Following the money

Q: When a company purchases another company, where does its payment go? — D.W., Superior, Colo.

A: If the company makes its acquisition with cash, the money goes to the shareholders of the purchased company. Their shares in the acquired company will one day disappear, replaced in their accounts with cash (or equivalents). Other classes of owners, such as holders of preferred stock, can also receive payments. Some of the cash might go to debt holders if the purchase agreement includes paying off debt.

If the purchaser pays with its own stock instead of cash, then the acquired company’s shareholders will get shares of the purchaser in exchange for their shares of the acquired company. They can sell these shares for cash or keep the shares, as shareholders of the purchaser. Some purchases involve both cash and stock.

Note, too, that companies often buy other companies for more than their recent market value, paying a “premium.”

Q: I don’t have to buy stock in multiples of 100 shares, right? — P.T., Hillsdale, N.J.

A: Right. You can buy just a single share, if you want, and in some cases, even just part of a share.

You can even buy fractions of shares through some brokerages. That can be handy if a stock is trading for, say, $1,000 per share and you only have $200 to invest. Read up on fractional-share investing if it interests you.

It used to be important to make sure you weren’t paying too much in trading commissions, as paying a $10 commission to buy a $40 share means you’re down 25 percent from the get-go. But these days, many, if not most, of the major brokerages are charging $0 for trades.