Gathering Relevant Information
Introduction
Now that you know the definition of a stock and the purpose of a company, how do you go about finding more information about a firm you may be interested in? Because knowledge truly is power when it comes to investing, your success as a stock investor depends on your ability to locate information and determine its importance.
The 10K: A 10K is an annual filing that publicly traded companies are required, by law, to send into the Securities and Exchange Commission containing everything about their business that an investor would want to know before buying or selling shares of stock in the corporation. These documents are available to the public for free. The best way to think about a 10K is to consider it a document that the government forces management to prepare for you, the owner, explaining the company’s finances, risks, opportunities, and current operations. It is full of the nitty-gritty details that make a lot of people’s eyes glaze over and, unfortunately, there is no way to simplify it. Once you’ve read a few 10K's, they will begin to look more and more accessible because they typically follow the same pattern.
This is a document filed with the SEC(Securities and Exchange Commission ) which contains a detailed explanation of a business. It is reported annually and contains the same financial statements the annual report does, in a more detailed form. The benefit of the 10K is that it allows you to find out additional information such as the amount of stock options awarded to executives at the company, as well as a more in-depth discussion of the nature of the business and marketplace. Sometimes you will find that a company has no financial statements in the 10K, but instead has written, "incorporated herein by reference" This means that the financial statements can be found elsewhere, such as in the annual report or another publication. Even if this is the case, it is still worth it to get a copy. You can find this by contacting the company, visiting their website, or going to FreeEdgar (freeedgar.com) or SEC.gov.
The 10Q: The is similar to the 10K, but is filed quarterly (four times a year - normally the end of January, June, September, and December). If the company is planning on changing its dividend policy, or something equally as important, they may bury it in the 10Q. These documents are critical and can be obtained in the same way as the annual report and 10K.
You will want to get a copy of all three documents for the past year or two from the company in which you are interested in making an investment. Most of them can be found at http://finance.yahoo.com - type in the ticker symbol of the company you want to research and then click the "Financials" link. This will bring up a copy of the latest quarterly financial statements. (For all good purposes, I would recommend you first analyze the annual balance sheet, which can be found by clicking "annual data" in the upper right hand corner.) As always, it is best to get the information directly from the company. You can head to the Investor Relations section on its corporate website (nearly all of them have one), and download free copies of the reports, all available for free, which you can then save for review. This not only saves paper and keeps your desk from piling up with clutter, it makes it much easier to review several years of annual reports at once, seeing how management's expectations played out in subsequent periods, helping you gauge how realistic and honest the executives are when communicating with the owners.
Another trick you will want to employ in your own analysis is to request and study the balance sheets, income statements, and cash flow statements of companies in the same industry at the same time. It can help you understand an oil company better if, say, you are studying all of the major oil companies at the same time. With the other firms fresh in your mind, differences, both positive and negative, are more likely to stand out and get your attention when calculating financial ratios or determining whether one corporation has a significant cost advantage over the other (and, just as importantly, why that cost advantage exists and whether or not it is sustainable). This is true for every industry in existence - it doesn't matter if you are reading the annual reports and 10K filings of chocolate companies, automobile manufacturers, newspapers, banks, gold mine operators, real estate developers, packaged food giants, soda bottlers, farm equipment suppliers, coffee shops, discount retailers, or theme parks. If one business mentions a new accounting rule that is going to influence results substantially, and another only glosses over it, that would raise red flags for the latter firm in my mind. Likewise, one company may point out a compelling opportunity the industry is facing, while other, more conservative firms don't expand on anything more than the results produced during the reporting period.
Making the Most of a Company Web Site
Another source of information is the company itself. Just plug the name of the company you want to research into Google. You should find the company Web site near the top of your results.
The investor section of a company's Web site can offer a variety of information. Copies of the public filings are usually available in more flexible, downloadable formats -- such as PDF, Microsoft Excel, or Microsoft Word. Also, you can sort through the firm's press releases and examine the latest investor presentations (typically in PDF or Microsoft Power Point formats).
It's definitely worth a visit to the company Web site. It doesn't take long, and reading the press releases will give you some of the most up-to-date information available. Also, it may be useful to see how a company does business on the Web.
Setting Up a Watch List
After you've researched your first batch of companies (read the public filings and visited company Web sites), it's time to set up a watch list. How do you do this? Fortunately, Morningstar and Yahoo offers these services for free.
