What to Know Before Investing in Stock

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The bottom line for investing in the stock market: do your research. Reputable investing websites and business publications are good places to start, but here are four important documents to read before investing in a company’s stock.

Annual report

An annual report is a publication that public corporations are required to provide to shareholders. They usually provide a narrative, complete with glossy photos and graphics, of the company’s performance during the preceding year, as well as detailed financial and operational information.The annual report is arguably the most important document to examine before you buy stock.

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According to the U.S. Securities and Exchange Commission, annual reports contain an opening letter from the company’s chief executive officer, financial data, market segment information, results of continuing operations, subsidiary activities and new product plans, as well as research and development activities regarding future programs. Some of the most important components for investors include the company’s income statement, balance sheet and cash flow statement.

Jeff Sica, the chief investment officer of the Morristown, N.J.-based Sica Wealth Management, says the corporate balance sheet provides the most detailed overview of two weighty factors when it comes to stock selection: the correlation between assets and liabilities. "It’s imperative to understand [this correlation] to determine the financial strength of a company," he says.

The SEC requires that companies file a 10-K, which usually contains more detail than the annual report. Some companies, like Apple, do not produce the sharp-looking version and opt to send shareholders the 10-K as the annual report. Read all annual reports, especially the showy, flashy versions, with a skeptical eye. Companies understandably want to present themselves in the best possible light, so it is up to you to read between the lines to determine the company’s health.

The annual report and the 10-K are available for free. You can find them on the company’s website in the investor relations section, request your own copy or search for it using the SEC’s Electronic Data Gathering, Analysis, and Retrieval system (EDGAR).

Form 10-Q

In addition to the annual 10-K, public companies have to file quarterly reports called 10-Qs, with the SEC. These filings provide you with a more recent picture of the company’s financial state and include unaudited financial statements.

Form 8-K

Public companies are also required to file a current report, Form 8-K, when something major happens that shareholders should know about. This includes changes in top leadership, the completion of an acquisition, and bankruptcy. The forms provide further information about the events and may include the text of the official press release relating to the occurrence.

Prospectus

The prospectus is a legal document that provides the information a potential investor needs in order to make an informed decision regarding the company’s stock. The preliminary prospectus is the document issued by a new stock's underwriter during the period before the initial public offering of securities. This does not contain a public offering price or any definitive information, but it gives potential investors an overview of the company. The final prospectus provides the important information found in the registration statement, which itself would be cumbersome and complex to read. Investors must be given the prospectus, even if he or she does not intend on reading it.

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