What do you mean by "doing homework"? Exactly. I have only worked with mutual funds up to this time and want to start to take the next step. I really resent the fact I never was taught any if this stuff in school. I have good savings habits, shop and spend wisely and live frugally and well below my means. But these behaviors won't create wealth without understanding how to invest. I am not comfortable with blindly doing as a "financial expert" tells me. HELP
ETA: Please use words and language a fifth grader would understand
SES -
First apologies for the aggravation.
"Doing Your Homework"1) Find out what a company does, how they do it, where they do it
2) Assess the Cost of the proposed purchase. Compare that to the Cost of the Security @ the 52 week Low and @ the 52 week high. - This will give you a general sense of whether there is more upside potential and less downside potential or Visa Versa.
This is a Risk exercise. Which is important, you have to be able to fully understand how much risk you are willing to take and how you feel if you exceed that risk - this will help to keep you honest with yourself.
3) Determine the BETA. BETA is a Measure of Volatility. The Markets have an Assumed BETA of 1. So A company with a BETA of say 1.2 will theoretically Move more either up or down in a given day than the Markets. Conversely a Company With A BETA of say 0.04 will move theoretically far less than the Market.
Generally speaking this is fairly accurate - But the Reality is that this can be vastly different than the Theory.
4) Check the 5 Year History - Past 5 Year EPS - Past 5 Year Revenue - Past 5 Year Dividend.
Generally speaking I personally like to see all these measures in the Green. To me that show that the Company has been generally fairly good at what they do and how they do it for a good bit of time - this in my mind lessens the chance of them doing something really stupid.
HOWEVER - Finding one or two of these showing a red does not mean automatically that the company is bad or too risky - Reason, they may have had something happen that affected the bottom line - Either that they couldn't control or something they did that will actually pay off down the road.
5) Take a Look at the Earnings for the past Quarter and the Past Year. Did they Meet, Beat or Miss ? How often did they do any of those.
To My Mind Constantly Missing Earnings is a Warning Flag. If I really am Interested In the Company and I see that I try to see if I can Find out what exactly happened or is going on. Based on that I either Continue to dig into the company or move on to looking at something else.
6) Take A Look at the SHORT INTEREST. How many folks are short this Month ? How many were short last month ? Is that Higher or lower ? How Many days would it take for the Shorts to cover if they were "Squeezed" ? (A Short Squeeze can cause the Price to Rocket upwards)
7) Take a Look at The Insider Activity. What are the Company Insiders doing ? Are they Buying, Are they selling. Is there More selling than Buying - Is there more buying than selling.
Insider Activity can be a decent tell. It gives a general feel for how Folks who Run the Company Feel about their company.
8) Take a Look at the Float. Specifically the Number of Institutions Holding Shares. Higher Numbers there tend to show that Financial Companies (Like Brokerages, Mutual Funds, Etc.) Really like the Company and are for now comfortable holding shares.
These 8 are things right off the top of my head that would be considered "Doing Your Homework". There are many more ways you can get a sense of a companies worth. And For as many Investors, so to are the Measures by which they value a company.
"Doing your Homework" really comes down to getting a good sense of Value, potential, risk and how you feel about a given company.
What "Homework" You do or how detailed you get in doing it has a lot to do with they Type of Investor you are (Or want to be) and the Style of Investing you Do (or Plan to do).
For Us (for example) - We are Value Oriented, Income Focused, Risk Managed, Fairly Aggressive.
Our Style of Investing is a Derivative of Dividend Long Term investing and Volatility Trading through the use of Contractual Derivative Instruments (Options).
So we do A LOT of "Homework".
We hope this helps some.
