Due diligence is researching enough information about the stock to decide whether you want to buy partial ownership of the company. The exact type of research you should do would depend on what type of investor you are. The two general types would be those that buy on technical indicators and those that buy based on the fundamentals. However, it’s advisable to investigate all factors regardless of your investment style.
The first thing to do is to read the most recent annual report. This document is filed by public companies, and is found on the company websites or on the SEC website. You also want to to read the quarterly earnings reports, as well as listen to the conference calls. These reports will give you balance sheet and operating income, as well as evaluations by management of how they viewed business in the most recent time period. Often times management will also give you a forecast for the upcoming quarter or year.
It’s also a good idea to review analyst reports. Most public companies are followed by major research companies, who put out ratings on them. The most common ratings given would be a “buy”, “hold”, or “sell”, indicating what the research company believes you should do with the stock. Sometimes different terms are used, such as “overweight” or “underweight”, but these indicate the same thing as “buy” and “sell.” Often, these reports also give detailed views on how the analyst views business prospects.
Next you want to sift through all the recent news articles, to see if anything important is going on. Most financial websites, like yahoo finance, will give you a list of news articles if you type the ticker symbol in. On the website, you will then be able to look at the chart and research technical paramters, like how the current price compares to the 50 day moving average. Also, you can look various indicators like % of shares short or the return on equity.
Always remember that the research doesn’t end once you’ve found that stock you are going to invest in. Prudent investing requires persistent vigilence. Especially in today’s fast paced business climate, it’s vitally important to stay abreast of all the new developments that affect your money. No one is going to care as much about your investments as you will.