Recently, we were asked: "A friend of mine is trying to sell me on some stock in a small company I never heard of before. Is there any way I can get more information on it?"
First off, this is an excellent response. Too many people simply buy shares when presented with a "hot" stock tip. That's not too smart. But researching a stock is.
Call the company and ask for an investor's package, which should supply a lot of information in the form of an annual report, press releases, and other reports. You can also look up these documents online at the company's website or at the Fool's Quotes & Data area. Try searching for the company's website via a search engine such as Google. If you can't get much, or any, information about the company, that's a very bad sign.
Once you get your hands on the company's financial statements, scrutinize them. Check to see how much the company is generating in sales and net income (earnings). See how quickly these and other items are growing (or not growing). See how much debt the company is carrying. Find out what its prospects are. Make sure it's not a penny stock (trading for less than $5 per share) -- if it is, consider just walking away, since penny stocks tend to be volatile, unimpressive performers that are easily manipulated by fraudsters. Don't rely on rumors of upcoming breakthroughs or promises of profits -- look for a solid track record.
You can also check on whether there have been any complaints lodged against the company (or any security) by contacting the North American Securities Administrators Association.
If you'd like to discover more stocks with great potential, check out our suite of investment newsletters (which are offered along with some free research reports). Their performance may surprise you.
You can also learn all about brokerages and find one that's right for you in our Broker Center. (Did you know that some well-regarded brokerages are offering commissions as low as $5?)
