Before you invest in any company, you should know as much as you possible can about them. What do they sell or what services do they provide to their customers? Who are their direct competitors? What makes the company you like so special? What is their competitive advantage? What are they planning to do for the future to grow? If they do not grow their profits, then their stock price will not grow either. This is a given since the classic finance definition of a share price is the present value of all the company’s future cash flows. To find all of this information out about a company, you should read as many Securities and Exchange Commission (SEC) reports that the company files as you can. I personally read all of the Annual Reports and Proxy Reports, and listen to the company’s conference calls that I can for any company that I am seriously considering to purchase. And, with the internet, all of the information is available right at your finger tips.
Annual Reports & 10-Ks
The Securities and Exchange Commission (SEC) has made it easier than ever to get a copy of all the reports that companies are required to submit to the agency. You no longer have to write for hard copies of a company’s annual reports, and many will not even mail them to you because of the high cost of producing them. You can search online for any report very easily on the SEC’s Edgar Database. You can also download a lot of these reports directly from the company’s website in their investor relations page.
The company’s annual report or 10-K report gives you a huge amount of financial data to digest about the company. Some of the highlights of the reports you should always hit up when reading are the CEO’s letter to shareholders, management’s discussion and analysis of results, income statements, balance sheets, and statements of cash flows. Do not get overwhelmed by all of the information that companies are required by law to throw at investors now. You will become more confident with these reports the more you read them. Soon, you will be able to spot red flags in the financial data, like excessive debt or poor cash flow, which is the goal before you do any investing in these companies.
Did you know that Bill Gates owns 713.1 million shares of Microsoft (as of 4SEP09) or 8% of the entire company? As of yesterday, that’s a street value of approximately $18 billion. Items like this and other executive compensation breakdowns are found in the company’s yearly proxy report. You can also find other interesting tidbits in the report about which Fortune 500 CEOs get free use of the company’s corporate jet, receive free chauffer service, etc. Public companies issue this report before their annual shareholders meeting to inform stockholders about key issues that they will be voting on in the meeting. For most companies, each share of stock a person owns represents a separate vote you can cast. Stock ownership is ownership in the company, and stockholders vote for board members and other important items that direct the company’s action and future. A company’s proxy report is a great indication of the direction the company plans to go in the future and makes for very interesting reading.
Conference calls are also very interesting to listen in on. Public companies that trade their stocks on the major stock exchanges usually have a lot of large institutional investors such as pensions and mutual funds. Many companies bend over backwards to keep these clients informed about what is going on inside the company and their plans for the future. One great way to be included in these calls even if you are not an investing big shot is to listen into the conference calls over the internet. You can find out what day and time the company you are thinking about buying shares in will have their conference call and a link to go to it at Yahoo Finance. You won’t get to ask questions like an investment banker or stock analyst, but the wealth of knowledge that you will learn from this inside source about the company is incredible and extremely valuable. It is a real behind the scene look at what is going on inside the business.