Buying my first stock in a company. What should I know?
August 16, 2010 7:26 PM Subscribe
I am about to buy 2-4 shares in a company that I would like to support. This company may not last this long, but they plan to pay dividends in two years.
What do I need to know, having never invested before?
Are there any good tutorials on what I can expect from my stock?
What about paying taxes/getting deductions if I lose money?
Basically, I would be happy breaking even, but am not sure that will happen. However, I strongly support the company and wish to see it succeed. How can I minimize the losses I might face if the company goes belly up?
Is the company publically traded or would this be a private purchase?
posted by Nelson at 7:59 PM on August 16, 2010
posted by Nelson at 7:59 PM on August 16, 2010
Best answer: Depends on the company and your 401k plan. Some are ultra flexible and others have a limited range of investment options. But it could be harder if this is an IPO or if this is an OTC deal.
But here's the thing. Buying shares isn't direct support. It's rewarding the current shareholders with a liquid market to trade in and potentially giving them an exit strategy for their initial investment. If you want to support the company, read the quarterly reports, read the prospectus and vote your proxy card. Proper shareholder oversight is crucial to keep management from wrecking a company. Failing that, a company needs reliable paying customers more than investors. Purchasing their product can be construed as an endorsement and support, as can writing letters to Congressional representatives on their behalf (usually done by employees en masse rather than the public).
As for managing risk, you can buy cash settled put options. Might not be 401k material. But 2-4 shares of any company with a "normal" share price isn't usually worth hedging, as commissions will eat your principle for breakfast; twenty bucks to get in and twenty to get out is already pretty bad, adding more to minimize loss is worse. Another way to hedge your risk is to buy bonds, not stock. Bonds are paid before shareholders in bankruptcy, so they're less risky. But have a defined and therefore limited upside, leading to the "equity premium paradox."
Other things you need to know:
* Dividends are income, and unless the shares are held in a tax advantaged account, you will pay income tax on them.
* Price:Earnings count for a lot, although some people like price:earnings:growth.
* Shareholders can lose their entire investment if the company does poorly. So can bondholders. So can bondholders who purchased credit default swaps from a bad counterparty.
* Owning shares in a company that isn't traded on an exchange may be impossible to sell.
* Companies aren't required to pay a dividend ever. Management is allowed to review the facts two years from now and decide to retain earnings instead.
* Incorporated firms are generally limited liability; the worst that can usually happen is that your shares become worthless. But it could happen that your relationship with the company and it's dealings is close enough that limited liability is revoked.
* There's a billion other risks I haven't mentioned because I'm not an expert. Read the prospectus for details on how things might go awry.
* I have no idea about tax writeoffs for losing money; all my holdings are tax advantaged. My working assumption is that write offs are less than the money lost.
posted by pwnguin at 8:01 PM on August 16, 2010 [3 favorites]
But here's the thing. Buying shares isn't direct support. It's rewarding the current shareholders with a liquid market to trade in and potentially giving them an exit strategy for their initial investment. If you want to support the company, read the quarterly reports, read the prospectus and vote your proxy card. Proper shareholder oversight is crucial to keep management from wrecking a company. Failing that, a company needs reliable paying customers more than investors. Purchasing their product can be construed as an endorsement and support, as can writing letters to Congressional representatives on their behalf (usually done by employees en masse rather than the public).
As for managing risk, you can buy cash settled put options. Might not be 401k material. But 2-4 shares of any company with a "normal" share price isn't usually worth hedging, as commissions will eat your principle for breakfast; twenty bucks to get in and twenty to get out is already pretty bad, adding more to minimize loss is worse. Another way to hedge your risk is to buy bonds, not stock. Bonds are paid before shareholders in bankruptcy, so they're less risky. But have a defined and therefore limited upside, leading to the "equity premium paradox."
Other things you need to know:
* Dividends are income, and unless the shares are held in a tax advantaged account, you will pay income tax on them.
* Price:Earnings count for a lot, although some people like price:earnings:growth.
* Shareholders can lose their entire investment if the company does poorly. So can bondholders. So can bondholders who purchased credit default swaps from a bad counterparty.
* Owning shares in a company that isn't traded on an exchange may be impossible to sell.
* Companies aren't required to pay a dividend ever. Management is allowed to review the facts two years from now and decide to retain earnings instead.
* Incorporated firms are generally limited liability; the worst that can usually happen is that your shares become worthless. But it could happen that your relationship with the company and it's dealings is close enough that limited liability is revoked.
* There's a billion other risks I haven't mentioned because I'm not an expert. Read the prospectus for details on how things might go awry.
* I have no idea about tax writeoffs for losing money; all my holdings are tax advantaged. My working assumption is that write offs are less than the money lost.
posted by pwnguin at 8:01 PM on August 16, 2010 [3 favorites]
Unless this company is an outlier, 2-4 shares of stock will be worth between $20 and $250. That's not enough to worry about the tax consequences and it's not enough for it to be practical for you to ensure against the loss of the money. It would be too expensive.
Perhaps, though, this is a privately held company, or one of those few publicly held companies with a share price in the hundreds or thousands of dollars. That would be useful information to know.
As pwnguin said, you can help a company by voting your proxy. You can also write to them, and of course purchase their products.
posted by alms at 8:11 PM on August 16, 2010
Perhaps, though, this is a privately held company, or one of those few publicly held companies with a share price in the hundreds or thousands of dollars. That would be useful information to know.
