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{Listen to the audio of this section and be sure to review your extra credit and workbook action items at the bottom of this page}

Before you put your hard earned money into any investment, you need to do your research. Essentially, you need to understand what you are investing in and determine whether the investment you are considering has the potential for growth. 

P.S. I'm using the Coca-Cola company (KO) stock and Vanguard's Total Stock Market ETF (VTI) as visual examples in this section, so listen to the audio but read through this section as well - Take your time to understand and be sure to ask any questions you have in the Facebook group.


Researching your stock market investment

When it comes to research there are some key things you need to look at and they are:
 

1. Past successes and failures

For stocks and bonds

If a company is publicly traded then the history of how they have performed is also publicly available including their balance sheets (their debts and their assets), their profits and losses as well as their cash flow history. Some factors to consider when doing your research would include:

  • If the company owes more than its owns
  • If the company is reporting strong profits, or perhaps it’s reporting losses (and why) and
  • Whether their earning more money from their sales and operations, as opposed to having money coming in mostly due to borrowing (debt) activities.
     

- Example:

  • See Coca-Cola's assets and liabilities on their balance sheet here.
  • See Coca-Cola's revenues and operating expenses here.
  • See Coca-Cola's cash flow report here.

 

Coca-Cola (KO) Profile,  March 2018 - Yahoo Finance

 Coca-Cola (KO) Profile,  March 2018 - Yahoo Finance

Coca-Cola (KO) Profile,  March 2018 - Yahoo Finance

Click the image to visit today's version of the chart for more detail.

 

Coca-Cola (KO) Performance Overview,  March 2018 - Morning Star

 Coca-Cola (KO) Performance History  March 2018 - MorningStar

Coca-Cola (KO) Performance History  March 2018 - MorningStar

Click the image to visit today's version of the chart for more detail.

 

For funds

 A similar research path is applied to funds (mutual funds, index funds, ETFs etc) and there are some key factors you want to consider. Because funds are aggregations of hundreds or even thousands of different companies and other investment types, you want to look at the fund itself overall. Specifically:

 

  • How the fund performed as a whole in the past and their long-term track record
  • How the fund is ranked within it’s category
  • How much the funds expenses are
     

Vanguard Total Stock Market ETF (VTI) Profile, March 2018 - Yahoo Finance

 Vanguard Total Stock Market ETF (VTI) Profile, March 2018 - Yahoo Finance

Vanguard Total Stock Market ETF (VTI) Profile, March 2018 - Yahoo Finance

Click the image to visit today's version of the chart for more detail.

 

Vanguard Total Stock Market ETF (VTI) Performance Overview, March 2018 - Yahoo Finance

 Vanguard Total Stock Market ETF (VTI) Performance Overview, March 2018 - Yahoo Finance

Vanguard Total Stock Market ETF (VTI) Performance Overview, March 2018 - Yahoo Finance

Click the image to visit today's version of the chart for more detail.


2. Future projections of performance

A great place to get a sense for the future projections of your investments are in their annual reports and these are usually available on the company or funds website.

- Example:

  • Check out the recent annual reports from Coca-Cola here 
  • Check out the recent annual reports from Vanguard's Total Stock Market ETF fund here


Some key things to look out for when reviewing an annual report are:

  • What their plans for growth are e.g. new products, expanding to new markets, acquisitions
  • How their plans will make them profitable

This website from the U.S securities and exchange commission, allows you to access the annual report filings for pretty much any company that is publicly available (which applies to publicly traded companies).


3. Trends in performance

Looking at trends is all about looking at how the stock or fund has performed year over year and essentially, you want to make sure the investment is performing well consistently on average while considering historical economic climates. For example, the 2008 stock market crash had a hard impact on almost all investments but some faired better than others.


The images below show the historical performance of Coca-Cola (KO) and the Vanguard 's Total Stock Market ETF (VTI):

 Coca-Cola (KO) Historical Chart, March 2018 - Yahoo Finance

Coca-Cola (KO) Historical Chart, March 2018 - Yahoo Finance

The above image presents a high level snapshot of Coca-Cola's stock since it's been a publicly traded company in 1963 (Their stock symbol a.k.a stock market identifier is KO). The dips represent market declines including the 2008 recession. A single Coca-Cola stock was ~$0.45 in 1963, in March 2018 it was worth ~$43. Click the image to visit today's version of the chart for more detail.