By creating a watch list, you'll be able to keep tabs on company news and easily find stock price information. Among other things, you can set alerts to notify you when a stock price has met or exceeded a particular threshold. Thus, your watch list will eventually become an integral tool in helping you make buy and sell decisions, stay organized, and keep informed.
Seeking Out Expert Opinions
After you've become a bit of an expert yourself by sifting through the information we've already discussed, you may want to read what other analysts and investors have to say about a particular company. While your investing decisions are yours to make, you might be able to gain a new insight or angle by reading others' research.
Guidance: This may or may not be helpful. It will certainly be confusing - so who do you believe? One guy says Buy and the other says Sell. Who can you believe or trust? Remember these three words: Patience, Discipline and Wisdom. A little common sense doesn't hurt! One in a hundred have the stock market figured out. Maybe one in a thousand, but keep digging until you find the right guy or gal.
Avoiding Information Overload
You shouldn't feel bad if you can't read every article from every source that comments on a company you're researching. In your journey to becoming an informed stock investor, you'll almost inevitably feel overwhelmed from time to time by the vast amounts of information available. Fortunately, you don't need to read it all to be successful. In fact, some information may actually harm your performance by taking your focus away from what's truly important. That's why I've highlighted the key pieces of information you will need to make an informed decision.
Guidance: Here's a quick step-by-step guide to becoming informed about a company: You'll want to eliminate some of these, after you have read all these (reports and articles) for a lot (a hundred or so) of different companies.
1. Obtain the firm's 10-K and really try to give it a thoughtful read. Don't feel bad if you spend a lot of time on this step. (Give it a couple of days to digest.)
2. Read through the 10-Qs when they are released each quarter. These are usually much shorter than the 10-K and shouldn't require more than an hour or two of your time.
3. Set up a watch list to organize the steady flow of news on all the companies that interest you.
4. Poke around on the company's Web site. This takes less than a half hour.
5. When time allows, visit relevant industry Web sites and catch up on some of the industry trends.
The Bottom Line
If you follow these steps, you'll be able to form a foundation of understanding about a company in about a week or two. Over time, you can build on your foundation and gain a much deeper understanding. Further, you'll be able to weed out the news and data that just isn't worth your time. All told, if you stay the course, you could be surprised how your knowledge will grow by applying this simple process.
Now that you know the definition of a stock and the purpose of a company, how do you go about finding more information about a firm you may be interested in? Because knowledge truly is power when it comes to investing, your success as a stock investor depends on your ability to locate information and determine its importance.
The 10K: A 10K is an annual filing that publicly traded companies are required, by law, to send into the Securities and Exchange Commission containing everything about their business that an investor would want to know before buying or selling shares of stock in the corporation. These documents are available to the public for free. The best way to think about a 10K is to consider it a document that the government forces management to prepare for you, the owner, explaining the company’s finances, risks, opportunities, and current operations. It is full of the nitty-gritty details that make a lot of people’s eyes glaze over and, unfortunately, there is no way to simplify it. Once you’ve read a few 10K's, they will begin to look more and more accessible because they typically follow the same pattern.
This is a document filed with the SEC(Securities and Exchange Commission ) which contains a detailed explanation of a business. It is reported annually and contains the same financial statements the annual report does, in a more detailed form. The benefit of the 10K is that it allows you to find out additional information such as the amount of stock options awarded to executives at the company, as well as a more in-depth discussion of the nature of the business and marketplace. Sometimes you will find that a company has no financial statements in the 10K, but instead has written, "incorporated herein by reference" This means that the financial statements can be found elsewhere, such as in the annual report or another publication. Even if this is the case, it is still worth it to get a copy. You can find this by contacting the company, visiting their website, or going to FreeEdgar (freeedgar.com) or SEC.gov.
The 10Q: The is similar to the 10K, but is filed quarterly (four times a year - normally the end of January, June, September, and December). If the company is planning on changing its dividend policy, or something equally as important, they may bury it in the 10Q. These documents are critical and can be obtained in the same way as the annual report and 10K.
You will want to get a copy of all three documents for the past year or two from the company in which you are interested in making an investment. Most of them can be found at http://finance.yahoo.com - type in the ticker symbol of the company you want to research and then click the "Financials" link. This will bring up a copy of the latest quarterly financial statements. (For all good purposes, I would recommend you first analyze the annual balance sheet, which can be found by clicking "annual data" in the upper right hand corner.) As always, it is best to get the information directly from the company. You can head to the Investor Relations section on its corporate website (nearly all of them have one), and download free copies of the reports, all available for free, which you can then save for review. This not only saves paper and keeps your desk from piling up with clutter, it makes it much easier to review several years of annual reports at once, seeing how management's expectations played out in subsequent periods, helping you gauge how realistic and honest the executives are when communicating with the owners.
