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What to Research before Investing in a Company

A company's annual report and the proxy tell you the general state of the company at the end of the last fiscal year, and as a potential investor you should pour over both of them carefully. But a lot can happen in the days between annual reports. If you're considering investing in a company, you should check out the latest facts any way you can.

Review quarterly reports (10Q)

Every three months, publicly traded companies have to update shareholders on their progress. They usually issue a news release and hold a conference call, but the minimum requirement is to file a quarterly report on form 10Q with the SEC. You can get the 10Q from the company or from the SEC's website.

The 10Q is similar in format to the 10K report but much less detailed. It includes a discussion of what has changed over the quarter and then includes quarterly financial statements with footnotes. The presentation may have fewer lines than the annual report, and it isn't audited by any accounting firms, but it should give you enough information to determine how your company is doing relative to the same time period last year.

Most companies have seasonal businesses. Most retailers, for example, post almost all of their sales in December. Hospitals show more admissions in winter months, because of flu and pneumonia, than they do in the summer. That's why you need to compare quarterly results to the same quarter a year ago rather than to the quarter that just passed.

Check up on current report filings (8K)

If a company has significant news to announce between the due dates for its 10K and 10Q filings, the SEC has it issue an 8K report, also called a current report of material events or corporate changes. An 8K may contain information about a management change, a disaster at an operating facility, the announcement of a major new product, or the outcome of a pending lawsuit.

In most cases, the company also issues a press release that you can find online. The 8K filing ensures that the news announcement becomes part of a company's permanent record, available to everyone through the SEC, no matter what happens to the press release or other news archives.

Listen in on conference calls

Many companies hold a conference call for analysts and investors after they report their earnings each quarter. One or two of the senior executives go through the results and explain what happened (with a hefty dose of positive spin), and then take questions. In most cases, only analysts and institutional investors invited by the company can ask questions, but anyone can listen. Companies usually announce these calls on their websites. Most companies also post a recording or a transcript of the conference call on their websites. (Companies don't have to have conference calls, but if they do, they are required to make the information available to all investors.)

These calls are great sources of information about where the business is headed. The questions — and the answers — give you a good sense of what concerns experienced analysts have about the financial results and the prospects for the future. The managers answering the questions may be cheery, candid, evasive, or even a combination of the three. The information helps you track the progress of the business, or find out where it's been and where it's going if you're a prospective shareholder.

View investor presentations

When you're checking out the investor section of the company's website, you may see some presentations that company executives have given to groups of investors, usually at brokerage firm conferences. The SEC requires presenting companies to share their presentations with all investors through transcripts, Webcasts, or slide shows that you can find on their websites.

As with the conference calls, there will be a lot of happy talk about how the company is the best at everything. You'll also get some data and news updates that can give you a sense of how the company is progressing toward its targets.

Do a news search

The SEC filings contain a ridiculous amount of information about a company, but it's all from the company's perspective. You also want to get information from people outside the company, who have different perspectives on the business.

Besides the major newspapers (the New York Times, the Wall Street Journal, the Financial Times), many companies are covered in great depth by the media of the town where the headquarters is. Some companies are followed by bloggers who are obsessed with the good, the bad, and everything in between. And sometimes, interesting tidbits about the company come up when you least expect them.

As an investor, you need to be comfortable with online research so that you can take advantage of all this information! Several financial sites let you monitor stock prices during the day, and many of these sites carry press releases announcing corporate news. A simple query through any of the popular search sites can turn up information that you may not have considered.

Google Alerts allow you place your search terms on file. You'll then receive an e-mail whenever a site with those terms comes up on Google. But that may not be enough for you. You may also want to consider searching blogs through a service like Technorati; you may even uncover a few related to your investments or to your social activism style that you want to monitor regularly.

Major news databases, such as LexisNexis or ABI/INFORM (go to the website and enter ABI/INFORM in the search box in the top right corner of the page), can help you find articles in smaller newspapers, trade magazines, and other publications that may not offer online access to their archives. Subscriptions to these services are pricey, but public libraries may allow you to get access to these databases through its website by using your library card. Your friendly local librarian may direct you to other investment databases the library subscribes to that you can use to help you find out more about companies before you invest in them.

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