Do Your Research
Now you know something about investing, have some idea of the sorts of assets you'd like to invest in, and you are ready to take the plunge. It's time to get busy and do some basic research on various companies. You can find this information online and in newspapers like Barron's and the Wall Street Journal.
Researching Mutual Funds and ETFs
You can find information about mutual funds through your brokerage firm, which should have a searchable database online of the mutual funds available, as well as information about those funds' stocks, bonds, and other holdings, along with data on the fund manager's investment style, the fund's turnover, and fees. This information is also available in a prospectus provided by the mutual fund management company, which you can order through your broker or view online.
Alert
Beware of hot tips and inside scoops. It isn't enough to like a product or the celebrity endorsing it. Before making a major stock purchase, you need to know more about the company's overall financial stability: whether its competitors are under-pricing it or grabbing more market share; whether it's facing rising operating costs or other challenges its management cannot control.
You can find mutual fund listings in Morning-star's annual “Morning-star 500,” a list of mutual funds that includes information about each fund's investing “style” (for instance, small-cap value), expenses charged, results achieved in the last few years, along with a profile of the investment manager and Morningstar's estimate of tax-adjusted returns on the fund.
Morningstar also grades each fund with a frequently cited star rating: Five stars indicate that a fund has posted excellent returns in the past on a risk-adjusted basis. Barron's and the Wall Street Journal also periodically publish lists of mutual funds that provide a wealth of useful information.
Your broker or financial advisor is probably your best resource for unearthing the goods on particular mutual funds. Charles Schwab and E-Trade both offer a wide range of non-commission mutual funds (where the fund either pays the broker for the referral, or the broker makes money managing the fund), which also frequently have very low initial investment requirements. Both brokers have online tools to help you sort through the thousands of mutual funds offered.
Essential
A company's price-to-earnings (P/E) ratio is the price of the company's stock divided by its earnings per share, or “EPS” (usually for the latest twelve months). Faster-growing companies tend to have higher price-to-earnings ratios, and they may be called more expensive because of their higher-than-average P/E ratio. However, it often makes sense to pay more for a company that is growing more quickly.
Is This Company Investment-Worthy?
Standard & Poor's, a respected provider of credit ratings, provides free access to a searchable database of its credit ratings for many public companies online. You can also check the company's finances on the Yahoo! Finance website. Enter the one- to four-letter “ticker symbol” of your stock, then click on the “Key Statistics” link. This will show how much money the company makes per share, as well as its price-to-earnings and other key valuation ratios.
You can find more in-depth information by browsing the investor-relations section of a company's official Web site. Investor presentations will give you insight into the company's strategic direction, and recent earnings announcements are the way the company's management team communicates its business progress to investors.
The U.S. Securities and Exchange Commission (SEC)
The U.S. Securities and Exchange Commission (SEC) maintains a financial filings database called “EDGAR.” EDGAR is an excellent source of in-depth, reliable information. Look for a detailed discussion about the company's operations in its annual financial filings, known as “10-K” forms, as well as in its quarterly filings, or “10-Q” forms. These financial filings include a section titled “Management's Discussion and Analysis,” where management discusses the company's operating strengths and weaknesses over the preceding quarter or year.
This information can greatly deepen your understanding of where the company actually makes its money, as well as the challenges and opportunities it faces. Check out competitors so you know what and how their peers are doing and how that might affect your favored company over time.
