Due Diligence

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If you frequent any investing forums, you’ll often hear the phrase do your own “due diligence”. Now, undoubtedly, that’s great advice, but rarely will anyone explain exactly what they mean by the term. We’ll take a look at the concept of doing due diligence, as it relates to stock investing, in this article.

Definition of due diligence

WikiPedia defines due diligence thus:

Due diligence is a term used for a number of concepts involving either the performance of an investigation of a business or person, or the performance of an act with a certain standard of care. It can be a legal obligation, but the term will more commonly apply to voluntary investigations.

As is implied by this quote, due diligence has to be done to a certain standard of care, although what this standard is, is not normally clearly defined. However, there are certain business contracts that will specifically state exactly what the standard is, and what’s expected before any money changes hand.

Now, how you defined due diligence when it comes to investing in a company’s stock is solely up to you. That’s why the term is used with such imprecision. Basically, you need to be able to satisfy your own standards to make sure you’ve done your homework.

You will probably want to start with financial statements from the companies themselves. The numbers rarely lie.

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