Question: It seems to me that there have seen more major company buyouts recently. What impact will that trend, if it is a trend, have on stocks?

A BuyandHolder

Answer:

Dear BuyandHolder,

You're right about the increase in buyouts.

The rash of buyouts thus far this year has resulted in fewer stocks for the public to invest in. In fact, the Wilshire 5000 Index no longer has 5,000 stocks - it is down to 4,910.

How Buyouts Affect Investors

• Shareholders make money. If you own shares in a company that's being bought out, it's generally a positive because shares of the target company tend to go up in price (and, in fact sometimes soar in price) when the announcement is made.
  
  It's generally smart to sell at this point and lock in the profit because if the deal goes sour so will the stock.
  
  
• Market goes up. Much of the cash generated from buyouts is reinvested in the remaining publicly traded stocks, thus pushing up the market in general.
  
  It's quite likely (although it can't be proven for certain) that the cash generated by this year's ongoing march of buyouts has been a key factor in the major indexes reaching new highs. On Wednesday, May 16, for example, the Dow Jones Industrial Average hit a record 13,487.53.
  
  
• Stocks are sought after. Based on Economics 101 and the law of supply and demand, the remaining publicly traded stocks (at least those of solid, well managed companies) become more valuable because there are fewer of them.
  
  Therefore, as a shareholder here at BUYandHOLD, generally speaking you own something for which there may be more buyers than sellers. That's a good position in which to be!

For More Information

For all you ever wanted to know about buyouts, go to: www.buyoutnews.com, which is run by Thomson Financial Group.

Good luck!