You probably wouldn’t make a major purchase without first reading product reviews, comparing an item to its competitors or assessing its features, performance, pricing and overall value to meet your needs. A similar approach can be followed before investing. Gathering the information necessary to make an informed decision about an investment is a process commonly known as due diligence.

Most investors purchase stocks, also referred to as equities, in the hopes that the company will become more profitable and that, as a result, the share value and any paid dividends will increase. By performing due diligence, you can better gauge whether a company is more likely to grow.

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Why Due Diligence Is Important

Investigating and confirming the facts about a potential investment is a crucial part of the investing process. When evaluating if a particular investment product is appropriate for you, first determine your investment goals and risk tolerance, and consider when you expect to need access to the funds.

Once you’ve determined your investing preferences and time horizon, you can start the due diligence process of identifying opportunities, risks and vulnerabilities to assess whether an investment might be right for you.

Finding Out the Basics About U.S. Stocks

Taking a clear look inside a company is the first step in performing due diligence and should include reviewing information from several sources, which might include:

• FINRA and SEC Resources: FINRA’s Market Data Center provides detailed market data on exchange-traded and over-the-counter (OTC) equities, options and mutual funds.

  Also, the Securities and Exchange Commission’s (SEC’s) EDGAR database provides free public access to corporate information, allowing you to research financial and operations information that public companies are required to file. In addition to 10-Q and 10-K filings, you can find information about shareholder meetings, executive compensation, beneficial ownership interest, and insider transactions on EDGAR.

• Company Websites: Look for information the company might share about products or services that can generate revenue, the board of directors, management experience and tenure, and how long the company has been in business. These types of details can help you assess a company’s viability and are often included on a company’s public website.

  Most companies also have investor relations webpages that provide links to their annual reports and required SEC filings. These reports include financial statements, management discussion and analysis, and other important details and disclosures.

• Other Financial Resources: Many financial news websites offer a quick view into a company’s financial information, such as their stock price, market capitalization, earnings ratios and dividend history. Understanding performance measures–such as net income, earnings per share and price to earnings ratios–can provide insight into a company’s profits or losses, expenses and how it’s spending money.

  You can also read how professional financial analysts view a stock and how they think it will perform in the near future. The opinion of a public company’s projected earnings based on the combined estimates of all equity analysts who cover the stock is also referred to as a consensus estimate. Such projections can provide a helpful benchmark, but keep in mind that they’re only estimates and opinions.

Here’s a snapshot of what information you can find and where:

Doing a Deeper Dive

After you’ve completed comprehensive research on a stock you’re interested in, the next step is to assess the company’s competitors, as well as others that operate within the same line of business. Understanding the health of an industry, as well as its role in a business cycle, can help you make informed investment decisions. Thoroughly analyzing several companies in the same industry provides insight on not only the company you’re interested in and its competitors but also how the industry as a whole is performing. The Global Industry Classification System (GICS) assigns each publicly traded company a sector, industry group, industry and sub-industry, allowing you to identify and compare a firm and its peers.

Additionally, knowing about key economic indicators can provide you with a broader view of data that might be impacting the stock market at a given point in time and how it might be affected in the future. Beyond providing specific company information, FINRA’s Market Data Center is also a resource for market news and upcoming economic releases.

Performing due diligence for other investment products is important too. For example, bonds have unique features and characteristics that require separate due diligence. Read more about due diligence for bonds.

In addition, before investing, be sure to use FINRA’s BrokerCheck tool to research investment professionals and brokerage firms you’re considering working with. You can also refer to the SEC’s Public Alert: Unregistered Soliciting Entities (PAUSE) site to research intermediaries who might be involved in the solicitation of an investment opportunity without being properly registered. Any entity that solicits U.S. investors to buy or sell stocks or other securities for their own accounts must be registered with the SEC.

Learn more about evaluating stocks and investing.

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