Another trick you will want to employ in your own analysis is to request and study the balance sheets, income statements, and cash flow statements of companies in the same industry at the same time. It can help you understand an oil company better if, say, you are studying all of the major oil companies at the same time. With the other firms fresh in your mind, differences, both positive and negative, are more likely to stand out and get your attention when calculating financial ratios or determining whether one corporation has a significant cost advantage over the other (and, just as importantly, why that cost advantage exists and whether or not it is sustainable). This is true for every industry in existence - it doesn't matter if you are reading the annual reports and 10K filings of chocolate companies, automobile manufacturers, newspapers, banks, gold mine operators, real estate developers, packaged food giants, soda bottlers, farm equipment suppliers, coffee shops, discount retailers, or theme parks. If one business mentions a new accounting rule that is going to influence results substantially, and another only glosses over it, that would raise red flags for the latter firm in my mind. Likewise, one company may point out a compelling opportunity the industry is facing, while other, more conservative firms don't expand on anything more than the results produced during the reporting period.
Making the Most of a Company Web Site
Another source of information is the company itself. Just plug the name of the company you want to research into Google. You should find the company Web site near the top of your results.
The investor section of a company's Web site can offer a variety of information. Copies of the public filings are usually available in more flexible, downloadable formats -- such as PDF, Microsoft Excel, or Microsoft Word. Also, you can sort through the firm's press releases and examine the latest investor presentations (typically in PDF or Microsoft Power Point formats).
It's definitely worth a visit to the company Web site. It doesn't take long, and reading the press releases will give you some of the most up-to-date information available. Also, it may be useful to see how a company does business on the Web.
Setting Up a Watch List
After you've researched your first batch of companies (read the public filings and visited company Web sites), it's time to set up a watch list. How do you do this? Fortunately, Morningstar and Yahoo offers these services for free.
By creating a watch list, you'll be able to keep tabs on company news and easily find stock price information. Among other things, you can set alerts to notify you when a stock price has met or exceeded a particular threshold. Thus, your watch list will eventually become an integral tool in helping you make buy and sell decisions, stay organized, and keep informed.
Seeking Out Expert Opinions
After you've become a bit of an expert yourself by sifting through the information we've already discussed, you may want to read what other analysts and investors have to say about a particular company. While your investing decisions are yours to make, you might be able to gain a new insight or angle by reading others' research.
Guidance: This may or may not be helpful. It will certainly be confusing - so who do you believe? One guy says Buy and the other says Sell. Who can you believe or trust? Remember these three words: Patience, Discipline and Wisdom. A little common sense doesn't hurt! One in a hundred have the stock market figured out. Maybe one in a thousand, but keep digging until you find the right guy or gal.
Avoiding Information Overload
You shouldn't feel bad if you can't read every article from every source that comments on a company you're researching. In your journey to becoming an informed stock investor, you'll almost inevitably feel overwhelmed from time to time by the vast amounts of information available. Fortunately, you don't need to read it all to be successful. In fact, some information may actually harm your performance by taking your focus away from what's truly important. That's why I've highlighted the key pieces of information you will need to make an informed decision.
Guidance: Here's a quick step-by-step guide to becoming informed about a company: You'll want to eliminate some of these, after you have read all these (reports and articles) for a lot (a hundred or so) of different companies.
1. Obtain the firm's 10-K and really try to give it a thoughtful read. Don't feel bad if you spend a lot of time on this step. (Give it a couple of days to digest.)
2. Read through the 10-Qs when they are released each quarter. These are usually much shorter than the 10-K and shouldn't require more than an hour or two of your time.
3. Set up a watch list to organize the steady flow of news on all the companies that interest you.
4. Poke around on the company's Web site. This takes less than a half hour.
5. When time allows, visit relevant industry Web sites and catch up on some of the industry trends.
The Bottom Line
If you follow these steps, you'll be able to form a foundation of understanding about a company in about a week or two. Over time, you can build on your foundation and gain a much deeper understanding. Further, you'll be able to weed out the news and data that just isn't worth your time. All told, if you stay the course, you could be surprised how your knowledge will grow by applying this simple process.