As pwnguin said, you can help a company by voting your proxy. You can also write to them, and of course purchase their products.
posted by alms at 8:11 PM on August 16, 2010
Best answer: I'm assuming this is some sort of private company. In that case it is unlikely you are going to be able to easily (if at all, I've never seen it tried) invest your 401k in it.
What about paying taxes/getting deductions if I lose money?
If you lose money after selling the stock or if the stocks value goes to zero you will be able to deduct it as a capital loss. In particular you will not be able to deduct the loss against your regular income all in one year, although you would be able to deduct it from your capital gains. In the event you did not use it up in one year you would be able to do things like carry the loss forward. See a page that talks specifically about capital losses for more details.
Basically, I would be happy breaking even, but am not sure that will happen. However, I strongly support the company and wish to see it succeed. How can I minimize the losses I might face if the company goes belly up?
Loan them money instead of buying stock or buy preferred shares. Either of those get paid before common stock holders with lenders being the most advantaged position. In any event for a small company you are likely to recover zero so accept that as a risk.
Whatever you do, it is going to be critical to read all legal material. Make sure you understand what you are signing and what you are buying.
posted by An algorithmic dog at 4:26 AM on August 17, 2010
What about paying taxes/getting deductions if I lose money?
If you lose money after selling the stock or if the stocks value goes to zero you will be able to deduct it as a capital loss. In particular you will not be able to deduct the loss against your regular income all in one year, although you would be able to deduct it from your capital gains. In the event you did not use it up in one year you would be able to do things like carry the loss forward. See a page that talks specifically about capital losses for more details.
Basically, I would be happy breaking even, but am not sure that will happen. However, I strongly support the company and wish to see it succeed. How can I minimize the losses I might face if the company goes belly up?
Loan them money instead of buying stock or buy preferred shares. Either of those get paid before common stock holders with lenders being the most advantaged position. In any event for a small company you are likely to recover zero so accept that as a risk.
Whatever you do, it is going to be critical to read all legal material. Make sure you understand what you are signing and what you are buying.
posted by An algorithmic dog at 4:26 AM on August 17, 2010
Response by poster: Sorry for the delay, hopefully someone is still reading this.
The company has priced stocks at $500 per share.
I don't know entirely what you mean by public offering. I am assuming you mean that anyone can buy a share? If so then, yes, it is a public offering. Or is this an SEC term?
posted by idyllhands at 12:04 PM on September 9, 2010
The company has priced stocks at $500 per share.
I don't know entirely what you mean by public offering. I am assuming you mean that anyone can buy a share? If so then, yes, it is a public offering. Or is this an SEC term?
posted by idyllhands at 12:04 PM on September 9, 2010
Best answer: Public offering. Small companies try to avoid this label because it means registering with the SEC and regular public filings.
The fact that the company is naming the price instead of a broker suggests this is not yet a publicly traded firm. Unless you're old friends with the founders or family, I'd be very wary of making this your first investment. Ask for a prospectus and read it carefully. If you're buying 2-4 shares of 500 dollars, that's not much to risk, but be prepared to lose it all in bankruptcy. Also be prepared to have shares you cannot sell to anyone but existing shareholders, and those dividend promises to magically disappear two years from now, which is just as good as losing all your money.
posted by pwnguin at 2:05 PM on September 9, 2010
The fact that the company is naming the price instead of a broker suggests this is not yet a publicly traded firm. Unless you're old friends with the founders or family, I'd be very wary of making this your first investment. Ask for a prospectus and read it carefully. If you're buying 2-4 shares of 500 dollars, that's not much to risk, but be prepared to lose it all in bankruptcy. Also be prepared to have shares you cannot sell to anyone but existing shareholders, and those dividend promises to magically disappear two years from now, which is just as good as losing all your money.
posted by pwnguin at 2:05 PM on September 9, 2010
Best answer: A publicly traded company is one whose stock is traded on one of the large public exchanges, such as NASDAQ or the New York Stock Exchange. Anyone can be stock in a publicly traded company. You just contact a broker, set up an account, and buy the stock. The price is effectively set by the market: how many people want to buy the stock versus how many people want to sell it. In generally, shares of publicly traded companies are easy to buy and sell.
By contrast, shares of a private company are not traded on a public exchange. Buying or selling stock in a private company is much more complicated and more difficult. If you own stock in a private company, you should have the expectation that you will simply not be able to sell the stock until and unless the company "goes public" (becomes a publicly traded company). You sometimes need to be a Qualified Investor to purchase stock in a private company.
Private companies do have have the accounting and disclosure requirements of publicly traded companies. As such, much less information about the companies is available to investors and you are more reliant on the good will of the company management to provide accurate information.
posted by alms at 5:02 PM on September 9, 2010
By contrast, shares of a private company are not traded on a public exchange. Buying or selling stock in a private company is much more complicated and more difficult. If you own stock in a private company, you should have the expectation that you will simply not be able to sell the stock until and unless the company "goes public" (becomes a publicly traded company). You sometimes need to be a Qualified Investor to purchase stock in a private company.
Private companies do have have the accounting and disclosure requirements of publicly traded companies. As such, much less information about the companies is available to investors and you are more reliant on the good will of the company management to provide accurate information.
posted by alms at 5:02 PM on September 9, 2010
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posted by idyllhands at 7:28 PM on August 16, 2010