Published Saturday, October 22, 2005

The Basis of Stock Splits

Q: How do I figure my cost basis when my stock splits 2-for-1? -- K.D., Bay City, Mich.

A: It's easier than you may think. Your basis splits 2-for-1 along with the stock. Imagine that you bought 100 shares of Home Surgery Kits (ticker: OUCHHH) for $50 each, paying a $12 commission. Your cost basis is $5,012 -- or $50.12 per share. After the split, you have 200 shares and your basis is still $5,012, or $25.06 per share. Always add the purchase commission to your cost basis and subtract the sale commission from your proceeds -- you'll save a few tax dollars that way.

If you're paying a lot more than $12 or $15 per trade in commissions, consider finding a less expensive brokerage. Learn more at www.broker.fool.com and www.sec.gov/answers/openaccount.htm .

Q: What are REITs? -- G.V., Watertown, N.Y.

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 and diversified, holding many properties, generally income-producing ones. Many REITs trade publicly on major stock exchanges.

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. They're required to invest most of their assets in real estate and pay out at least 90 percent of their taxable income as dividends. In good years, REIT dividends can run quite high, sometimes topping 10 percent. Learn more at www.nareit.com .


The ABCs of Options

If you want to invest in Carrier Pigeon Communications (ticker: SQUAWK), you can buy shares the usual way -- or you can buy options. There are two main types of options: calls and puts. A call gives you the right to buy a set number of shares, at a set price, within a certain period of time (often just a few months). For this right, you pay a price premium. Puts give you the right to sell shares.

If SQUAWK is selling for $50 per share, you might buy "January $55" call options for it. Let's say you pay $6 each ($600 total) for call options to buy 100 shares of SQUAWK at $55 apiece. If, just before your options expire, SQUAWK is selling for $65 per share, you can exercise your options and buy 100 shares for $5,500. Then you can keep them or sell them for their current rate, netting $6,500. Your profit may appear to be $1,000, but you paid $600 for the options, so it's really $400, less commissions and taxes.

Options are risky. If SQUAWK stays at $55 or falls, your $600 would be entirely lost. With the options you bought, you're betting that the stock will top $61 per share -- $55 plus $6 -- by January.

Options are appealing because of the leverage they offer. With $1,000, you can buy only 20 shares of a $50 stock. Alternatively, that $1,000 could buy many options tied to hundreds of shares of stock. But with options, timing is usually critical. If things don't go your way in a short time frame, your option will expire worthless. Most options expire unexercised and worthless.


Options are not for beginning investors, and many advanced investors steer clear, too. Still, there are a few situations where they can make sense. Learn more at www.cboe.com/LearnCenter, www.fool.com/FoolFAQ/foolfaq0055.htm and www.fool.com/news/commentary/2003/commentary030515JF.htm .


Pre-Foolish Days

Many years ago, I was given some shares of Lucent, at the time a darling stock of Wall Street. A few years later, Lucent dropped about 10 percent. When stocks go on sale, one should buy ... correct? So I bought 100 shares. Time went on and Lucent went down some more. "Maybe I'd better do some learnin' before I buy some more." That's when I became a real Fool and read some Foolish books. I then bought some more stock -- different company, different attitude, better investment. I still have Lucent, and it's carrying a 92 percent-plus loss. I keep it in my portfolio along with some 200 percent gainers and all the others. It serves as a good reminder to make sure I know what I'm doing. -- Rich Hartley, Laura, Ill.

The Fool Responds: When stocks go "on sale," you shouldn't always buy -- they may be on their way to being discontinued. You were smart to decide to read up on investing. Knowing more won't guarantee great results, but your odds of doing well should improve. You can learn a lot online for free, at Web sites such as www.better-investing.org .


I was founded in 1910 by a Nebraska teenager who moved to Kansas City, Mo., with some shoeboxes full of postcards. I got my current name in 1925, and my familiar slogan was introduced in 1944. I produced my first Valentine in 1913, and today I offer nearly 1,500 different Valentine's Day cards. My 54-year-old dramatic television series has won more Emmy awards than any other program. I'm one of America's most admired companies, with 18,000 employees. My brands include Crayola and Silly Putty. I rake in more than $4 billion annually, and I'm privately held. Who am I?

Last Week's Trivia Answer: Not long after the Wright brothers took flight in 1903, my founder turned a shipyard into an airplane factory. Business stalled after World War I, so for a while I made furniture and boats. You may have heard of my B-52s or my Stratoliners, or you may have flown on one of my 707s, 727s, 747s or even my Air Force One. I've also made subway cars and wind turbines, among other things. Since 1996, I've merged with or bought part of Rockwell International and Hughes Electronics and merged with McDonnell Douglas. I moved my headquarters from Seattle to Chicago in 2001. Who am I? (Answer: Boeing)


American Girl Taunts Barbie

Sibling rivalries can be a lot of fun to watch, but they can also be quite painful. Just ask Barbie, whose "little" sister American Girl is putting up a fight for supremacy as Mattel's (NYSE: MAT) top gal. Sales of Barbie have dwindled over the past few years, and she's losing shelf space to Bratz dolls, from Hasbro (NYSE: HAS).

Looking at last quarter's earnings, Mattel actually fared pretty well, reporting a 10 percent increase in sales. Barbie's other siblings -- Fisher-Price brands, Hot Wheels and especially the entertainment segment (which includes Batman toys) -- all delivered positive results. And the popularity of her little sis, the American Girl, boosted revenues with a 20 percent increase in sales. But domestic sales for Barbie have fallen from more than $900 million in 2000 to less than $600 million last year.

Is it a good time to buy Mattel before the upcoming holiday season? Well, the stock is trading near 52-week lows and sporting a P/E ratio near 15. In addition, Mattel's recent share buybacks and healthy dividend yield around 2.7 percent reflect a commitment to return value to investors.

It's true that Barbie is the flagship product for Mattel, but Mattel's other products account for more than half of the company's sales and have significant potential to grow both domestically and internationally.

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