Should every investor do what is termed due diligence? And what the heck is due diligence? And how much is enough?
“The price is going up on my stock and if I don’t get in now at the lower level I’ll miss out on a great opportunity.” How often have you heard that or maybe more to the point how often have you said, “well I really don’t have the time to investigate that deeply and all the guys in the chat room are convinced that the stock is ready to take off. And they seem to know what they are talking about.” If that was you don’t be too alarmed because I think that everyone who has purchased stock has used that same pre-ipo due diligence hong kong internal rationalization at one time or another when it comes to going along with the investing crowd.
Of course, you don’t know who really just promotes but not buys in the chat room and may also receive a fee for hustling the other chat room members. Don’t be surprised at that revelation because many promoters/hustlers earn a good living by hanging out at chat rooms and forums. Occasionally a sharp-eyed member suddenly realizes what member xz is doing and he/she gets banned from the chat room but more often then not he/she can continue to hang around and influence the members in a more subtle fashion.
So this gets me to due diligence and what it means to the beginning investor. I know that investing can become tremendously exciting and all consuming as you pit what skills you have against the market makers and others who control the stock market. But you can very quickly lose what assets you have if you don’t do at least some due diligence.
Due diligence starts with inquiring whether the company you are interested in has registered its securities. You can check with the SEC (a great place to check for EDGARS and other information.) Once you know that the company has registered with the SEC you should also know that the company is required to maintain a reporting schedule. Also checking the EDGARS will provide real time information including name and addresses of officers, filings of material change, quarterly and annual financial statements and others. Although this is not an exhaustive review of materials that you can elicit from the SEC website it does show that prudent information is readily available to you for your due diligence.
After checking SEC filings you should then review as best you can the financial statements that also include purchases and sales by insiders. Since company officers are required to report sales of stock as well as purchases, that can become a very interesting document and also ring a warning bell as well. You might also check to see that the quarterly and annual statements are certified by an auditor or accounting firm.
Check for red flags such as trading suspensions, also check for any other violations of the regulatory acts from the SEC as well. I would think twice before dealing with any company that has trading suspensions in its EDGAR base.
I would also be concerned if you find the financials to be questionable. You don’t have to be an accountant to notice that the company has a very large amount of debt, that revenues have declined over the past 5 years say as expense have increased. There certainly could be good explanations for that but the important thing is that you inquire to your satisfaction.