8/20/2012 2:45 PM ET
Gathering relevant information
STOCKS 106: Knowledge is power when it comes to investing, and your success as a stock investor depends on your ability to locate information and determine its importance. Here's where to find what you need to know.
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. In this lesson, we'll point you in the right direction and tell you where to concentrate your efforts.
Sorting out the public filings
At first, public filings may look like alphabet soup. But when researching a company, they are some of the most important documents you will read.
If a company has a stock on a major exchange like the New York Stock Exchange (NYSE), it is required to file certain documents for public consumption with the Securities and Exchange Commission (SEC). The SEC imposes guidelines on what information gets published in these filings, so they are somewhat uniform. Finally, companies are required to file documents in a timely fashion.
Among the public filings available, the most comprehensive and useful document is the 10-K. The 10-K is an annual report that outlines a wealth of general information about a company, including number of employees, business risks, description of properties and its strategies. The 10-K also contains the company's audited year-end financial statements. The 10-K contains management's discussion and analysis of the previous business year, and compares it with earlier years.
We suggest making the 10-K the first stop in your journey to researching a company. How do you find a firm's 10-K? Just visit the SEC website, click on "Filings & Forms," and then "Search for Company Filings." After plugging your company's name into the "Companies & Other Filers" search, you can pick the 10-K out of the list of forms.
Morningstar.com also has links directly to the SEC website. Just enter a company's name or ticker into the search box, and choose the "SEC Filings" link on the left.
What about all those other forms? Some of them are worth a read. For instance, the 10-Q contains some of the same data that you'll find in the 10-K, except that it is published on a quarterly basis. Although it's a little less comprehensive and the financial statements are typically unaudited, the 10-Q is a good way to keep tabs on a company.
Another important document is the annual proxy statement, also called DEF 14a. It contains details about executive compensation, the board of directors and the shareholder voting process. The proxy is a must-read for gaining insight into a company's corporate governance and understanding the rights of shareholders.
If you're interested in a recent event, typically associated with an earnings release or major company announcement, you can find the details in a company's most-recent 8-K. Also, you may want to occasionally peruse the Form 4s to see if insiders have been trading company stock. Every time company insiders buy or sell shares in their company, they are required to file the Form 4. While an insider's trading activity may be no smarter than your own, it can at least reveal if management's investment behavior is consistent with its tone.
Making the most of a company website
Another source of information is the company itself. Just plug the name of the company you want to research into the search engine of your choice. You should find the company website near the top of your results.
The investor section of a company's website 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 company's press releases and examine the latest investor presentations (typically in .pdf or Microsoft PowerPoint formats).
It's definitely worth a visit to the company website. 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
Now, it's time to set up a watch list, which can help you keep tabs on company news and easily find stock price information. How do you do this? Fortunately, Morningstar offers these services for free:
- Go to the Morningstar.com and click on the tab labeled "Portfolio"
- In the Portfolio Manager window, under "Create a Portfolio," click "New Portfolio."
- You'll see a box labeled "Step 1." It's automatically set up to build a watch list, so click "Continue."
- Pick a name for your portfolio, or just call it "watch list." Then, plug in the ticker symbols of the companies you want to watch. Click "Done."
- In the following window, you'll see a list of updates, alerts, and tips that Morningstar will send you daily for the companies in your watch list. Click "Done" again.
- Now you have a watch list that you can visit anytime by clicking the Portfolio tab on Morningstar.com.
By creating a watch list, you'll be able to 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
While your investing decisions are yours to make, you might be able to gain a new insight or angle by reading others' research.
Obviously, we think a subscription to Morningstar.com's Premium Membership service, which would allow you to read our analysts' opinions, is one worthwhile resource.
Avoiding information overload
You shouldn't feel badly 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. Fortunately, you don't need to read it all to be successful. Information won't harm your performance. But paying attention to some of it might. That's why we've highlighted the key pieces of information you will need to make an informed decision.
Here's a quick step-by-step guide to becoming informed about a company:
- Obtain the firm's 10-K and really try to give it a thoughtful read. Don't feel badly if you spend a lot of time on this step. (Give it a couple of days to digest.)
- 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.
- Set up a watch list to organize the steady flow of news on all the companies that interest you.
- Poke around on the company's website. This takes less than a half hour.
- When time allows, visit relevant industry websites 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. Over time, you can build on your foundation and gain a much deeper understanding. Further, you'll be able to weed out the news that just isn't worth your time.
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