How to Evaluate a Stock: A Starter Course

A 10-K is long, and you only need a few of its sections to start judging a company.

Who the course suits

You’ve bought an index fund or two. The fund did the choosing, spreading your money across hundreds of companies you never had to look at, and now one name keeps coming up in conversation or in the news and you want to know whether the business behind it is any good before you put money into it directly. That’s the reader these lessons are built for. No finance background is assumed. If you know what a ticker is and how to place an order, you have enough.

What to have ready

Get the latest annual report, the Form 10-K, for one company you’re curious about. Every US-listed company files one with the SEC each year, and you can pull it free from EDGAR, the SEC’s filing system, by searching the company’s name. You’ll also want a calculator or a spreadsheet, and a quiet stretch for each lesson, longer than the reading time shown if you work the examples against the filing.

Pick a business you can describe in one sentence. A retailer works. So does a restaurant chain, or a company that makes something you’ve used. Banks, insurers and conglomerates keep their numbers in shapes that take longer to learn, and on a first pass the arithmetic should be the only hard part.

How to work through it

Go in order. The sequence runs from ownership to the financial statements to a single valuation check, and it ends with you writing a case on one page, so each lesson leans on the one before.

Each lesson works an example on a made-up company with round numbers. Redo it with your company’s real figures from the 10-K as you go. The sums are short. Doing them yourself is what makes the later lessons land, because by the valuation lesson you’ll be dividing a price by an earnings figure you found and checked with your own eyes, and by the last lesson you’ll have a page of notes on a real company that nobody else wrote for you.

A short quiz closes each lesson. If an answer surprises you, reread that section before moving on.

What it leaves out on purpose

Forecasting is out. So are technical analysis and options.

Each of those is a subject of its own, and each tends to pull a beginner away from the questions that come first: does the business earn money, does that money show up as cash, and is the price one you could defend in writing? You won’t build a discounted cash flow model here or predict next year’s earnings. Analyst estimates appear once, in the valuation lesson, and where earnings estimates come from covers how those numbers get made if you want the background.

The course also says nothing about how much of your money should go into one stock. That’s a portfolio question, and it has its own course.

Where to go after it

Two courses pick up from here. Measuring growth that lasts is for readers who can now read an income statement and want to judge a growing company: how fast it’s growing, whether the growth is sound, and what to pay for it. Building a diversified portfolio steps back from single companies to the whole account, covering why concentration hurts and how funds and individual stocks fit together.

If you’d rather protect what you already have before picking anything new, the investor safeguards course walks through checking a broker, what account protection covers and how to keep your login out of someone else’s hands.

Start with the first lesson, what you own when you buy a share, and have the 10-K open when you do.