Investing is difficult. Don't let anyone tell you otherwise. Sure, the dynamics of buying a stock is simple; you enter the number of shares of a particular company and hit the buy button. Next thing you know it, you are part owner of a company.
But, did you select the right company? How do you know? What criteria should you use? Do you understand the criteria that you are using? As you can see, this is why investors need to learn accounting.
Accounting can help you unravel the details of how a company is doing. When you become proficient in accounting, you'll even start to pick up on clues when something seems out of place. When you discover these accounting anomalies, you can avoid companies that are trying to cook the books.
I am not suggesting that you need to have CPA-level knowledge to invest. You need to learn the basic elements of accounting. That's not the same. CPA knowledge goes much deeper into advanced concepts. It's not necessary to have that level of knowledge to use for investing purposes.
The primary concepts you'll want to grasp concern the financial statements of companies. When you learn these, you'll have most of what you need to analyze the quantitative factors of a company. Accounting won't do much good for the qualitative factors, however. That requires more learning outside the realm of accounting.
The main reason why companies use creative accounting is that they can get away with it. While the Securities and Exchange Commission was created to help combat these practices, the truth is, the agency doesn't have the resources to police every company all of the time. Companies are aware of this shortcoming of the agency.
In many cases, by the time the agency picks up on these practices, the people involved in the scheme are long gone. They've cashed out and have moved onto bigger and better ventures.
These companies also rely on the fact that most investors not knowing about accounting. Imagine if more people become adept on the subject. It would bring these shady practices more into the limelight. In essence, investors would be self policing by not falling for the tricks and avoiding companies who put these tricks to use. It would take the wind out of these companies' sails.
When you learn the proper basic accounting fundamentals, the next step is to apply that knowledge. Here is where the magic begins. You will know when a company doesn't meet the high standards you'll place on your investments going forward. If companies don't pass your criteria, move on. This is power in my book!
Most novice investors wouldn't know a good investment if it bought itself for them. It's because they don't have an understanding of accounting which prevents them from choosing worthy companies. You won't have that problem. You'll be selective and rise above them when your portfolio skyrockets in value.
It is true that accounting is not the most exciting subject. I can remember the groans of my classmates at the mere mention of the subject. There are certain people who enjoy bean counting as they call it. For the rest of us, going to accounting class and doing the work was high stress.
The good news is I have found a great program that makes learning accounting easy. As an aside, I don't receive any money for recommending this program. It is just something that I found to be good at helping people learn a dry subject.
I won't get into the specifics here as I have already done that on my finance website. I wrote a review about the service that I think will help you decide whether to join or not. The fact that a good chunk of the training is available free would make me wonder why you wouldn't sign up.
As you'll see, the course covers learning about financial statements and how they tie into a company's accounting transactions. It will give you training on the principles of accounting which will help you understand why businesses choose to take the actions they take.
It will also be a good first step in knowing when something is not right with a company. When you learn the basics of accounting and notice a company is not following the proper rules, that will help alert you to improper transactions. This could keep you from investing in bad companies.
Learning accounting will give you the tools to make you a better investor. It will take some practice applying the concepts, however. The concepts have to click with real world financial statements published by companies. While this does take some effort, not learning accounting will never make you a good investor. Always keep that fact in mind!
The title of this section is similar to the title of a review I wrote on my financial site about the Accounting Coach service . It is something you can register to free of charge. You can upgrade to one of the two paid tiers that give you enhanced learning features. But, as a free member, you'll have access to plenty of materials that will help you learn what you need to become a better investor.
Learn more about the following resource which reviews the Accounting Coach service. The quicker you you get started, the quicker you can use your skills to choose great investments.