Understanding a company

[brettc4]

A number of books I have read and tips from traders say you should only invest in a company if you understand it and how it makes money. This is one of the reasons Warren Buffet didn't invest in Tech stocks as he didn't understand how they made money.

For some industries this is a little easier, but for others, the industry is foreign to a large number of investors and so to are some of the idiosyncracies that can really affect an organisation.

For example, some people may not understand or easily see the link between the direction of the overall markets and those companies that generate revenue from managed funds or superannuation especially if that company, such as AMP is also involved in a large number of other activities, but can easily see how it would affect Listed investment companies such as ARGO.

For the particular companies you are interested in, how did you learn what you needed to know to understand the company, how it makes money and what factors, both internal and external have an infact on it's share price?

Cheers,

 

[cuttlefish]

imo its definitely important to understand a company and the industry sector it operates in and how it stacks up to its peers in terms of outlook and value.

I'm sure that at some stage the thread will get overtaken by chartists that will say you don't need to know a thing about the company to trade it but until that time you might get some answers to your questions.

I find that one of the best ways to get a good feel for a company is to read their last annual report thoroughly. Annual reports for all companies can be found by searching historical announcements on the ASX web site (or via the announcements area that your broking platform provides). A browse through their recent announcements for any additional useful info is also worthwhile.

Make sure you understand the companies capital structure - issued capital, classes of instruments on issue (shares, notes, options etc.), debt levels etc. when making value comparisons between companies. But also remember qualitative factors are also important in addition to the raw figures.

 

[tadpole]

when looking at announcements why is it that even a good one by a company can still send the stock price down?

eg. fmg - ore being loaded onto ship

soi - another contract worth 4.5m each year over the next 4 years

aqd - directors wife bought 857,545 shares in company

to me i would have thought these types of announcements would increase the stock price rather than decrease (which in all 3 was the case)

am i missing something here?

 

[Trembling Hand]

when looking at announcements why is it that even a good one by a company can still send the stock price down?

to me i would have thought these types of announcements would increase the stock price rather than decrease (which in all 3 was the case)

am i missing something here?

The people to buy after news are the ones that haven't done their research to know that the news was coming. And they are exactly the people that the smart money, who have done all the work, look to sell into. Because once the lazy want in its closer to the end than the start. simple really