Ask the Fool
Following the Money
Q: When a company purchases another company, where does its payment go? — D.W., Superior, Colorado
A: If the company makes its acquisition with cash, the money goes to the shareholders of the purchased company. Their shares in the acquired company will one day disappear, replaced in their accounts with cash (or equivalents). Other classes of owners, such as holders of preferred stock, can also receive payments. Some of the cash might go to debt holders if the purchase agreement includes paying off debt. If the purchaser pays with its own stock instead of cash, then the acquired company’s shareholders will get shares of the purchaser in exchange for their shares of the acquired company. They can sell these shares for cash or keep the shares, as shareholders of the purchaser. Some purchases involve both cash and stock. Note, too, that companies often buy other companies for more than their recent market value, paying a “premium.”
Q: I don’t have to buy stock in multiples of 100 shares, right?— P.T., Hillsdale, New Jersey
A: Right. You can buy just a single share, if you want, and in some cases, even just part of a share. You can even buy fractions of shares through some brokerages. That can be handy if a stock is trading for, say, $1,000 per share and you only have $200 to invest. Read up on fractional-share investing if it interests you. It used to be important to make sure you weren’t paying too much in trading commissions, as paying a $10 commission to buy a $40 share means you’re down 25% from the get-go. But these days, many, if not most, of the major brokerages are charging $0 for trades.
My Dumbest Investment: Two Big Blunders
My dumbest investments — so far — have been in the funeral home and cemetery company StoneMor and in web-based marketer Rocket City Enterprises. I bought them years ago, and I’ve kept them in my portfolio as a reminder to dig really deep into a company before buying its stock. I liked StoneMor because its dividends were excellent, and its financials seemed OK. And death services sure seemed like something everyone would need at some point. However, I’ll never forget my dad advising me to not buy the stock. He said there was no room for it to grow — it was limited. He was right. —Y., online
The Fool responds: You have a smart dad. StoneMor wasn’t performing well in the mid-2010s, and it slashed (and then ended) its fat dividend, which had been topping 20% at one point. (In general, ultra-high dividend yields should raise a flag for investors, as they can be tied to stocks in trouble.) It’s considered a penny stock now, with a market value recently below $350 million. Even if it were performing well, it wasn’t likely to grow quickly, as death rates generally tend to be stable, and few places need many more cemeteries. Rocket City Enterprises was recently listed with a price of zero. You’re right that it’s well worth digging deeply into any stock you might buy. And steer clear of penny stocks, too.
The Motley Fool Take: Riding the crypto wave
Investing in cryptocurrencies such as Bitcoin and Ethereum is very popular, but there are more than 13,000 cryptocurrencies out there, and it’s far from clear which ones will be the best investments. So consider investing in the cryptocurrency exchange Coinbase Global (Nasdaq: COIN) instead. Barring outright bans by major global powers, Coinbase should be at the center of whatever cryptocurrency’s future is. It recently had 89 million registered users, though few were making monthly transactions. Coinbase generates most of its revenue from these trades. It was recently sitting on $7.1 billion in cash and cash equivalents. Trading activity has fallen lately, and Coinbase’s stock was recently down nearly 60% from its 52-week high, sporting a price-to-earnings (P/E) ratio near 12. But there’s a good chance that crypto trading will revive. And Coinbase is building out different long-term revenue streams. For example, it’s offering financial custodial services to corporations, something that could grow in importance as businesses diversify their balance sheets. Coinbase is expanding globally, is supporting trading for new cryptocurrencies and will soon launch a marketplace for non-fungible tokens (NFTs). Risk-tolerant long-term investors might want to take a closer look at this crypto leader. (The Motley Fool owns shares of and has recommended Coinbase Global.)
– By Andrews McMeel Syndication