 

 Vanguard Total Stock Market ETF (VTI) Historical Chart, March 2018 - Yahoo Finance

Vanguard Total Stock Market ETF (VTI) Historical Chart, March 2018 - Yahoo Finance

The above image presents a high level snapshot of the Vanguard Total Stock Market ETF since it's been publicly traded company starting in 2001 (Their stock symbol is VTI). Click the image to visit the actual chart. The dips represent market declines including the 2008 recession. A single stock of VTI was ~$51 in 2001, in March 2018 it was worth ~$141. Click the image to visit today's version of the chart for more detail.


4.  Expenses and fees

Before you invest, it’s important to understand what fees are associated with the investment because fees can eat into the overall return of your investment especially if the fees are based on a percentage of your investment. For example, if your portfolio reported a 10% performance return in the last year but you paid 1% in fees, then those fees and expenses would take away 10% of your total earnings and profit.

Some common fees include:

  • Brokerage account fees: For example, annual fees to maintain your account and subscriptions for premium account features.
  • Trade commissions: Charged when you buy or sell certain investments like stocks or bonds.
  • Mutual fund transaction fees: When you buy and/or sell some mutual funds.
  • Expense ratios: Annual fees charged by all fund types (not applicable to stocks), which is a percentage of your investment in the fund. Index funds and ETFs usually have the lowest fees.
  • Sales loads: A sales charge or commission on some mutual funds, paid to the broker or salesperson who sold the fund.
  • Management or advisory fees: A percentage of your investment that is paid to a financial advisor or robo-advisor.
  • 401(k), 403 (b) and 459 (b) fees: Administrative fees to maintain your retirment accounts, often passed on to the plan participants by the employer.

5. Other considerations

A few other things to consider looking at when you do your research would include:

  • Track records: Looking at the track record of a company’s CEO or the track record of the person in charge of managing each fund you are interested in
  • Media mentions: What’s being mentioned in the news when it comes to the company, fund or bond you are interested in investing in.

Start practicing with simulation accounts

While you are getting comfortable learning about how investing in the stock market works and how to do research, starting a practice account that you can use to invest real time in simulations of the stock market using dummy money is a great (and fun) ideas.

Some great practice / simulation platforms include:

For research resources, stop by the resource page.


Extra credit!

Below are some terms and definitions to keep an eye out for as you do your research (Definitions from Vanguard):

 
 A  snapshot summary of Coca-Cola's stock (KO),  March 2018 - Yahoo Finance.

A  snapshot summary of Coca-Cola's stock (KO),  March 2018 - Yahoo Finance.

Click the image to visit today's version of the chart for more detail.


 A  snapshot summary of the Vanguard Total Stock Market ETF (VTI), March 2018 - Yahoo Finance

A  snapshot summary of the Vanguard Total Stock Market ETF (VTI), March 2018 - Yahoo Finance

Click the image to visit today's version of the chart for more detail.

 

 

Using the above snapshots of the Coca-Cola's stock (KO) and the Vanguard Total Stock Market ETF (VTI), take a look at the terms and definitions below and then match them to the numbers in the image above.
 

- Earnings per share (EPS)

The is basically a company’s profit divided the number of share available for trading. Basically it tells you how profitable each share of a company is and is one way to track growth over time.
 

- Price/earnings ratio (PE Ratio)

This divides the stock's share price by the amount of earnings it's distributed in the last 12 months (per share). A high price/earnings ratio indicates that investors are expecting more growth in the future. Because different industries have different prospects for growth, this indicator is mainly useful when comparing companies within the same industry.
 

- Price/book ratio

This divides a stock's share price by the total value of all the company's assets minus its liabilities (per share). If the price/book ratio is low, the shares may be undervalued.
 

- 52-week high/low

This represents the highest and lowest prices at which the stock has traded in the past year. A stock that nears or passes its previous high or low could see additional trading volume and volatility.
 

- Dividend yield

This divides the value of dividends paid in the past year (per share) by the stock's current share value. This can indicate how much of a company's cash flow is being passed through to investors.
 

- Beta

This measures how volatile the stock is compared with the overall market.

 

The more you know, the more informed decisions you can make about your investments.


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Take a stab at doing your own independent research in your workbook (located in the investing main menu) using the following pages: 

  • Stock & Fund Research