How to perform stock market due diligence before you invest IV

The term due diligence is used in a lot of different aspects. When it comes to stocks, it relates to deep research and study to make sure that you have all the facts and details needed to make a comprehensive decision.

This article along with those previous ones (How to perform stock market due diligence before you invest III) is a quick snapshot of how to do your due diligence when looking to invest in stocks, and we hope that it could help you just a little.

Here are the next two steps you should take on your first view of new stock.

Continuing with the due diligence checklist, you should make a point to research short-term and long-term prices. Look at the movements of the stock over a few quarters at least. Also, knowing how many shares are available is a good idea when completing your due diligence.

Step 7: Stock Price History

At this point, you'll want to nail down just how long all classes of shares have been trading, as well as both the short-term and long-term price movements mentioned above. Has the stock price been choppy and volatile, or smooth and steady?

This outlines what kind of profit experience the average owner of the stock has seen, which can influence future stock movement. Stocks that are continuously volatile tend to have short-term shareholders (Momentum traders), which can add extra risk factors to certain investors.

Step 8: Stock Options and Dilution

Next, you'll need to dig into the 10-Q and 10-K reports. Quarterly SEC filings are required to show all outstanding stock options as well as the conversion expectations given a range of future stock prices.

1. SEC Form 10-Q is a comprehensive report of financial performance submitted quarterly by all public companies to the Securities and Exchange Commission.

2. A 10-K is a comprehensive report filed annually by a publicly traded company about its financial performance and is required by the SEC. Use this to help understand how the share count could change under different price scenarios. While stock options are potentially a powerful motivator for retaining employees, watch out for shady practices like re-issuing of "underwater" options or any formal investigations that have been made into illegal practices like options backdating.

Options backdating is a practice whereby a firm issuing stock options to employees uses an earlier date than the actual issue date to fix a lower exercise price, making the options more valuable.

Moving forward you also need to consider the other factors when performing due diligence on stock, including expectations and risks which we will cover in the next chapter of the topic, for more details stay tuned.