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Morningstar.com's Interactive Classroom

Course 106
Gathering Relevant Information

Introduction

Now that you know the definition of a stock and the purpose of a company, how do you go about finding more information about a firm you may be interested in? Because knowledge truly is power when it comes to investing, your success as a stock investor depends on your ability to locate information and determine its importance. In this lesson, we'll point you in the right direction and tell you where to concentrate your efforts.

Sorting Out the Public Filings

At first, public filings may look like alphabet soup, but when researching a company, they are some of the most important documents you will read.

If a company has a stock on a major exchange like the New York Stock Exchange (NYSE), it is required to file certain documents for public consumption with the Securities and Exchange Commission (SEC). The SEC imposes guidelines on what information gets published in these filings, so they are somewhat uniform. Finally, companies are required to file documents in a timely fashion.

Among the public filings available, the most comprehensive and useful document is the 10-K. The 10-K is an annual report that outlines a wealth of general information about a company, including number of employees, business risks, description of properties, and strategies. The 10-K also contains the company's audited year-end financial statements. In addition to possessing crucial facts and figures, the 10-K also includes management's discussion and analysis of the past business year and compares it with preceding years.

We suggest making the 10-K the first stop in your journey to researching a company. How do you find a firm's 10-K? Just visit the SEC Web site, click on "Filings & Forms," and then "Search for Company Filings." After plugging your company's name into the "Companies & Other Filers" search, you can pick the 10-K out of the list of forms. Morningstar.com also has links directly to theSEC Web site. Just enter a company's name or ticker into the search box, and choose the "Filings" tab on the quote page navigation.

What about all those other forms? Some of them are worth a read. For instance, the 10-Q contains some of the same data that you'll find in the 10-K, except that it is published on a quarterly basis. Although it's a little less comprehensive and the financial statements are typically unaudited, the 10-Q is a good way to keep tabs on a company throughout the year.

Another important document is the annual proxy statement, also called DEF 14a. In the proxy, you will find detailed information about executive compensation, the board of directors, and the shareholder voting process. The proxy is a must read for gaining better insight into the corporate governance of the company you're researching and determining your rights as a potential shareholder.

If you're interested in a recent event, typically associated with an earnings release or major company announcement, you can find the details in the most recent 8-K. Also, you may want to occasionally peruse the Form 4's to see if insiders have been trading company stock. Every time company insiders make a transaction in company stock, they are required to file the Form 4, allowing you a peek into whether they are buying or selling shares. While an insider's trading activity may be no smarter than your own, it can at least reveal if management's investment behavior is consistent with its tone.

Making the Most of a Company Web Site

Another source of information is the company itself. Just plug the name of the company you want to research into the search engine of your choice. You should find the company Web site near the top of your results.

The investor section of a company's website can offer a variety of information. Copies of the public filings are usually available in more flexible, downloadable formats--such as PDF, Microsoft Excel, or Microsoft Word. Also, you can sort through the firm's press releases and examine the latest investor presentations (typically in PDF or Microsoft Power Point formats).

It's definitely worth a visit to the company Web site. It doesn't take long, and reading the press releases will give you some of the most up-to-date information available. Also, it may be useful to see how a company does business on the Web.

Setting Up a Watch List

After you've researched your first batch of companies (read the public filings and visited company Web sites), it's time to set up a watch list.

By creating a watch list, you'll be able to keep tabs on company news and easily find stock price information. Among other things, you can set alerts to notify you when a stock price has met or exceeded a particular threshold. Thus, your watch list will eventually become an integral tool in helping you make buy and sell decisions, stay organized, and keep informed.

Seeking Out Expert Opinions

After you've become a bit of an expert yourself by sifting through the information we've already discussed, you may want to read what other analysts and investors have to say about a particular company. While your investing decisions are yours to make, you might be able to gain a new insight or angle by reading others' research.

Avoiding Information Overload

You shouldn't feel bad if you can't read every article from every source that comments on a company you're researching. In your journey to becoming an informed stock investor, you'll almost inevitably feel overwhelmed from time to time by the vast amounts of information available. Fortunately, you don't need to read it all to be successful. In fact, some information may actually harm your performance by taking your focus away from what's truly important. That's why we've highlighted the key pieces of information you will need to make an informed decision.

Here's a quick step-by-step guide to becoming informed about a company:

1.Obtain the firm's 10-K and really try to give it a thoughtful read.Don't feel bad if you spend a lot of time on this step. (Give it a coupleof days to digest.)
2.Read through the 10-Qs when they are released each quarter. These areusually much shorter than the 10-K and shouldn't require more than anhour or two of your time.
3.Set up a watch list to organize the steady flow of news on all thecompanies that interest you.
4.Poke around on the company's Web site. This takes less than a half hour.
5.When time allows, visit relevant industry Web sites and catch up onsome of the industry trends.

The Bottom Line

If you follow these steps, you'll be able to form a foundation of understanding about a company in about a week. Over time, you can build on your foundation and gain a much deeper understanding. Further, you'll be able to weed out the news that just isn't worth your time. All told, if you stay the course, you could be surprised how your knowledge will grow by applying this simple process.

Quiz 106
There is only one correct answer to each question.

1 What is the must-read public filing that provides a comprehensive overview of a company and is published annually?
a. 10-Q.
b. Form 4.
c. 10-K.
2 Which public filing provides investors with a quarterly update?
a. 10-Q.
b. Form 4.
c. 10-K.
3 If you want to find out if the CEO is selling his or her stock or buying more, you should search which public filings?
a. 10-Q.
b. Form 4.
c. 10-K.
4 Which one of the following sources contains financial information audited by an independent accounting firm?
a. 10-Q.
b. 10-K.
c. Press release.
5 Which of the following sources is written from a point of view other than the company itself?
a. Press release.
b. 10-Q.
c. Analyst research report.
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