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Ask Dave

Becoming A Major Holder

Mark has the chance to become a major stockholder in his company. Hear why Dave doesn't think it's such a hot idea.

QUESTION: Mark will be able to buy in as a major shareholder to his firm in 15 months, about 1.5% of the company. It will cost him 3 times his income. It could increase his income up to $40,000 a year. He has heard Dave discourage the use of single stocks, and he wants Dave’s advice about whether this is a good idea.

ANSWER: This is more akin to a partnership than a stock. Basically, you are a minority shareholder in a business, so you have zero power. Whatever money you put up, you could lose because the people running the business could decide to close it, and you would be powerless to stop it. You’re making a $300,000 investment that has no liquidity and you can’t sell on the open market. I would want to make at least 30% return on my capital, and I wouldn’t risk my money on this. It’s way too scary.