Buying Stock Is Like Buying A Used Car

by Hank Coleman

Most people dread buying a used car. They feel like they are going to be taken advantage of and sold something that is not worth the money. Or, you know that you are going to be paying on that car for what seems like the rest of your life. The same fears are prevalent in the investing world as well. Buying stocks is a lot like buying a used car. They have more in common that most people realize or want to admit.

Understanding How The Market Works. When a company sells shares of stock initially, they do so through an initial public offering (IPO). IPOs have become famous thanks to the dot com tech crazy of the late 90s. It seemed like a new company was issuing stock for the first time every time you turned on the television or opened a newspaper. Everyone was going public. But, what happens after the dust settles?

99.9% of all buying and selling of stock happens on the secondary market. When you send an order to buy 100 shares of Coca-Cola to your discount stock broker, you are actually buying those shares from another person. The company is not issuing new shares of stock. You are not buying the shares directly from the company in that case. You are buying someone else’s shares that they own.

Imperfect Information. If you are buying the shares that someone is selling, what do they know that you do not know? Like a used car salesman, the person with the most knowledge about that car or that stock has the advantage. Why are they selling? Is there a skeleton in the closet? When you purchase stock, you should always consider the transaction from the other person’s point of view.

Kick The Tires. I remember when my wife and I bought a car a few years ago. We had to drag our three year-old son around to all the car lots with us. Of course, he was not enthused at first, but I figured out that if I gave him a job, he would be very happy. So, his job was to kick all the tires on the cars we were considering. It was a very important job for a three year-old and made him feel included. It didn’t hurt that he kept asking the salesman for a tow truck for the family to buy either. But, like buying a used car, buying shares in a company is a trial. If you like how it performs during the test drive, maybe you will buy more shares of stock over the years. It is easy to start small by purchasing just a few shares, and then you can easily build up. I have been doing this for years through DRIPs with companies like Coca-Cola, Wendy’s, McDonald’s, etc.

While buying stock and investing can be a daunting task, it does not have to overwhelm you. Like with buying a used car, research, patience, and persistence can go a long way to making it a great event.

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{ 5 comments… read them below or add one }

Find Accounting Leads June 23, 2010 at 11:47 pm

No doubt it is just like buying a car. Seems people understand more about their cars than they do individual stocks. Make sure you get educated!

Hank Coleman June 25, 2010 at 9:15 am

Very good point. We will pour over Consumer Digest for a new car or a washing machine but not think much about the next investment we make. We should conduct as much due diligence with investing as we do with other purchases.

Land Investment July 13, 2010 at 9:56 pm

When people buy a car they usually do a lot of research. But when it comes to buying a stock they tend to ask friends and neighbors. It always amazes me how little research people do.

I Owe the IRS May 7, 2011 at 11:31 am

This a great analogy! Haven’t heard this one before.

Tax Leads May 20, 2011 at 10:08 pm

I think I’d rather buy a stock anyways.

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