DOCUMENTS NEEDED IN SECURITY ANALYSIS

When one wants to seriously invest in stocks, one just doesn’t google “best media hyped stocks for 2009” and the first option that comes up is what he/she will put his money in. No. That is when the work begins because the has to find the stocks that have the best chance of giving him returns that will satisfy him  in that they will compensate the work he did in finding them.

So this begs the question; how does one find a good stock. There is but one answer. Due diligence. An investor has to look through numerous financial records of public companies looking for those that suite the requirements that he has set. This post will not deal with these requirements per se but on the documents

These financial records that the investor looks at are;

The financial statement. This consists of

1.The balance sheet– which show the financial position of the company as at the closing date(a single day). That is why the heading is always “as at dd/mm/yr” it is a detailed record of what the company owns (its assets) both tangible like machines and furniture and intangible like goodwill and its liabilities(what it owes) that include bank loans, debts incurred in running of the business etc.

2.The income statement/profit and loss statement/statement of revenue and expense– as the name implies, it show the earnings for the period covered (financial year). You may have noticed that they are always entitled “for the year ended dd/mm/yr”. It is not always year because some companies issue these results quarterly so basically, it is for the financial period ended. They contain sales, non operating income, gains and losses from all the various business transactions, depreciation and depletion of assets,  income taxes, dividends paid, etc. it basically shows how cash flows through the business.

The prospectus– This document is used by companies offering securities for sale. It basically describes the business and how the proceeds from the sale of the securities(IPO) will be used, the company’s market cap, everything that you would want to know about the directors like their contacts, resumes, amount of shares each hold etc

The interim statements– these include the company’s earnings only for less than that company’s financial year.

Conference calls from C.E.O.s. some companies have regularly scheduled conference calls where the CEOs talk about the companies present standing to the shareholders.

These are the four major documents that an investor needs to know how to analyse but this is not the end of it there are so many other sources of information that an investor can go to find more information.

This include;

Periodic reports to public agencies– they are just like financial statements but more detailed

Statistical and financial reports

Requesting specific information from the company. If the shareholder still cannot find information he is looking for from the above sources, then he should contact the company and ask for it since technically being a stockholder means that he owns part of the business and thus entitled to most of the information pertaining to the business.

Pro-forma statements-but alert investors normally ignore them because they are kinda useless. What I mean is that companies misuse them and mislead their shareholders. Initially they were meant to provide investors with a better picture of long term growth by removing short term non recurring expenses but now they also include normal expenses like shareholder’s dividends, costs of mergers and acquitions. So to avoid being thrown off, the investor should not take it seriously.

I wanted to keep this post really short (something that I have failed to do) because in the near future, I will redo it in vivid minute (and disturbing detail).

Are there any other documents that any investor out there uses in stock analysis for his stock portfolio?