What Pros Look at That Other Investors Overlook
As all beginners should, it's easy to judge a stock based off of its fundamental statistics. If you are not familiar with fundamental statistics (or the term itself) then please check out this article before hand! But beyond that, investors should look at the details not often in headlines. These seemingly hidden clues reveal a lot about a business, especially when paired with unbreakable statistics.
Insider Trading
We have received a beautiful gift from the SEC, where high level employees, executives, and directors must disclose their trades within their publicly traded company. When people in these positions are buying shares with their own money, it's a sign of strong confidence. While I would certainly never base a trade solely on this information, it is great to look at if you are on the fence. For instance, one of the stocks I was bullish on (which is now up over 11% this past month) had overwhelming amounts being bought by insiders earlier this year.
Free Cash Flow
An earnings report is a great tool to grade a company four times a year. Releasing updates on important company statistics (that you can learn how to read here!). But in the downtime of earnings season, investors are somewhat in the dark of the nitty gritty financials, enter free cash flow. Free cash flow shows how much money is left after expenses and investments. This money is often fuel for dividends, stock buybacks, or reinvested in the company. This compared to the most recent earnings or future earnings can tell a story that even the earnings report can't. For example, if the company pays a high dividend and reports high earnings, but borrows money to pay out their dividends, that is a VERY red flag.
Capital Allocation Decisions
The biggest loss on a single stock I have ever had was due to an oversight on the management of a company. And no, unfortunately there is no statistic that will tell you the average IQ of the people managing a desired business – at least on yahoo finance. However, I have since learned from my hefty loss that looking at how a company spends its profits is a tool that works similarly. Capital allocation and the decisions behind it drive the growth of a company. But, a CEO that is raking in 10% of a company's profit, marketing that doesn't take advantage of a trend, or anything else that makes you question the motive behind the decision should be investigated.
That's all folks! I hope you feel like this has improved your stock knowledge more than what it is already. Remember that there is no magic formula for investing, so find what works for you. If you want to level up your stock market investing potential, consider trying the Pro plan for a week – on the house! Get access to exclusive articles and tools that will exponentially help your investing journey.
*This article is for informational and educational purposes only. It should not be considered financial, investment, or trading advice, nor a recommendation to buy or sell any securities or financial instruments. Past performance is not indicative of future results. Markets are volatile and unpredictable; no indicator is foolproof.