Hi Brian and welcome to the FIO. Your questions convince me you have already started to learn about the stock market. I would suggest that you continue to learn about the stock mraket by taking advantage of the free simulator at
Investopedia.com - Your Source For Investing Education (one of our sponsors) they have tutorials as well as a tremendous data base of stock related info.
As to your questions:
The best way to get into the stock market is your way. I mean that you should feel confident in your aproach. Your first example is a good way to go if you feel less inclined to risk. As far as diversity goes that is dependent on the costs of transactions as a percentage of the total invest. If you have 2500 to start and were going to invest 100 each month you could invest 500 in five companies then each month invest another 100 in one of the five in turn. If the cost of the purchase were $7.99 that would mean your cost
each month would be
7.99% the anual return on your investment would have to be greater than that for you to make any money.
Here is what I would do with that money if I were into the blue chips and were going to add cash regularly to my holdings. I would go to the money paper and get into a DRIP (Dividend Re-Investment Plan) they have there or to sharebuilder. I know little of sharbuilder but have used the money paper. They offer a subscription to the "money Paper" it lists companies that have DRIPs and they offer reduced fees to enroll you into different plans (non subscribers pay higher fees) To me this is the safest way to get your "feet wet" in the market.
My proceding statements should have addressed the first two questions. Your last question is answered thus: If you were to have bought 100 shares MSFT when it went public you would have about 28800 shares at $28 a share or $806,400.00 so in some cases the 40 year hold might be good however, selling something will depend entirely on your objectives for a stock. If you want to get in make a few $$'s and get out your criteria for selling will be different then the buy hold and dollar cost average plan. This is not to say that a long hold position will never be sold as Enron taught many even a blue chip can go down hard and fast it would be better to sell and retain a few dollars then to go bust on a position. You cannot just buy it and forget it you must stay involved with what is happening with all the companies you hold you are one of the owners after all.
Lastly I would like to re-iterate my welcome to you and to encourage you to pursue stock market education vigorously as this will ultimately be the difference between success and failure. Please feel free to ask as many questions as you like people here are very eager to help the only silly question is the one you do not ask. Good luck!