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Sunday, May 27, 2012 - Page updated at 07:30 p.m.
The Motley Fool: Every Sunday, useful tips on investing
Ask The Fool
Buying stock directly
Q: You have explained buying stocks through a brokerage account, but you didn't mention that folks may also be able to buy shares directly from the companies themselves. Right?
Brokerages are not the only option.
You can hold a lot of stock through mutual funds in your 401(k), for example.
And as you noted, with many companies you can buy stock directly from them, through direct stock-purchase plans, dividend reinvestment plans (sometimes referred to as "DRIPs") and the like.
These plans often let you buy small chunks of stock, for small sums, and charge low or no fees.
Investors: Which kind are you?
What kind of investor are you?
Here are some possibilities:
• Value investors focus on fundamentals of companies, such as cash flow, profit margins and dividends.
Aiming to buy stocks for significantly less than their estimated worth, they're bargain hunters, seeking a sizable margin of safety.
They want to buy a dollar for 50 cents.
• Growth investors seek rapidly growing companies.
They'll often pay top dollar for such firms, forgoing a margin of safety and expecting stock values to keep rising as the companies grow.
These stocks can pull back sharply or even implode, though.
• High-yield investors are primarily seeking cash-generating holdings that offer modest risk.
They tend to focus on bonds and stocks with high dividend yields, such as real-estate investment trusts (REITs) and preferred stocks.
• Large-cap and blue-chip investors prefer large, established companies with proven track records of profitability. (Examples: General Electric, Verizon, Merck, ConocoPhillips, United Parcel Service.)
These firms are often good dividend payers, too.
• Small-cap investors are drawn to smaller, younger firms, which can be risky, but offer the chance of greater reward, as they can grow quickly.
Small-cap companies can be more obscure and harder to find information on, but they're sometimes easier to understand than many large caps, since they tend to be rather focused.
• Mutual-fund investors favor mutual funds, where their money either keeps pace with a particular stock or bond index, or is invested in holdings selected by professional money managers.
Many funds feature outlandish fees and subpar performance, but others can serve you well.
These styles are not mutually exclusive.
You may focus on large-cap companies that are good values, for example, or high-yielding mutual funds.
My Dumbest Investment
Dear Fool: I do believe that Under Armour's stock was — and is, to date — my dumbest investment!
The Fool responds: Under Armour has given its long-term investors quite a ride, topping $60 in 2007, plunging below $20 in 2009 and then touching $100 this year.
Depending on when shareholders got in and out, they may be quite happy or despondent.
The sports-apparel company has a market cap near $5 billion and a recent price-to-earnings (P/E) near 53, well above its five-year average P/E of 36.
That suggests that the stock may have gotten ahead of itself again.
On the plus side, its revenue and earnings have been growing at double-digit rates and accelerating, and it's adding outlet stores aggressively.
It doesn't have the fattest profit margins in its industry, though, and its stock price doesn't seem to be a screaming bargain right now.
It might be worth keeping an eye on.
Remember to always focus on both quality and price — you want a great company at a good or great price.
Copyright 2012, The Motley Fool
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