Step 8: Get Financial Information

Selecting stocks on your own, without the safety net of an index fund, can be scary, fun, and immensely rewarding. You'll need to learn what kinds of companies to look for, then evaluate them to ensure they're worthy of your trust.

If the thought of finding and researching companies on your own is stressing you out, consider some of our stock research services. Our analysts' investment ideas can give you excellent starting points for your own further investigations. But if you're ready to try it all on your own, here's how to get started.

Gather information
Even if you've discovered a seemingly promising company, don't just run out and buy shares of its stock. You should first familiarize yourself with the company's financial information.

To start, call the company you're interested in, ask for the "investor relations" department, and request an "investor information packet." A full packet, available absolutely free, typically contains all of the following essential documents:

• The annual report (most recent)
• The 10-K (most recent)
• The 10-Q (most recent)
• Press releases (all recent ones)
• Analysts' reports (any available up-to-date ones)

Don’t want to wait for the mailman? The Internet is your friend. You can access all recent SEC filings, including company 10-K's and 10-Q's, without ever leaving your keyboard. The investor relations portions of many companies' websites will also offer downloadable copies of the documents above. And on Fool.com or any other financial portal site, a company's ticker symbol is all you need to acquire its news, financial snapshots, and estimates of future earnings. (If you're not sure what some of that stuff is, just keep reading.)

Financial statements
With information in hand, you'll want to first take a quick read through every key document. You want to gain a sense of the company's mission, its products, its attitude, and its prospects.

Every company issues three main financial statements:

• The income statement (or statement of operations)
• The balance sheet
• The statement of cash flows

The easiest of the three to understand is the income statement, which shows how much money the company made over the last year, and what proportion of those funds comprised profits. Next up is the balance sheet, revealing how much cash, inventories, and debt the company has. The third and most complex piece is the statement of cash flows, revealing how much money the company is really making as it works through operations, makes investments, and borrows money.

A company's financial statements can tell you how quickly sales are growing, how the company is financing its growth, whether it has taken on too much debt, how efficiently it's collecting the money owed by its customers, how much profit it's making on its products and services, and all kinds of fascinating information. You should also look for improving or worsening trends in the firm's financial health, and compare the company's numbers against its industry peers.

These financial statements will also appear in the 10-Q and 10-K reports. The 10-K is issued once a year, along with the annual report, while 10-Qs are issued three times a year, at the end of the intervening quarters.

The 10-Q summarizes the company's quarterly performance. The 10-K is dedicated to a company's financials, not its story. It thus includes information you simply won't find in most annual reports, including insider stock holdings and brief biographies of the management team. Fools may particularly enjoy the latter -- it's fun to read about how the company chairman filed for personal bankruptcy in 1989, or graduated from our own alma mater.

Press releases are an even more frequent source of information on your company; hands-on investors should keep close tabs on them. More casual investors can safely ignore press releases in favor of the quarterly reports -- but remember, this approach works much better with safer, bigger companies. For volatile small-cap growth stocks that move radically based on every new piece of information, you'll want to keep current on the very latest news. Just remember that companies' press releases tend to put a favorable spin on the latest developments, however bad the news may actually be.

Analyst reports
Most companies have been examined and analyzed by one or more financial analysts. These professionals, most often employed by brokerage houses, write reports that include their personal opinion of the stock, estimates of future earnings, and other prognostications. These reports might be included in the packet the company sent you, or available on the company's Web site. (If not, ask the company to provide you with analyst names and contact information, so that you can request your own copies.)

We at The Motley Fool love getting our hands on these reports, since analysts know a fair amount about how to evaluate a particular company's growth prospects. While we don't accept every assertion analysts make, we think that confronting their opinions is crucial to understanding the companies we hold.

But while we appreciate the substance of these reports, we're rarely fond of their surface. We advise you not to pay attention to the analysts' ratings on securities -- "Strong Buy," "Buy," "Accumulate," "Attractive," "Speculative Hold," whatever. See, the same firms making these judgments also made a lot of money by financing the same companies they're now analyzing. That's what we Fools like to call a huge, blatant conflict of interest. Curiously enough, the first buy recommendation issued for a newly public company nearly always comes from the exact same firm or firms that underwrote its IPO. Strange, huh?

More importantly, any analyst who ever slapped an outright "Sell" recommendation on a stock would probably lose that company's business forever. Thus, you'll almost never see such a recommendation from Wall Street. 

Honestly, it's not analysts' job to warn you away from troubled companies. They want you to trade in and out of stocks, paying commission fees all the while, rather than patiently holding great companies to amass long-term wealth.

Beware misinformation
We should also warn you about the notorious "hot tip," a sneaky beast with many different guises. It can pass itself off as "investment information," "a can't-miss opportunity," or "the chance to invest in a revolutionary company." It can appear on the Internet, in print, on the phone, or even at a party. Whenever you encounter this wily critter, protect yourself: Do your own research, and draw your own conclusions. Jumping into a stock based solely on rumors and hype can cost you dearly.

Now that you've gathered the information you need, it's time to talk about what to do with it.

To see the rest of the 13 Steps, follow the links at the bottom of this article.