Surviving the Stock Market: How to Analyze a Company Before Investing

Ever felt like you’re walking on a tightrope when it comes to investing in a company? Like you’re playing a high-stakes game of Russian roulette with your hard-earned money? No more, because we’re about to dive headfirst into the world of company analysis. This is not for the faint-hearted. This is for the brave, the bold, and the slightly paranoid who believe in the mantra ‘forewarned is forearmed’. So, let’s get started, shall we?

Decoding the Enigma of Company Operations and Finances

When you buy a stock, you’re not just buying a piece of paper. You’re buying part ownership of a company, and with it, an opportunity to partake in its successes (or failures) over time. But how do you know if a company is worth investing in? Start by getting answers to important questions about a company’s operations and finances. This is not just about looking at numbers. It’s about understanding the story behind those numbers.

And where do you find these answers? In just a few documents. All companies that trade publicly on national exchanges report earnings to the Securities and Exchange Commission (SEC) on a quarterly basis in an unaudited filing known as the 10-Q, and annually in an audited filing known as the 10-K. These reports include a wealth of important information including a business overview and discussion of risks facing the business, such as supply chain challenges or lawsuits.

Playing with Ratios: Evaluating Stocks

Because companies differ in size and the number of shares they have issued, you might want to use ratios to compare the value of different stocks. Several key ratios can be derived from a company’s earnings reports—and you can easily find many of them using FINRA’s Market Data Center. But remember, these ratios are not absolute. They need to be compared to the market as a whole and to a company’s particular industry, since there can be significant variation in the average ratio across industries.

FINRA’s Market Data Center is a comprehensive, content-rich, free online information resources for retail investors. It features detailed market data—including company profiles, key ratios and valuation information—and trading data on a wide range of stocks.

Professional Stock Research

Another way to learn more about individual stocks is through professional stock research. Some brokerage firms, typically full-service firms, provide research from their own analysts and perhaps from outside sources. But beware! Not all research is created equal. Some of this research is free, while some comes with a price tag. And not all of it is reliable. Research provided by FINRA-registered broker dealers is required to include clear, comprehensive and prominent disclosure of conflicts of interest. But investment research obtained from other sources may not have similar investor protections in place.

For example, stock analysis found on social media or online forums might not disclose if the publisher or promoter of that research has a financial stake in the company or investors taking certain actions. Posts can be used to spread false or misleading information to try to manipulate a stock’s price (either positively or negatively), resulting in real consequences for companies, particularly small or micro-cap companies, and investors who trade on this information.

Evaluating Your Overall Portfolio

At the end of the day, while it’s important to evaluate each stock in which you individually invest, it’s also important to evaluate it as part of your overall portfolio. Always remember to consider how an investment in a given stock will fit with your overall investment strategy and whether it will help you achieve asset allocation or diversification that you are looking for in your portfolio.

So, there you have it. The art of analyzing a company before investing. It’s not easy, it’s not foolproof, but it’s necessary. Because in the world of investing, knowledge is power. And the more you know, the better your chances of surviving the stock market.