Beginner's Guide to Picking Stocks: Step 2 of 10 – How do they make money?

You can read it here or on my personal blog. Sometime have photos of charts and it is a bit easier to post images there.

Step 2 of 10: What does the business do and how do they make money?

This seems like a such an obvious thing to research before purchasing a stock, however I see a lot of people buy a stock because it “sounds cool” or “I think will it will grow” or even worse “It will keep on going up!”. All of these are sayings are hopes and dreams and cannot be backed by logic. It is very hard to make any consistent returns solely on hope. Just because stock is going up it doesn’t mean it will keep going up and it is true the other way around as well. You have to back up your qualitative reasoning with numbers so you don’t wonder into fantasy land. We will talk about how we can back up your reasoning with data.

When we are buying a share of stock, we should think of it as becoming a part owner of that company instead of owning just a piece of paper because at the end of the day that is what we are really doing. If we own 100% of the shares outstanding we own the entire company.

Let’s take Apple (NYSE: AAPL) for example. They make money by selling iPhones, iPads, Macs, transactions within their AppStore, Apple Watch, and by selling other apple accessories. We can find this in Apple’s annual report or in the finance world they call this the 10-K report.

Sometimes how companies make money isn’t as obvious as Apple so we would have to do some more digging. A lot of people use Apple phones so the business is fairly simple. They design phones, then they have multiple different distributors to sell their products at a profit.

If you are researching a company that you have no idea how they make money, just stop researching and go to a different company. There are thousands of companies to choose from!

It is easier to analyze a company in an industry that you work in. If you work in technology like me, look at public tech companies because you are more likely to know what they do and how they make money right off the bat. I personally have a hard time knowing drug companies because I do not work in that industry.

To learn more on how and what % of their revenue comes from different revenue streams, You should search “Apple investor relations” or “Apple 10-K”. In these reports, companies splits out revenue per sector and a section explaining how the company makes money. There is also a report called 10-Q which are quarterly reports. The SEC requires public companies to release these reports and have a conference call every quarter where investors can ask CEO’s about their company and other questions they may have.

TL;DR

• Don’t buy stocks just based on thoughts.

• Figure out how the company makes money.

• If you can’t figure out what the company do, skip it and move on.

Submitted November 10, 2017 at 03:47PM by stock_market_noob http://ift.tt/2jhA1Ye