Researching Companies for Investment Purposes: What to Look For
Research is a crucial and necessary step to investing. Get information about a company you're investing in, about the financial professionals you're dealing with, about the products you're considering, and all other things related to investment. This will help you prevent future problems, including the possibility of being scammed or being drawn in to invest in risky ventures.
Registered versus Non-Registered Companies
There are two types of companies in which you can invest, and the difficulty of finding information about each type varies.
Registered or public companies are easier to research than non-registered or private companies. The former type are required to submit to SEC's regular reporting requirements, whereas the latter type is required to furnish only the most minimum amount of information to the public.
Even so, you should never assume a company's viability and legitimacy from its registration status. Registered companies could perpetrate a scam just as easily as non-registered companies, and non-registered companies can be as safe an investment as registered companies.
In other words, you should always research a company before you invest in it, regardless of its registration status. The following section discusses some of the information you need to get about companies.
Company Information to Look For
The following are examples of information you should look for when thinking of investing in a company.
1. Products or Services Offered
What does the company do, exactly? Is it engaged in business or not? Is it an importer or an exporter? Is it a manufacturer or a services provider? Is it an investment company, instead? What products does it deal in or what services does it provide?
This is the type of basic information you must find out about any company. While you're at it, find out the company's performance. How are its products or services faring? Does it have brand or recognition in its market or in its industry?
2. Financial Standing
You should also research the company's financial standing. What are its assets and liabilities, and how do the two compare? Find out, too, about its cash flow. Does it have problems meeting short-term cash needs? You should also research the company's ownership structure.
3. Track Record
While you can't rely on a company's past performance when trying to predict whether or not a company will make profit in the future, it still pays to find out how the company has fared in the securities market so far. At the very least, it should clue you in to the company's strengths and potential weaknesses.
4. Market and Business Activities
You should also brush up on the companies' market activities. You should read all of the reports it has recently filed. Find out what you can about changes in ownership, board decisions, marketing campaigns, projects, etc. You should find out about its investment programs, too.
Find out, too, the companies with whom the company do business. What accounting firm does it use? Which brokers distribute its shares? Does it have an investment banker?
6. Owners and Directors
Who are the people running the company? You should check the names of the major stockholders, the directors of the company and even the officers that manage the company's day-to-day operations. Find out, too, about these people's stand regarding important issues.
7. Disciplinary History
Has the company or its key personnel ever been the subject of complaints and investigations?
Sources of Information
Information available about companies is typically limited to non-investors. Investors are privy to information that is not available to the general public. Nevertheless, even prospective investors have access to the following sources of company information:
A company's prospectus, issued when the company is offering shares to potential investors, is a rich source of information about a company. In the prospectus, you'll find important information like:
- The company's incorporators and directors, their addresses and their ownership interests in the company
- The company's officers and their compensation structure
- The quantity and classes of shares issued by the company
- Share prices and minimum required investment
- Past performance, investment objectives, investment strategies, and risks
- An independent auditor's assessment of the company
- Affiliations (the people or firms involved in the offering)
Where to go: To obtain a company's prospectus, request one directly from the company. If a financial professional is brokering a deal for you, he should be able to obtain a copy of the prospectus on your behalf. You should also check the company's website for a copy of the company's prospectus.
2. Corporate Records
Companies, especially public ones, are subject to SEC's periodic reporting requirements. Examples of forms you should check out are the Form 8-K (filed by companies for significant events) and Form 10-Q (filed quarterly). Of particular importance is Form 10-K, which is filed annually and contains a company's audited financial statements.
Where to go: Go to the SEC (particularly the EDGAR database), your state's securities regulator or the company to get a copy of a company's corporate reports. If the company is not under SEC, it may still be under the regulatory powers of other government agencies or private regulatory bodies.
3. Financial Statements
A company's financial statements are a great tool for assessing a company's financial position and profitability. It gives you an overview about a company's ownership structure, assets, liabilities, cash flow, etc.
Where to go: You can find a company's financial statements with its annual corporate report filed with the SEC. You can also try asking the company directly for a copy. You should also check the company's corporate website; the company may have posted a copy of its financial statements.
4. Company Press Releases and Brochures
A company's press releases and promotional brochures, whether geared towards the general public, consumers (if it does business) or investors should be read for relevant, additional information.
Where to go: Use the internet to look for articles and posts about the company you're investigating. You can also go to your local library and search for such posts and articles in old issues of newspapers and magazines.
5. Assessment and Review of Independent Bodies
There are outfits out there that assess, review and compile information about companies for the sake of their investor clients. Bloomberg, Lexis-Nexis and Hoover's are examples.
Where to go: Access these organizations' website online to see how you can gain access to information.
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