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Chapter 6 - Anatomy of a Stock (Sneak Peak...)

What makes a particular stock better or more attractive than another? How can you tell if a stock is a worthwhile buy? What is its current price telling you? Is it under-priced or over-priced? These are the types of questions we will explore in this chapter. In previous chapters we examined factors that make a stock (and its price) move up or down, factors such as the nature of the company itself, the demand for its products and services, the state of the economy, and the number and quality of competing firms all come into play. In addition, we saw that large institutional investors such as banks and pension fund companies often buy and sell huge quantities of shares which usually has a significant impact on the price of a company’s stock. Furthermore, the type of stock itself (i.e., a Growth, Value, Penny Stock, etc.) also has an influence on price. Finally, company-related news can single-handedly move a stock’s price in either direction. Choosing a stock based on these factors alone is insufficient. Any good investor needs to dig a little deeper in order to see what lies beneath the surface. Think of a stock like an iceberg. Many investors pick stocks based on the information that is immediately apparent – the 10% that is visible above the surface. Savvy investors, on the other hand, scrutinize the 90% that lies beneath the surface. In this chapter, I will tell you how to do just that. Moreover, you will learn how to use a few tools of choice to pick winning stocks. Our first tool, the Annual Report, will help you gain more insight into a particular company and the nature of its operations. Then we will cover Financial Statements and Ratios to understand what information the actual numbers (i.e., Sales, Expenses, Profits, etc.) give about the company. Looking at numbers is essential, because numbers don’t lie. They tell the true story. And numbers are not subjective in nature like other kinds of company information. Using simple financial ratios will also help us gauge the performance and financial well-being of a company. Many investment and financial experts use what is called Fundamental and Technical Analysis to analyze stocks; I will only briefly describe what these are as they are rather complex in nature and well beyond the scope of this book. Nevertheless, it is important that you have an idea of what fundamental and technical analyses are. There are many books written on the subject.

For now, let’s begin with an overview of fundamental and technical analysis, and then we will look at the Annual Report as well as Financial Statements and Ratios...//

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