Even in today’s economy, buying stocks as an investment is an important thing to do if the intent is for a long term investment.  Historically stocks have out-performed conservative bank or money market funds.  They do have some short term swings but if you have invested with a good solid company, generally the short term swings can be ridden out.  The other thing to do is doing what is known as diversification.  We will talk more about that later.

Buying stock in a company is nothing more than establishing ownership in that company.  If a person wanted to invest in a company, there are several methods to accomplish it.  One method would be to buy corporate bonds which are nothing more than loaning the company money.  This method would result in a payment of some percentage return, generally around 5-7% in today’s market, on your money.

Another method of buying stock is to purchase preferred stock.  Preferred stock is generally considered a higher ranking stock than common stock and its terms are negotiated between the corporation and the investor.

Preferred stock usually carries no voting rights but may carry priority over common stock in the payment of dividends and upon liquidation.  Preferred stock may contain a conversion feature where it can be converted to common stock.  Preferred stockholders will be paid out in assets before common stockholders and after debt holders in a bankruptcy.  Therefore it is a safer investment but because it does not contain voting rights, the shareholder cannot exert influence on the company through the election of corporate officers and the corporate bylaws.

Common stock is the usual method of investing in a company. Usually common stock will perform better than preferred stock or bonds over time.  Therefore it is my opinion that purchase of common stock is the best method to invest in a company.

Another type of stock is where a company ends up buying back its own stock.  This is known as treasury stock.  If a company feels that its stock price is below where it should be, the board of directors can direct the company to buy its stock on the open market and report that stock in the equity section of the balance sheet as treasury stock.  This serves to reduce the amount of stock available and can have the effect of increasing the stock price on the stock market.

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