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        Fundamental Analysis

        Views 8872023.04.21

        How to perform stock market due diligence before you invest

        Whether it's $Tesla(TSLA.US)$, $Bed Bath & Beyond Inc(BBBY.US)$, $AMC Entertainment(AMC.US)$$AMC Entertainment(AMC.US)$ , Bitcoin, or even Dogecoin, it seems like money flow could be minted every day in any way. There are countless stories about investors buying into meme stocks or cryptocurrencies and score a huge profit off them, yet the truth is most people end up losing their money while trying. 

        There's always a better way of building wealth, if you are willing to put in the effort to do some due diligence, riches can be made. So what exactly is stock market due diligence? Simply put, it's a closer look at the finances of any public company you are considering investing in. Here are few steps and general tips to get you started. (In this article we will cover the frist two) 

        Step 1: Company Capitalization

        The first step to perform a stock market due diligence is to form a mental picture or diagram of the company you are considering investing in. A market capitalization that refers to the total value of all a company's shares of stock could show you just how big the company is. 

        The market capitalization says a lot about how volatile the stock is likely to be, how broad the ownership might be, and the potential size of the company's end markets. Larg-cap companies tend to have more stable revenue streams and financial valuation framework hence it provides less volatility. Meanwhile, small-cap companies may only serve single areas of the market and may have different perspectives on the company's valuation that could cause more fluctuations in their stock performance. 

        At this step, you start with accumulating information that will set the stage for everything to come while not making any judgments regarding the stock performance. The vital fact on the first check would be what stock exchange do the shares trade on? Are they based in the United States? or, are they American depositary receipts(ADRs) with another listing on a foreign exchange? ADRs will typically have the letters "ADR" written somewhere in the reported title of the share listing. Then it comes with " How to calculate the market cap of the stock? " 
        This information along with market cap should help answer basic questions and set the stage for everything to come. 

        Step 2: Revenue, Margin Trends

        Fundamental analysis considers everything from knowing how the company makes money and looking to the financial numbers related to the company you are researching, it may be best to start with the revenue, profit, and margin trends. 

        Look up the revenue and net income trends for the past two years at a financial news site that allows you to easily search for detailed company information using the ticker symbol. These sites provide historical charts showing a company's price fluctuations over time, plus they will give you the P/S ratio and P/E ratio. Look at the recent trends in both sets of figures, noting whether growth is choppy or consistent. You should also review profit margins to see if they are generally rising, falling, or remaining the same. This information will come into play more during the next step. 

        Due diligence is an investigation of a potential investment to confirm all facts and to ensure the purchase will meet our needs. Moving forward you also need to consider a variety of factors when performing due diligence on stock, including valuations, competitors, management, and risks which we will cover in the next chapter of the topic, for more details stay tuned. 

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