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Ask the Fool: What is a secondary offering?

If a company needs cash, it could sell off assets, borrow money – or sell more shares of stock, via a "secondary offering."

Motley Fool

Q: I read that Zoom Video Communications had a secondary offering. What does that mean? – T.R., Cedar Crest, NM.

A: It means Zoom sold more of its shares to raise money – in this case, about $2 billion. When a company debuts on the stock market, it usually has an "initial public offering" (IPO), selling shares to the public and collecting money from the sale. (The shares will then trade hands on the market, but the company doesn't profit directly from that.) If a company needs a cash boost it has choices: It could sell off some assets, borrow money – or sell more shares of stock, via a "secondary offering."

If a company's shares have skyrocketed, as Zoom's have, due to videoconferencing demand during the pandemic, it will collect a lot of money for each share.

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The downside of offering new shares for sale is that doing so dilutes the value of existing shares. Imagine, for example, a company with 100 shares of stock outstanding. If you own 10 of them, you own 10% of the company. If it issues 20 more shares, though, your 10 shares will only be 1/12th of the company, or 8.3%.

Q: What are the best books about Warren Buffett? – P.L., Wilkes Barre, Pa.

A: Try Roger Lowenstein's "Buffett: The Making of an American Capitalist" (Random House, $20) for a great review of his personal and business history, along with his investment thinking. You can learn a lot through Buffett's own words via Carol J. Loomis' "Tap Dancing to Work: Warren Buffett on Practically Everything, 1966-2013" (Portfolio, $18) and Lawrence A. Cunningham's "The Essays of Warren Buffett: Lessons for Corporate America" (Carolina Academic Press, $35).

Fool's school

Medicare Advantage plans:

Anyone signing up for Medicare gets to choose either "original Medicare" or a Medicare Advantage plan. (They can switch between them at least once a year, too, during the annual enrollment period.) Close to 38 million people were recently enrolled in original Medicare -- which consists of Part A (hospital services) and Part B (medical services) -- while more than 23 million had chosen a Medicare Advantage plan (sometimes referred to as Part C).

Medicare Advantage plans are well worth considering. Offered by private insurance companies such as Anthem Blue Cross and UnitedHealthcare, they're regulated by the U.S. government. This is key: They're required to provide at least as much coverage as original Medicare – and they typically offer much more.

While original Medicare doesn't cover vision, hearing and/or dental care, many Medicare Advantage plans do; they often include prescription drug coverage, too, which those in original Medicare have to pay extra for. Original Medicare will often charge you 20% of many bills, with no upper limit, while Medicare Advantage plans might charge you a low copayment for each doctor visit or service – and they cap your out-of-pocket spending.

There are some drawbacks, though. While original Medicare lets you see any health care provider who accepts Medicare, Medicare Advantage plans typically limit you to a network of doctors – though these networks can be large. Original Medicare usually won't cover you outside the U.S., but some Medicare Advantage plans offer limited coverage abroad.

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So, what's best for you? Start by making a list of the prescription drugs you take and the doctors you see. Also list the kinds of health care services you need and use, noting any upcoming surgeries, travel or big-ticket expenses. When reviewing the plans you're considering, compare how well each will meet your needs – and how much you'll likely spend out of pocket with each option.

The Medicare.gov website offers a "Medicare Plan Finder" to help you compare and choose. Note the star ratings of your candidate plans and favor four- or five-star plans.

My dumbest investment

Penny stock burn: Go Solar USA was the first stock I ever owned. As I write this, it trades at $0.006 per share, and it taught me what a lot of experts say about penny stocks: You can't get rich overnight. – C.S., online

The Fool responds: Many experts consider penny stocks far too volatile and dangerous for investors, and we have long warned against them ourselves. (A penny stock these days is one trading for less than about $5 per share.) But they continue to attract many investors – typically naive ones.

If you have $1,000 to invest, for example, being able to buy, say, 10,000 shares of a $0.10 stock can seem better than buying 10 shares of a $100 stock. It can indeed seem like you can get rich overnight with such seemingly bargain-priced stocks. But even low-priced stocks can fall, and penny stocks often do. Indeed, Go Solar USA's shares have recently traded as low as $0.001 per share and have been volatile.

If you'd wanted to invest in solar energy, a better move would have been to pick a few established, growing and profitable solar stocks – or a mutual fund or exchange-traded fund (ETF) that focused on solar energy companies or alternative or renewable energy companies. Two ETFs to consider, especially if their prices retract a bit, are the Invesco WilderHill Clean Energy ETF (PBW) and the iShares Global Clean Energy ETF (ICLN).

Foolish Trivia

Name that company: I trace my roots back to my 1984 founding by a couple who wanted to connect different kinds of computer systems more easily. In 2000, before the internet bubble burst, I was briefly the world's most valuable company, with a market capitalization of over $550 billion. (Recently, Apple held that title, with a value of $2.2 trillion.) Today I offer everything from routers and switches to security software, videoconferencing services, cloud solutions, data backup and analytics, and much more. I employed more than 77,000 people as of mid-2020, and have been named a top workplace multiple times. Who am I?

Last week's trivia answer: I began as a provisions market in Austin, Minn., in 1891. I developed the world's first canned ham in 1926. By the late 1930s, I offered my workers guaranteed annual wages, a joint-earnings plan and an employee profit-sharing trust. During World War II, I shipped hundreds of millions of cans of meat overseas, mostly to the U.S. military. Today, with a market value recently near $26 billion, I oversee brands such as Skippy, Spam, Dinty Moore, Applegate, Justin's, Austin Blues barbecue, Black Label bacon, Herb-Ox, Chi-Chi's, Don Miguel, Jennie-O, House of Tsang, Wholly Guacamole and Vital Cuisine. Who am I? (Answer: Hormel Foods)

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The Motley Fool take

Banking on profits: Citigroup (NYSE: C) is a blue-chip stock on sale, with its shares recently down almost 20% from their 52-week highs. One of the biggest banks in the world, Citigroup has been pressured by the pandemic and fears of what it might do to Citigroup's business. Low interest rates have also hurt its ability to generate meaningful interest income, while employee errors also cost the company.

Citigroup is soon to be under new management, though, with incoming CEO Jane Fraser – the first woman ever to lead a large Wall Street bank. It's spending more than $1 billion to improve internal controls, and reports. "The entire management team is committed to achieving operational excellence and a best-in-class risk and control environment." The company is also restructuring itself, and Fraser may be eyeing more global expansion.

The world's eventual recovery from the pandemic will boost Citigroup's business as well, as more people work, spend, take out loans and pay off debt.

Overall, Citigroup should be a less risky stock in the future. While the next few months, even quarters, could be rocky, Citigroup should be a good long-term investment coming out of the recession. Management plans to buy back $1.8 billion in stock, and possibly much more. (Buybacks may benefit shareholders if they're executed when shares are undervalued.) Meanwhile, patient believers can enjoy Citigroup's dividend, which recently yielded a respectable 3.1%.

Copyright 2021 The Motley Fool
Distributed by Andrews McMeel Syndication

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