2/26/06
Due Diligence is the process of figuring out whether you want to invest in a particular stock. This can be based on many different factors, your temperament, level of risk you want to take, what you think the stock will do, value of the stock or any combination of these factors and many others.
To simplify things a bit I’m going to break down your research in two different arenas. People generally decide to buy a stock for a variety of reasons, but the reasons are based on either a fundamental analysis or a technical analysis. The difference between these two is huge. Fundamental analysis looks at the value of the stock, the industry the stock is from, company reports and items of that nature. It is a very fact-based look at what the stock is worth, where the value might go and returns (also called dividends) the stock will provide. (Explaining returns, dividends and the like will be another newsletter)
The second method of looking at stocks is the Technical analysis. That is done using charts and graphs of where a stock’s price has been, and what it is likely to do. This is less based on the company or products and more looking at patterns and likelihoods. Different methods you may have heard of include Candlestick Charting and moving averages, Bolinger Bands and other foreign sounding terms. They all have their place and many folks are very successful using these methods.
Both methods have their pros and cons and people who employ them can show gains (somehow no one likes showing loses, go figure.)
I prefer looking at the fundamental analysis because I think that value of a company is preferable to looking at trends. If you read last week’s letter, you know I look at investing as buying shares of a company’s future, not just a paper transaction.
I can’t dig too deeply into factors to look at, but most people will look at a company’s history, net return on assets, net profit and the pattern those factors are following. Other things would be looking at the annual reports (Available online for most companies), Price to Earnings ratio, share book value and capitalization.
To get to the bottom line, Due Diligence is your way of making sure the company you are investing in is more than a rumor or a hot tip of the day. You want to protect your investment, and make sure you aren’t throwing your money down a hole. (Better to throw it my way, if you just have too much.)
Next week, we’ll talk about The Dow Jones Industrial Average and what it means to you.
The columns, articles, message board posts and/or any other features provided on Wealth Training Source are provided for personal finance and investment information and are not to be construed as investment advice. Under no circumstances does the information in this content represent a recommendation to buy, sell or hold any security. The views and opinions expressed in an article or column are the author’s own and there is no implied endorsement by Robert Britt of any advice or trading strategy
copyright Robert E. Britt 2006
