Why Graham Stephan Says This Important Form Will Help You Figure Out Where to Invest

Perfect for everyone who thought high school reading assignments were fun!

One of the most important skills you learn to become more successful at investing is research. The more knowledge you can acquire about the companies in which you wish to purchase stock, the more prepared you will be to make decisions about those investments.

But what's the best way to get to know your prospective investments? According to popular finance icon Graham Stephan, it's all about the 10-K. (And no, he's not talking about a marathon!)

"If you really want to know about the company you're investing in," he tweeted, "you need to learn how to read its 10-K."

The 10-K in a nutshell

Alright, so if we're not talking about races, what are we talking about? Essentially, the 10-K is an annually updated document that covers more or less everything you'd want to know about a company before investing.

An average 10-K can be more than 100 pages long. It includes information about the company's:

• History
• Organizational structure
• Financial statements
• Earnings per share
• Subsidiaries
• Executive compensation

The SEC (U.S. Securities and Exchange Commission) requires every listed U.S. company to provide a 10-K so investors -- and potential investors -- can learn about the company and the condition of its finances.

If a company is publicly traded, it will more than likely have some sort of "For Investors" or "Investor Relations" page on its website. This is typically where you'll find the 10-K.

Pro tip: While the 10-K is updated annually, it's not what most investors mean when they refer to the "annual report." Instead, this typically refers to the chairman's letter, which is a much shorter document. Think of the chairman's letter as the Sparknotes, and the 10-K as the full, unabridged book.

How it's organized

All 10-K documents are organized in the same way, which makes it easy to find exactly what you're looking for when you dive into one. Each 10-K has five parts, broken into 15 different "items."

While there is a ton of great information packed into the 100-plus pages, most stock brokers and other investors don't actually read every word. Instead, many experts focus on four key areas:

1. Business: This is the very first section, and it gives you an overview of the company's operations, products, and services. In other words, this section tells you all about how the company makes money.
2. Risk Factors: This is the next section, and it outlines all of the potential risk factors the company is currently -- or soon to be -- facing. They'll be listed in order of importance.
3. Selected Financial Data: Here's where the company provides a basic look at its financial data for the last five years. There's far more detailed data provided later in the document, but this is a great place to get a feel for a company's financial situation.
4. Management's discussion and analysis (MD&A): This part of the 10-K is where the company's management discusses the business's operations over the last fiscal year. It's the company telling its side of the story.

Another interesting area to check out? The section on Executive Compensation. This juicy section is all about the company's compensation policies, including how much was paid to the top company executives.

Invest within your competency

One important thing worth pointing out here is that the best 10-K in the world is only going to do so much if you don't understand what's inside of it. For instance, if you don't understand much about the energy sector, then reading the 10-K for an energy company may not be as enlightening as you hope.

That's why it's important to make sure you stick to what you know -- or what you can learn.

In the words of popular online investing personality, Compounding Quality, "It’s very important to always invest within your circle of competence. If you don’t understand the business model, you can skip the company right away."

Knowledge is power. But wisdom tells you how to wield it.