Sifting Stock Information
Introduction to Stocks
There are plenty of resources to help you make informed investment decisions.
If you are considering individual stocks for your investment portfolio, there's a great deal of information readily available to help you evaluate the companies that issue them and the prospects for the stocks' future performance.
You can find some of this material on your own, on the company websites and in official reports to the Securities and Exchange Commission (SEC). You can use analyst reports provided by independent research companies, including Value Line, Inc., and Standard & Poor's, and read investment newsletters and the financial press. And you can ask for advice from your financial adviser.
Financial Details - are good indicators of the shape a company is in — and whether its stock is likely to be a good investment. They are reported regularly in the financial press and on on financial websites, and are available through your broker.
Book value is the company's net assets minus its outstanding debt. Book value is supposed to represent the value of the company if, today, it shut down operations, paid off its debts, and were sold off. A small or low book value may be the result of too much debt. But sometimes a low book value means that assets are underestimated, and that the stock is a good value for potential investors.
Earnings per share are calculated by dividing the company's net profit by the number of shares it has issued. If earnings increase each year, you can usually assume the company is growing. You might also check whether sales per share are increasing as well. If not, an increase in earnings may instead come from price increases. That's not considered to be as positive an indicator of future prospects.
Return on equity is a percentage figured by dividing a company's earnings per share by its book value.
Payout ratio is the percentage of net earnings a company uses to pay its dividend. The normal range is 25% and 50%. A higher ratio may mean the company is struggling to meet its obligations.
Companies Details - Companies are required by law to keep theirshareholders and the government up to date on how the business is doing. That information can be very valuable in keeping tabs on your investment. The most complete information the company provides is included in the 10-K report it files with the Securities and Exchange Commission (SEC), summarized in its annual report. You also get quarterly reports, which include concise summaries of the company's current performance.
An annual report reviews the company's operations for the past year and offers some broad predictions for the coming one.
A typical annual report includes:
* A section outlining the company's philosophy of doing business.
* Detailed reports on each segment of its operations. This information can reveal weaknesses
in the management structure or the products or services the company offers.
* Financial information, including the profit-and-loss statement for the year, and the balance
sheet, showing thecompany's assets and liabilities at the end of the year compared to
previous years. Footnotes attached to the financial summaries can sometimes reveal
problems such as lawsuits against the company or proposed government regulations that
might influence profitability.
* An auditor's letter stating that the company's financial statements are in order.
Annual reports, along with other details about the company, are usually available from brokers, directly from companies, and on corporate websites.
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