their stock prices are low, think again.

A company files for Chapter 11 bankruptcy protection (usually extremely reluctantly) when it’s having trouble paying its bills. Under Chapter 11, the company can continue to operate while it reorganizes. With any luck, it will get its act together and become stronger than before, as Texaco did after filing Chapter 11 in 1987. If the company cannot generate enough capital to pay off its creditors, it likely will end up in Chapter 7, which means complete liquidation.

In Chapter 11, the company remains in possession of its own assets, under the administration of a court-appointed trustee. It must then file a plan of reorganization with the bankruptcy court. If any creditors are to receive less than full value for their claims, they will have the right to vote on their acceptance. After the vote, the court can then elect either to accept or reject the plan. So the bankrupt company has some flexibility, but if it tries to deal too harshly with various creditors, its plan isn’t likely to be approved.

In most cases, the company will have to sell off assets to raise money to pay creditors. The proceeds usually won’t be enough to pay all prioritized creditors in full. So the creditors might accept a reduced amount of money, and/or some stock in the reorganized company.

If you notice much attention being paid to creditors and little to shareholders, you’re not imagining things. Those who hold shares of common stock in the company are not anywhere near the front of the line. They’re behind debt holders, merchant creditors, trustees, employees, the IRS and even preferred shareholders. Creditors don’t have to share anything with existing shareholders. Even the insiders’ stock stakes are generally reduced to zero value.

Some companies in Chapter 11 do emerge from it and survive — but many don’t. And with those that do, it’s rare for shareholders to benefit, as they’re last in line to receive something from the bankruptcy. Steer clear of companies in trouble.