Let’s say you decide you want to purchase the stock of specific companies versus going for mutual funds. The goal then is to decide in which of the many companies to put your money. That’s where things can get tricky.

I hope that you’re not going to race out and pick hot stocks, unless you just like bragging to your friends that you own a piece of ABC company. Also, you’re not going to race out and sell your shares of ABC because the value drops. That would be a really stupid thing to do and I know you’re not stupid.

Your goal is to find value stocks with good companies. What do I mean by value stocks? Basically, you want to buy them on sale. For example, let’s pretend your shopping for a new computer. You’ve decided you like Ziggy computers. You’ve done your research and have chosen to buy a new Ziggy computer because it has all the bells and whistles that you require. It is reliable and it is in your price range. So, the next step is the purchase.

Some of you will race right down to the nearest store that sells Ziggy computers and buy one. That’s okay, particularly if you’re desperate and need a computer today because you run a business and your old Ziggy died, but that usually isn’t the case. Time gives you a little break and so you shop around and buy that $2500 Ziggy computer for $2000. You just earned yourself $500 in nontaxable funds. Well, you shop for stocks the same way and when you find a stock on sale it’s said to be under valued or a value stock. Of course, unlike your new Ziggy, the savings on the stock will reduce your basis when you sell it down the road. Oh well, how else can we possibly fund wars and pay for roads.

Just like the example of a computer purchase, the first step in stock shopping is to determine what types of stocks you want to buy. Are you interested in giant companies (large-cap), middle sized companies (mid-cap), small companies (small-cap), or emerging companies (micro-cap)? Here’s what all that means depending on who you’re talking to:

The dollar amounts for the various sized companies came from three different sources. Now you understand why I simply called them big, middle, small, and extra small. I know it's not sophisticated, but you don't need sophistication to make smart investments, just some knowledge, and a lot of common sense.

Generally speaking, the large cap companies are your lowest risk investments because they have lots of money and a long history. Of course, Enron was a large-cap company. I'll leave it at that.

You may also elect to purchase class A or class B common stock in the same company. Depending on the company, the different classes vary in their price, dividends, and or voting rights. You can also elect to purchase preferred stock. This puts you in a lower risk (and lower return) than common stockholder, but a higher risk than a bondholder.