This post is part of The One Hour Project, in which you can spend just one hour to put your finances in a better place without a big lifestyle change, through frugality or other financial choices.
Regardless of whether or not you include individual stocks as part of your investment plan, having a general idea of how a stock works can be an incredibly valuable piece of knowledge to have. Even for those who only invest via a retirement plan, that retirement plan is usually just a collection of stocks, so knowing how stocks work can help teach you how your retirement plan works – and it might give you insights on how to invest your money more effectively.
What can be gained from this?
First, you’ll get in touch with your risk tolerance. Most stocks, over the course of a small period like this, stagger up and down a little, and possibly see a big lurch. If you imagine that you have some significant money in the stock, the sight of it going up and down day after day will probably tell you whether you can stomach this particular roller coaster or whether you should be investing more conservatively.
It will also likely show you how different news reports affected the stock you were looking at and thus how news reports affect stocks. The Federal Reserve cuts interest rates and your stock goes up. The company exceeded earnings expectations by a cent and the stock goes up. A competitor brings out an amazing new model and the stock goes down.
You’ll also learn what a lot of basic stock investing terminology means. This will help you to understand a lot of financial news and also help you to understand your own investment choices.
If you’re already into individual stock investing, your research will probably tell you whether you would buy into this company or not. This research will at least somewhat indicate whether the company is in line with what your investing philosophy is and whether you believe you can make some money from the stock.
Here’s what you do.
Identify a company you’re interested in. I often identify companies based on the quality of their customer service – if I have a great customer service interaction with a company, my impression of that company goes way up and I’m much more likely to want to do business with them in the future. Of course, the reverse is true – atrocious customer service drives me away.
Just select a company that you’re somewhat familiar with as a customer, either directly or indirectly. For this example, I’ll talk about Herman Miller (MLHR), a company that produces office furniture, including the exquisite Aeron chair.
Investigate the company. Find out how their business is doing. I usually start at the Yahoo! Finance page for a particular stock, so here’s that page for Herman Miller. I usually also check Google’s info on the stock.
Here are a few big things to look for:
Recent news developments and how they affected the stock This is easy to find on the Google page for the stock. What sorts of recent events had an effect on the stock price? Their graph of the recent stock history identifies recent news reports and points to when that event occurred, so you can see what affected it.
How the competitors are doing Look at the company compared to the competition, which can be found on the Yahoo! page. Compare their earnings per share (EPS, how much money the company is making per each share of stock out there) and their P/E ratio (price/earnings, which means how valuable the stock of the company is compared to how much money the company is actually making). You might want to actually peek at each competitor in more detail.
What the company’s insiders are doing Take a look and see what the people involved with the company directly are doing. Are they selling a lot of stocks without anyone buying any? That’s a bad sign. A lot of buying is often a good sign. Don’t be scared away by a little bit of selling – they might be selling the stock to build a home or something – only be worried if several different people are selling stock.
Obviously, this is just a start. Take your time and don’t get lost here – if you don’t know what any word or term means, stop and use Wikipedia to look it up. Use this investigation of a company you’re interested in to find out what a P/E ratio really means and why it’s important, for starters.
Once you’ve invested some time in this, put it on the back burner for a month. Check in on the company news about once a week and see if there’s been any big change, but let it slide for several weeks.
Then, when you have a bit of time, go back and trawl through all of the information again. Has your feeling on the company changed? Do you think it’s doing good business or bad business? Generally, if you can’t see any big problems, it’s doing just fine. It also doesn’t matter whether you’re an expert – the best analysts on Wall Street have at least as much trouble with these questions as you have.
The purpose here is to learn a bit about how stock investing works so that when you have to make a choice about investing, you’re not completely out in the blue. Plus, you might learn a thing or two about your favorite company – a friend of mine got really into this exercise and found out all sorts of interesting – and a few disheartening – things about the large corporation he works for and the soundness of their business. It started off as a learning exercise; it ended with him restructuring his 401(k) plan.