Do your own research is a common piece of advice. But how do you do this in practice?
I have previously written about How I Find Bargain Shares. Although I flagged up a number of ways of finding new investment opportunities, I emphasised that you always need to do your own research on any prospects (sometimes written as DYOR).
Why?
The Internet is absolutely full of information. In an ideal world we could rely on all of it to be accurate. Unfortunately it is not always so. Sometimes information is inaccurate because of genuine errors. Events happen which are not always instantaneously reflected in all data sources, such as a profit warning or dividend cut. Acting on out of date information is a recipe for disaster.
Even worse though, some information is intentionally inaccurate. Rampers and de-rampers are people who repetitively post selective and even misleading information about companies on Internet bulletin boards, in a sensationalist way, to drive up or undermine their share prices. Retaining a healthy dose of scepticism is critical for a successful investment career.
Accepting that we need to do our own research, what does that actually involve?
Valuation
Depending on what sort of investor you are (a subject I recently covered in my article How To Make Money From Shares), your objective might be to buy shares which you think are undervalued. The first thing to work out therefore is the value that the stock market currently places on the company (otherwise how can you decide if it's undervalued?). It's the number of shares in issue multiplied by the share price.
Although the share price is easy to find, the number of shares in issues takes rather more detective work.
AIM companies have an obligation under rule 26 to disclose the number of shares in issue on their web site. Usually this will be in a section titled investors or shareholders. Companies which are listed on the main market may also disclose this information there, so it's worth checking this first.
Often companies, in accordance with the FSAs disclosure and transparency rules, will disclose the number of shares in issue in announcements headed 'Total Voting Rights'. It's important however to review subsequent announcements to ensure they have been no further issues or buy back of shares.
In the absence of these sources, one way I use to find the total number of shares in issue is to use significant holding announcements. These disclose the number of shares held and the percentage of the total holding this represents. From this you should be able to work out the total number of shares in issue. Again check for any subsequent shares issues or buy backs by the company.
What the company does
Having worked out what a company is worth the next thing to do is find out exactly what it does.
Most companies now have a web site and generally these are full of background on the company; what it does and where it operates. These sites usually contain copies of the Annual Reports and Interim Statements. In most of these is a fairly extensive review of what the company does and how it has been performing. It's always worth taking the later with a pinch of salt. Management are not always the best judge of a company's success.
It's also worth googling the company. This may throw up other sources of information on it.
Who runs the company
For many investors, the secret to a successful company is the management. How long have they been with the company, how much faith do they demonstrate in its future and how incentivised are they to succeed?
Most company websites and annual reports have biographical details of the directors. This often includes their age, how long they have been with the company and any directorships of other companies. Annual reports also disclose the share holdings of directors and their share options. Usually but not always they disclose the individual remuneration of directors.
If you can't find out what you want, why not ring the company and speak to the company secretary. If they won't tell you what you want to know, assuming its not sensitive personal details, you might wonder what they have to hide.
Analysing the financials
Now you know what the company does and who runs is, what about its financial performance.
Most companies now provide electronic copies of past annual reports and interim statements on their web sites. All companies are obliged to provide preliminary statements (sort of abridged annual accounts) and interim reports as stock exchange announcements.
Accounts are full of information, some of which you will literally need an accounting qualification to interpret (which I admit I do have). What sort of information you'll want from these reports will depend on what sort of investor you are. Value investors will be looking at things like the net asset value of the company, how much of it is made of intangible assets and what other assets there are, what the debt levels are and the profitability of the company. Growth investors might look at the history of sales and profit growth. Yield investors will look at absolute level and history of dividend payments and how secure it looks.
Predictions for the future
Of course, just because a company has done well in the past doesn't mean it will continue to do so in the future.
Predicting the future is of course the hardest part of any investor's job. Brokers are paid to do this and make their estimates available in research notes. Unfortunately these days it is increasingly hard for private investors to obtain these notes, although as I pointed out in How I Find Bargain Shares, some are still available.
Sites such as Motley Fool do publish consensus analyst estimates. How much reliance you place on these is a matter of judgement.
Some companies provide the stock market with regular and routine updates on trading performance. There is also a general obligation on companies to announce to the stock market if trading is no longer in line with the market's expectation. A review of stock exchange announcements will identify any of these.
Finally companies also provide commentary on the outlook for future performance in their preliminary and interim announcements.
Testing your views
Once you done your research and put together your analysis of the company as a potential investment, it's often helpful to get the opinion of others.
One way of doing this is to post it on one of the many bulletin boards that exist on the Motley Fool. You will find that the more detail you post the more likely to you are to get a response. You also need broad shoulders, especially if you've got it wrong or missed some important issue. However the objective is to make money, not impress anyone, so don't take it to heart.
Once you've done all this, it's still not guaranteed that things will run to plan. However it's more likely than if you invest on blind faith.
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