Forced Selling and the Fed

Q. What is "forced selling"? -- A.D., Chepachet, Rhode Island

A. It can refer to multiple things. For example, imagine you've invested "on margin." (That's when your brokerage lends you money to invest with.) If your holdings fall in value significantly, you might receive a "margin call," requiring you to add money to your account -- which you might do by selling some shares. If you don't take action, the brokerage may force-sell some shares for you.

Meanwhile, if you own shares of a mutual fund and it closes, your shares may be sold and the cash from the sale sent to you. Also, if a fund hasn't been performing well, many shareholders may sell their shares, requiring the fund managers to sell off some stock the fund owns in order to pay the exiting shareholders what they're owed. The managers may not have wanted to sell shares, but they were forced to. (Ironically, this can happen after a stock-market crash -- a time when the fund managers might prefer to be buying shares of lower-priced stocks, not selling them.)

Q. What's "the Fed"? -- C.B., Kirkwood, Missouri

A. The Federal Reserve is America's central bank, launched in 1913. Among other things, it's responsible for managing America's monetary policy to maximize employment and balance inflation and interest rates; promoting America's financial stability, including that of its financial institutions; and helping protect consumers. Its seven-member Board of Governors is nominated by the president, confirmed by the Senate and accountable to Congress. The Fed also encompasses 12 Federal Reserve Banks across the country and the Federal Open Market Committee, which influences interest rates, one tool in managing the nation's money supply. Learn more at FederalReserve.gov

Fool's School

All About Stock Buybacks

If you invest in individual stocks, you need to understand stock buybacks -- the "repurchasing" of shares -- which can be good or bad news.

Here's why you might celebrate a stock buyback: Imagine a pizza cut into eight roughly equal pieces. Now imagine it cut into six pieces instead. Each piece will be bigger, right?

It's essentially the same with stocks. Each share represents a (small) degree of ownership in the company. When a company buys back shares, essentially retiring them, it reduces the number of shares that exist; that means each remaining share represents a larger part of the company's value.

Here's a simplified example: Let's say Buzzy's Broccoli Beer (ticker: BRRRP) has 1,000 shares outstanding. If you own 100 of those shares, you own 10% of the company. But if Buzzy's buys back 200 of its shares, that leaves only 800 shares outstanding; if you still own 100, your stake in the company is now 100 out of 800, or 12.5%. You haven't done anything, but the company has transferred some value to you via the buyback. Dividends are one way that companies reward shareholders, and buybacks are another. (Some companies do both.)

The main concern with buybacks is whether the company is buying its shares when they're overvalued. In such a case, it's wasting shareholder money and destroying value. That money might be better spent driving growth or paying a dividend.

A stock buyback can also make earnings growth per share look greater than the company's overall growth in net income. Imagine that Buzzy's earned $1,000 in its last quarter. If it has 1,000 shares, its earnings per share (EPS) is $1 -- $1,000 divided by 1,000. After its buyback, though, $1,000 in earnings divided by only 800 shares yields an EPS of $1.25. So its EPS has risen -- not because the company performed better and earned more money, but because its share count shrank. It's smart to check how much of a company's EPS growth is due to factors other than improved performance.

My Dumbest Investment

Didn't Buy Buffett's Stock

My most regrettable investment? Well, my first brokerage account was at Merrill Lynch, and the fees on trades were so high that I always tried to buy in 100-share lots to spread the fee across more shares. I learned about Warren Buffett's company, Berkshire Hathaway, when it was trading around $1,500 a share. Since I couldn't afford 100 shares, I didnÕt buy any. I count that among my worst investment decisions. -- S.B., online

The Fool responds: We can't argue with you. When Warren Buffett took control of Berkshire Hathaway in 1965, the stock's price was about $19 per share. In 1996, he created a second class of shares, Class B, with each share originally worth one-thirtieth of the original Class A shares. (In 2010, he split the B shares 50-for-1. So now, each B share, recently priced near $508 apiece, is about 1/1,500 the price of an A share.) If you'd bought a single share at $1,500 long ago, even paying the trading commission, you'd have done well: Those A shares were recently trading at more than $760,000 each!

Some good news is that trading fees have fallen sharply over the past quarter-century or so, and many major brokerages now charge $0 for most trades.

(Do you have a smart or regrettable investment move to share with us? Email it to [email protected].)

Foolish Trivia

Name That Company

I trace my roots back to 1976, when two college dropouts built a machine in a garage. Then they built more models. I'm credited with launching the first commercially successful personal computer and was a graphical user interface (GUI) pioneer. My sales surged from $7.8 million in 1978 to $117 million in 1980. (Recently my market capitalization was more than $4 trillion.) I've been a technology innovator for a long time, introducing iconic and hugely successful digital music players, wearable devices, wireless audio products and mobile communication gadgets. I've sold more than 3 billion smartphones. Who am I?

Last Week's Trivia Answer

I trace my roots back to the Prohibition years of 1920 to 1933. During this period, souped-up vehicles were used by bootleggers to avoid capture. Once I was founded in 1947 to promote stock-car racing, some of these folks ended up as race-car drivers competing in my events. I held my first race in 1948 in Daytona Beach, Florida, but really made my name with a 1949 race in Charlotte, North Carolina, that was 200 laps long -- about 150 miles. Car speeds reached 68 miles per hour then -- and can top 180 miles per hour these days. Who am I? (Answer: NASCAR

The Motley Fool Take

Blue Chip Dividends

Coca-Cola (NYSE: KO) is a stock worth considering if you're seeking dividend income. The company has raised its annual payout for an impressive 60-plus consecutive years. Over the past five years, it has grown that payout by 24% -- a solid pace that helped offset the effects of inflation. Its dividend recently yielded 2.6%.

Coke has an impeccable supply chain and global brand recognition, and its network of bottling partners allows it to maintain high profit margins. Remember that Coca-Cola produces syrups and concentrates, which its bottling partners then use to manufacture, package, merchandise and distribute its products. Coke thereby maintains high operational flexibility across global markets, which can help it withstand region-specific slowdowns.

Thanks in part to its strong brands, Coca-Cola has been able to raise prices amid inflation and largely weather the economic storm in recent years. While sales haven't gone through the roof, it has steadily increased its top line -- by 6% in 2023, 3% in 2024 and 3% in 2025. This is the type of steady growth that can be counted on for dependable and consistent gains, and it permits future dividend growth.

Coca-Cola is a low-volatility stock, with a beta of only 0.36. (A "beta" of 1.0 means shares are about as volatile as the overall market; one below 1.0 reflects less-than-average volatility.) This is a stellar stock that can be ideal for risk-averse long-term investors

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