Stocks — Doing Your Homework

Radio Transcript, 2 minutes 20 seconds, for use during week of Oct. 8.

Description: Penny and Ira discuss researching stocks to make wise investment decisions.

Ira: We’ve talked about different categories of stocks, like growth, income and speculative stocks.  And the different risks associated with different categories.

Penny: That’s right.

Ira: My question today is--once I’ve set my goals and decided to invest some money in the stock market, how do I make the best decision I can about which stocks to buy?

Penny: You’ll first need to invest considerable time studying specific companies.  You should pick your stocks based on the underlying value of the company rather than on speculation.

Ira: So I need to look at the finances of the company, not just the price of the stock?

Penny: Yes.  You’ll want to learn more before you invest.  Good stocks tend to stay good so you can take your  time and do your research and learn what you need to know to make the best decision.

Ira: What kinds of things should I look for?  How do I get started?

Penny: Begin with the company’s financial statement.  It may not be exciting but it will contain a wealth of information.

Ira: Are financial statements difficult to get?

Penny: The Securities and Exchange Commission at www.sec.gov provides these at no cost in their EDGAR database.  You can also get annual reports simply by calling the companies you’re interested in.

Ira: Great.  And what should I look for once I’ve gathered my information?

Penny: It’s all in the numbers.  From the financial statements, you’ll have the information you need to calculate financial ratios, such as price-to-earnings, dividend yield, and return on equity.

Ira: It sounds like the more I know, the better.

Penny: Absolutely.  While it can be tempting to buy stocks on a whim or a tip from a friend, it really pays to take the time to gather information, figure the financial ratios, and make a decision that fits your financial goals.  And you have to ask yourself if you are willing to devote the time.  If not, buying individual stocks is not a wise choice.

Ira: Thanks, Penny. 

Penny: You’re welcome.  And remember, for more information visit the ISU Extension website at extension.iastate.edu and look for Invest Wisely.