Investors need to learn to play better defense. In other words, they need to learn to look out for things that can potentially have a serious and adverse impact on the company that they are invested in. For example; what should you ask? And where should you look? Read on for some simple tips.

Is the company you own shares in engaged in serious litigation? If so, how serious is it? Could it have a material adverse impact on the company? In short, be sure to check out the 10K, 10Q, press releases and/or the proxy statement for additional details as they may be discussed there.

What if there is something you don't understand or something that you would like to learn about or need further clarification on? Consider calling the company's investor relations department and asking directly. That is what they are there for, to answer investor inquiries. (For more check out Who is responsible for protecting and managing shareholders' interests? and Where can I find a company's annual report and its SEC filings?)

Also, it might make sense to search the web for any news articles related to a particular suit. Such articles might detail the amount of money in dispute and maybe contain an idea of what the potential outcome might be if a judgment was reached in favor of the plaintiff.

Short On Cash?
A company can have an all-star management team, a beautiful facility and catchy marketing slogans, but a company without cash is kind of like a race-car without fuel. With that in mind, investors and would-be investors would be wise to research how much of the green stuff the company has on hand to fund ongoing operations, and to grow.

The balance sheet can be a great place to start. It will show the dollar amount of cash and equivalents and short-term investments as of a certain date. What does that equal per share? Is the amount consistent with what some of its competitors are carrying? Is it up or down sharply from the prior quarter and the comparable period the year before? In the Management Discussion & Analysis section of the quarterly report or 10K, does the management team comment about whether or not it thinks the amount is sufficient to fund operations and grow? (Learn about the components of the statement of financial position and how they relate to each other, see Reading The Balance Sheet.)

Remember, if a company needs to tap the equity markets in order to raise cash, dilution could become an issue.

Competitive Threats
It's sometimes easy to get caught up in a given company's story. In other words, if a company has been showing excellent sequential and year-over-year growth, has a great name and a great product or service, it's possible to become mesmerized in a way. But the investor or would-be investor should never get complacent.

Instead, investors should always do their homework; they might consider searching online for companies that make competitive offerings and review trade journals. Investors might also listen to company conference calls as management may sometimes comment on competitors. Reviewing the competition's websites might be another idea as well. Basically the idea is to try to get a handle on whether or not others are nipping at your company's heals and whether or not their product or service may change the dynamics of industry. (These events offer the average investor a chance to hear management respond to analysts' hard-hitting questions, read Conference Call Basics.)

Grasping new competitive threats early on in the game is obviously important, because it's possible that the market leader today could get knocked out of the box and be a second-tier player tomorrow.

Macro Threats
It's sometimes difficult and in some cases impossible to predict certain macro events in advance. In other words, predicting interest rates or the price of a gallon of fuel a year or two down the line can be difficult at best.

However, it is important to know that political unrest, economic crisis, weather or other factors can potentially cause a stock to drop. It's also important to try to understand how they might impact a company. Therefore, savvy investors should try to take note of all macro events and try to figure out their potential impact, if any, on the industry in which the company operates and the company itself. (Learn more in Macroeconomic Analysis.)

For example, if one Middle Eastern nation were to become engaged in a conflict with another, it stands to reason that there could be a disruption of the oil supply from the region. This, in turn, could have an adverse impact on supplies here and by extension force up the price of a gallon of gasoline. Taking this one step further, companies that truck a larger amount of their goods to their store base (like retailers) could be hit with higher-than-expected costs and therefore suffer on the earnings front.

Again, investors might try to review macro events as they take place and are reported and then try to think them through to their possible completion. This may help them better understand what impact if any they may have on the company they are invested in. Now, some may think that keeping tabs on the news is too burdensome. But those people might keep in mind that many Wall Street traders and analysts tune into news feeds throughout the day to monitor macroeconomic events that transpire.

Finally, a company's 10K and/or quarterly reports may also shed some light on macro events that could transpire that could have an adverse effect on the company.

Know the Expectations
If a company generates a large profit in a given quarter, that's great. But if analysts were expecting an even larger profit the stock could tank. In short, it's vital that investors and traders be aware of what the expectations are. It may allow them to pick a better entry point. (Want to invest but don't know where to start? Learn how to make your money work for you with the tips in Learn To Invest In 10 Steps.)

It's great for an investor to understand the company's basic story, products and services. However, it's also important to understand the potential risks and negatives that could have an adverse impact on the company and, by extension, the share price.

Related Articles
  1. Retirement

    Smart Ways to Tap Your Retirement Portfolio

    A rundown of strategies, from what to liquidate first to how much to withdraw, along with their tax consquences.
  2. Mutual Funds & ETFs

    The ABCs of Mutual Fund Classes

    There are three main mutual fund classes, and each charges fees in a different way.
  3. Investing Basics

    5 Common Mistakes Young Investors Make

    Missteps are common whenever you’re learning something new. But in investing, missteps can have serious financial consequences.
  4. Mutual Funds & ETFs

    The 4 Best American Funds for Growth Investors in 2016

    Discover four excellent growth funds from American Funds, one of the country's premier mutual fund families with a history of consistent returns.
  5. Products and Investments

    A Guide to DIY Portfolio Management

    These are some of the pillars needed to build a DIY portfolio.
  6. Investing

    What Investors Need to Know About Returns in 2016

    Last year wasn’t a great one for investors seeking solid returns, so here are three things we believe all investors need to know about returns in 2016.
  7. Options & Futures

    Five Advantages of Futures Over Options

    Futures have a number of advantages over options such as fixed upfront trading costs, lack of time decay and liquidity.
  8. Mutual Funds & ETFs

    The Top 5 Buffalo Funds for Retirement Diversification in 2016

    Discover the top five Buffalo Funds for retirement diversification in 2016, with a summary of each fund, including manager and performance information.
  9. Mutual Funds & ETFs

    How to Build Your Own Mutual Fund

    Here are some tips for building a mutual fund that may help pave the way to a strong performance.
  10. Mutual Funds & ETFs

    Are the Most Popular Mutual Funds Your Best Bet?

    Learn about the dangers that come with investing in the most popular mutual funds and discover how investors can better fill out their portfolios.
  1. What's the difference between a stop and a limit order?

    Different types of orders allow you to be more specific about how you'd like your broker to fulfill your trades. When you ... Read Full Answer >>
  2. Are secured personal loans better than unsecured loans?

    Secured loans are better for the borrower than unsecured loans because the loan terms are more agreeable. Often, the interest ... Read Full Answer >>
  3. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  4. Does mutual fund manager tenure matter?

    Mutual fund investors have numerous items to consider when selecting a fund, including investment style, sector focus, operating ... Read Full Answer >>
  5. Why do financial advisors dislike target-date funds?

    Financial advisors dislike target-date funds because these funds tend to charge high fees and have limited histories. It ... Read Full Answer >>
  6. Why are mutual funds subject to market risk?

    Like all securities, mutual funds are subject to market, or systematic, risk. This is because there is no way to predict ... Read Full Answer >>
Hot Definitions
  1. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  2. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  3. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  4. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  5. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
Trading Center