Motley Fool: Stock sales only an indirect benefit to firms

ASK THE FOOL: A Stock Answer

Q: When I buy stock, what am I buying? I see that the company gets its money when the stock is first issued. But after that, how does the company benefit? - G.L., Riverside, Calif.

A: A share of stock represents a (small) chunk of a real company. If a firm has a million shares outstanding and you buy 100 of them, you own one ten-thousandth of the company. The company does get its money at the one-time issuance of the share, but as shares fluctuate in the open market, companies do care how they fare. A falling stock can make it easier for the firm to get bought out. A rising stock can help insiders with stock or stock options get richer.

Q: What are REITs? - R.B., Hickory, N.C.

A: Real estate investment trusts (REITs) let you invest in real estate without actually buying any property. They're organizations that combine the capital of many investors to acquire or finance all kinds of real estate, such as offices, hotels or apartments. A REIT is a little like a mutual fund, as its portfolio is professionally managed.

REITs have some other twists, too. For starters, corporations or trusts that qualify as REITs generally don't pay corporate income tax and are often exempt from state income tax as well.

FOOL'S SCHOOL: Your Million-Dollar Portfolio

Don't think you could never build and grow a seven-figure portfolio because, odds are, you can - and today's panic-ridden stock market offers an exceptional opportunity for investors. In their new book, "Million Dollar Portfolio: How to Build and Grow a Panic-Proof Investment Portfolio" (Collins Business, $27), Motley Fool co-founders David and Tom Gardner explain how you can amass a million bucks.

An offshoot of our Million Dollar Portfolio - a service that enables investors to follow along as Tom Gardner invests and manages $1 million of the Motley Fool's own money - the book draws on the collective wisdom of dozens of analysts across the company as well as thousands of investors throughout our community.

In a nutshell, what you need to learn in order to invest effectively is how to choose good stocks. David and Tom offer six key criteria, such as finding companies with consistent earnings growth, little to no debt and simple business models.

It's also good to select a diverse variety of promising stocks, such as deeply undervalued stocks, rapidly growing stocks, small-cap stocks, blue-chip stocks and international stocks. Make sure your portfolio is suited to your degree of risk tolerance, too. During your investing life, it's also critical to learn when to sell - and not sell. Don't sell in a panic, and respect the rewards of patience. Do sell if the reasons you bought are no longer valid, or if you've found a much more attractive place for your money. Learn more in the "Million Dollar Portfolio." We'll publish an excerpt next week, but in the meantime, click over to www.book.fool.com for more info.

MY DUMBEST INVESTMENT: What Buffett Meant

I took a position in Warren Buffett's company, Berkshire Hathaway, a few years ago, buying one share of his class-A stock for around $20,000 (yes, one share: $20,000). A while later I was reading the annual letter to shareholders, and Buffet said he did not think the business would keep growing as it had in the past. I assumed that since the CEO of the company did not have faith, why should I? I sold the stock around $30,000, and it's recently been trading around $100,000. Next time I need to read the stock research. - Lloyd F., Raymore, Mo.

The Fool Responds: Shares actually topped $150,000 earlier in the year! You didn't quite understand Buffett. Since Berkshire has grown so big, he simply doesn't expect the company to be able to keep growing as quickly as it has in the past, when it was smaller. He does still expect long-term growth, though. Those interested in the stock should know there's a class-B version, selling for around $3,500 recently.