DUE DILIGENCE

Due diligence is an investigation, audit, or review performed to confirm facts or details of a matter under consideration. In the financial world, due diligence requires an examination of financial records before entering into a proposed transaction with another party.

Types of Due Diligence
Due diligence is performed by equity research analysts, fund managers, broker-dealers, individual investors, and companies that are considering acquiring other companies. Due diligence by individual investors is voluntary. However, broker-dealers are legally obligated to conduct due diligence on a security before selling it.

How to Perform Due Diligence for Stocks
Below are 10 steps for individual investors undertaking due diligence. Most are related to stocks, but, in many cases, they can be applied to bonds, real estate, and many other investments.

After those 10 steps, we offer some tips when considering an investment in a startup company.

Step 1: Analyze the Capitalization of the Company 

Step 2: Revenue, Profit, and Margin Trends

Step 3: Competitors and Industries

Step 4: Valuation Multiples

Step 5: Management and Share Ownership

Step 6: Balance Sheet

Step 7: Stock Price History

Step 8: Stock Dilution Possibilities

Step 9: Expectations    

Step 10: Examine Long and Short-Term Risks