When it comes to investing in the stock market, it’s important for investors to know that doing investing on their own is no simple task. While the implied logic seems simple to buy low and sell high, there is a lot of research that goes into making sure that you are buying the right companies at the right price points. Any slip up in research or a companies performance can bring share prices down significantly and cause massive losses in your portfolio.
While there is a lot of information out there on companies, ultimately a lot of it can be useless noise, and sometimes investors overlook important data points. Therefore, it is important they know what these important data points are so that they can optimize their buying and selling opportunities to make the most money. So here are three key things investors need to watch for when investing in a company.
Employee Stock Trades
You might want to track employee stock trades. It may not be a fundamental characteristic to watch for when investing in a company, but it is one of the secret hidden indicators of price movement for a stock. Employee stock trades also known as insider trades, are often looked at as a sneak preview of something the company is prepared to release, or a sign that a stock price is either too expensive or cheap.
There are obviously certain rules about insiders buying and selling stocks to move prices. For starters, any board member or management that owns large portions of shares are usually required to disclose to the SEC before they make a purchase or sell shares, especially if it is going to be large transactions. Since the market price is a function of supply and demand, it is expected that when they put orders in for stocks, that their transactions will significantly move the price during trading hours, which will impact people’s investment decisions.
Insiders will buy and sell stocks mainly because they feel the current price is too cheap or expensive based on their valuation of the company, they know some news is brewing that other investors will likely react to, or they just simply want to expand their position, either way, they must disclose to the SEC this plan, and as an investor, you will want to track that.
Quarterly Earnings Reports
It is very likely when doing initial research on a company that you may have looked at companies’ SEC filings of its balance sheet, income statement, and cash flow. While it’s a great basis for starting a position, it is even more critical to assess them each quarter to ensure that you either want to still be invested or if you want to change the amount you are invested in such a company.
When you bought a stock, it is likely that you bought it at what is referred to as a price to earnings multiple, which signifies how expensive a stock is compared to the anticipated earnings per share it to receive. A stock with high multiple means that it has many assumptions built into its price and therefore it is critical to ensure those assumptions are being met so that it continues to trade on that multiple. Therefore, it’s important to monitor these numbers that come out once a quarter to see that on paper, it is meeting its performance obligations that investors bought into.
More important than quarterly earnings reports are shareholder meetings that companies are required to offer to their shareholders. At these meetings, the CEO and board discuss the companies operations over the past quarter or year and typically discuss what they expect moving forward. They may also discuss any change in management.
Many CEOs will provide what is referred to as guidance, which is either a qualitative or quantitative forecast of where the company expects to be either on a short-term or long-term basis. For example, if a company had disappointing earnings reports, they may use the meeting to discuss why they missed on numbers and whether it’s impacting their future goals and price targets. It’s important to know what other major investors’ thesis is for a company, because many may decide to sell out of their position if they feel the company has fallen short of expectations.