The stock market has become a major source of wealth for investors around the globe. While some stocks offer higher returns, others are riskier investments.
Before you invest in a company, you’ll want to perform due diligence. This means looking at financial statements, analyzing management reports, and researching competitors.
If you want to know how to do due diligence on a stock then follow these steps:
Step 1: Know Your Investment Goals
You may have an idea of what kind of investment you would like to make. If so, then it will be easier to determine which companies are right for you.
If you don’t have any ideas about where to start, here’s a list of different types of investments that you can choose from:
Stocks – These are shares of a publicly traded company. They represent ownership interest in a corporation.
Real estate – Real estate refers to land and buildings such as houses, office towers, shopping malls, warehouses, etc. It also includes other things such as apartment complexes, hotels, and even parking lots.
Bonds – Bond investments are loans made by governments or corporations to finance projects. The loan is repaid with interest over time.
Mutual Funds – Mutual funds are pools of money managed by professional fund managers who use their own expertise to pick individual holdings.
Gold – Gold is a precious metal that people often keep as an investment. You can buy gold coins, bars, jewelry, and more.
Silver – Silver is another precious metal used for making jewelry. Like gold, silver is a popular form of investment.
Precious Metals – Precious metals include gold, silver, platinum, and palladium. People typically invest in them because they believe they’ll hold value over time.
Step 2: Determine Which Companies Are Right For You
Once you’ve decided on your type of investment, you need to narrow down the choices. There are many ways to find companies. Here are three of the most common ones:
1) Online search engines
2) Directories
3) Company websites
i) Online Search Engines
A good place to start when searching for a company is through online search engines. When using an online search engine, you need to enter keywords related to your chosen industry.
For example, if you wanted to find a company that makes car parts, you might enter “car parts” into one of the search engines.
You’d probably get back thousands of results. It’s up to you to decide how much information you want to see before deciding which company to invest in.
ii) Directories
Another way to find companies is through directories. Many of these directories are free to use. Examples of these directories include:
— Yahoo! Finance Directory
— The Wall Street Journal Small Business Guide
— Business Week
— Dow Jones/Nasdaq
— Google Local
— Local Yellow Pages
Step 3: Find Financial Statements
Financial statements provide detailed financial information about a company. Before investing in a stock, you should look at its financial statements.
This will give you insight into whether the business is profitable, has enough cash flow, and has enough assets to cover future expenses.
Financial statements can be found on company websites, but it’s usually easier to find them on the Internet. If you don’t know where to find them, ask someone who does.
If you don’t have access to financial statements, you may want to consider buying a stock anyway. Buying stocks without knowing anything about the company is risky. But if you already know what you’re looking for, it’s not so bad.
If you don’t have access, here are some resources that can help you out:
— Investopedia
— Wikipedia
— Investor’s Business Daily
iii) Company Websites
Companies also post their financial statements on their website. These statements are typically available in PDF format. It’s important to note that while they’re easy to find, they aren’t always reliable.
Companies sometimes change their accounting methods or make other changes between years. In addition, some companies choose to hide certain things from investors.
So even though you can find financial statements on a company’s website, it doesn’t mean everything is accurate.
There are two types of financial statements:
1) Income Statement
2) Balance Sheet
The income statement shows a company’s profit or loss for a specific period of time. It’s made up of several categories including revenue, cost of goods sold, operating expense, interest expense, taxes, depreciation, amortization, and non-operating expense.
The income statement is broken down by quarter, year, and total. Companies often break down their income statement by month as well.
The balance sheet lists all of a company’s assets, liabilities, equity, and shareholders’ equity. Assets include money, property, equipment, inventory, and accounts receivable.
Liabilities include debt such as loans, mortgages, and bonds. Equity includes any ownership stake held by owners. And shareholders’ equity refers to the amount owned by the company’s shareholders.
A company’s balance sheet is divided into three sections: current assets, long term assets, and short term assets.
Current assets include cash, accounts receivable, inventories, prepaid expenses, and investments. Long term assets include buildings, land, machinery, and equipment. Short term assets include furniture, vehicles, and office supplies.
A company’s net worth is equal to its total assets minus its total liabilities. Net worth is an indicator of how much value a company has. If a company has more net worth than liabilities, then it’s considered solvent.
Conclusion
To conclude, you can do due diligence on a stock by researching and reading financial statements. However, these statements are rarely 100% accurate.
They might be missing key information, which could lead to incorrect conclusions. Therefore, you’ll need to dig deeper with additional research before making your investment decision.
