PEEK BEHIND THE CURTAIN BEFORE INVESTING
Peek Behind the Curtain
When I buy shares of stock in any company I am saying I have faith. I believe in this company’s worth, purpose and ability to run a good solid business. I believe this company will prosper and grow and I want to be part of it and be around to share in the fruits of their success. The extent to which I will enjoy those fruits is determined by how much stock I purchase, how great an investment I make.
Get to know the company
The Ethics Test
One of the many miracles of the internet is that you are able to visit the site of the company you are interested in investing in and explore the answers to questions you have about them. For example, I am always interested to know exactly what the company does, where they do it, if their activities damage the environment and if it impedes on the lives of the locals. I call this my ethics test. If they pass that test I move on to the next which is to investigate how the company is run.
Who’s Running the Show
Companies are just like families. They have a hierarchy, rules, budgets and goals. On the site I’ll always find a list of the corporate executives (the hierarchy). I read about the Chief Executive Office (CEO), the financial officers(CFO) and the operations people (COO). I learn about their education, their previous experience and reputation. If I think I can trust them I move on to the next criteria which is the financial health of the company. How do they handle their money? I look for the tab titled financials and I read the financial statements for the most recent past quarter (three months) and the last completed year. At the bottom of the financials are notes and memos. These often provide clues to important points that might otherwise be missed. They will describe anomalies and exceptions to rules, if officers are buying or divesting of shares and large equipment purchases that only happen once, that kind of thing. These things can help me decide if I see a future for myself with this company. For example, if I see a footnote telling me that the Chief Financial Officer and the CEO sold a wagon full of their own company’s shares, I’d suspect they knew something that wasn’t great news. That is useful information and if I was considering buying shares, that would be enough for me to decide to walk away. If, however, I was considering buying options, I might use that information in a different way.
Checking Out the Numbers
The last tab I will study on the company’s website is usually titled “Investor Relations” or something similar to that. That section contains the market information. It will have past performance charts and share prices. It’s important not to be daunted by financial statements and stock performance charts. You may never be an expert but you can certainly bring yourself to a point of trusting what you see. It’s only numbers.
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Female hand drawing back curtain, image courtesy of FrameAngel at http://www.freedigitalphotos.net
Ethics Sign, image courtesy of Stuart Miles at http://www.freedigitalphotos.net
Organization Boards, image courtesy of nongpimmy at http://www.freedigitalphotos.net