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Guide to Researching a Stock

Guide to Researching a Stock. It's Very Hard to Beat the Stock Market. Many people use the S&P 500 as a reference in terms of beating the market S&P 500 is a investment fund that tracks 500 U.S companies. Two Main Investment Strategies.

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Guide to Researching a Stock

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  1. Guide to Researching a Stock

  2. It's Very Hard to Beat the Stock Market • Many people use the S&P 500 as a reference in terms of beating the market • S&P 500 is a investment fund that tracks 500 U.S companies

  3. Two Main Investment Strategies • Fundamental Analysis: a method of picking companies based off of their valuation.  Fundamental Analysis studies everything from overall economy and industry conditions to financial condition and management of the company.  • Technical Analysis: evaluation of securities by studying statistics generated by market activity.  Relies heavy on charts and recognizing patterns.  

  4. Steps for Researching Stocks • What drives Revenue? • Who are the company's competitors?  • Management • Financials • Speak with management • Valuation • Pitch

  5. What Drives Revenue? • Revenue is the amount of money a company makes • Your goal is to figure out how the business makes its money • You also want to find out how the management of the company divides up the business • You also want to look for the main driver of revenue • This is usually called the "bread and butter" or the "cash cow" • You want the "cash cow" to have competitive advantage • Competitive advantage is what puts the company in a favorable or superior business position • Examples of competitive advantage are high margins, high barriers of entry, etc.   • Cash Cows are good because it gives the company extra cash to invest into other areas of the business • Example of a business is Alphabet • Its main driver of revenue is the search/advertising business  • Barriers to entry/Competitive Advantage are brand loyalty, high margins, owns 60 to 70% of the search industry • Its other segments are Calico, DeepMind, GV, Capital G, X, Google Fiber, Nest Labs, Jigsaw, Sidewalk Labs, Verily, and Waymo

  6. Competitive Positioning  • Every company lists its competitors in their 10-k statement • Sometimes the list in good and other times the list is not so good • Understanding the what drives the revenue of a company helps you figure out who the real competitors are • During this phase of research you want to answer three questions: • How does the market see your target company? • How do competitors see your target company? • How do customers see your target company? • While answering these questions you want to get a general understanding of how the industry works and where it's going in the future

  7. Management • Management is the administration of a business organization • Understanding the management is very important because they are the people that will execute a plan that will provide you returns on your investment • When you make an investment you want to be confident in the managements ability in executing a plan in a volatile environment • When researching the management you want to understand: structure and incentives and decision making • Structure of the management is who makes up the board of directors (group of induvial that represent shareholder) and make operators of the company and what these people bring to the table • Management's incentive is how the management get compensated and how that relates to the shareholder • Management's decision making is judging how well management has made major choices for the company based on market conditions

  8. Financials • The financials of a company include the balance sheet, income statement, cash flow statement, and statements of shareholders equity • This information is found in reports filed to the Securities Exchange Commission • SEC is basically an organization created by the Congress the oversee the stock market • When a company goes public, the SEC requires the company to publish a 10-k and 10-Q statement • 10-k statement is a yearly report that sums up a the company's performance • Includes information such as company history, organizational structure, equity, holdings, earnings per share, subsidiaries, etc. • 10-Q statement is a quarterly report that contains information regarding quarter that just pasted • This process should reinforce all of the information and conclusions you made in the previous steps

  9. Conclusion Steps for Researching a Company • What drives Revenue?  • Who are the company's competitors?   • Management  • Financials  • Speak with management  • Valuation  • Pitch

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