Making informed investing decisions requires you to develop the ability to independently research stocks and assess them as potential buying opportunities. Learning how to research stocks is an invaluable tool which will serve you throughout your lifetime as an investor. In fact, knowing how to research stocks can be beneficial even for other types of investments such as real estate. The main points are still the same.
If you are just starting out and are wondering how it’s done, it can, naturally, be a little intimidating and seem somewhat overwhelming.
Don’t fear it. Just like everything else, you can learn stock analysis and within a short period of time can become a competent stock researcher. In this brief guide, we’re going to cover the fundamentals of stock research.
How much time should you spend on researching?
The amount of time you spend researching a stock depends on your individual goals as a potential investor. Are you looking for a quick buy because someone you trust has given you a tip? Then perhaps 15 or 20 minutes will suffice, just to learn the basics of what the company is about.
If you want to invest for the long-term, however, it’s best to take at least a few hours to allow for a deeper analysis.
Either way, you should make researching stocks a habit. Doing so will allow you to learn faster and will, time and time again, prevent you from making potentially costly mistakes and allow you to spot great opportunities in the form of undervalued stocks and rock-solid companies.
What should you look for?
There are several things you should always look for when researching stocks. The following is a quick rundown:
1 – What is the stock’s activity/history like?
When looking at the historical price movements of the stock in question, try to focus on the long term, rather than the short term.
The perspective a long-term chart (5-year) will give you will tell you much more about a company than a 1 month or even 1-year chart. Take the long view for the deepest insights.
You’re looking for an overall trend upwards and steady dividend payments (if that’s your goal). Allow for downward trends during economic downturns and recessions, as all companies rise and fall with the economy to some extent.
2 – What does the company actually do?
These days there are more industries than anyone could hope to fully understand, ad while old-school textile and steel companies still exist, they do so alongside complex biotech firms and billion dollar companies that are almost purely digital.
It’s important to understand what the company you are investing in does and what the overall picture is for the industry it operates in. You can find out lots of useful information on Yahoo Finance, where publically traded companies will have a profile page, and on the company’s own corporate website.
If you understand what the company does and think the industry is solid and/or has a bright future, this is a great sign and means further investigation is warranted.
3 – How does the company make money?
The legendary investor Warren Buffet point blank refused to cash in on the tech bubble at the turn of the millennium, despite immense pressure from shareholders in his company and even being mocked in the media.
Buffet justified his decision by stating simply that he didn’t understand how tech companies made money. When it all crashed and burned and billions of dollars were lost overnight, Buffet was left unscathed, while those who had mocked him were laughing on the other side of their faces.
It’s important to have a good grip on how the company you’re investing in actually makes money. This information alone can help you better understand how the company will likely perform in the future and can help you avert potential disaster.
Read as much news as you can about the company and if you are willing to dig a little deeper, look into its previous quarterly and annual reports. These are a goldmine of information about a company’s finances. You can also look for third-party analyst reports for a second or even third opinion.
4 – Does the company actually make money?
You might be surprised how many big-name companies don’t make much money. There are household names that have never turned a profit as of the time of writing, and as an investor, you need to know if that is the case.
This is where fundamental analysis comes in. It’s the bedrock of stock analysis and is somewhat like looking under the hood of a car to check the engine before you buy it.
Here are some of the information you should look at.
This is the most detailed financial report you will encounter outside of the annual report. It details the company’s structure, history, executive pay, equity, financial statements, and lots of other useful information.
Every company files one of these quarterly as mandated by the SEC. The information is less detailed than what you would find in a financial report and it isn’t audited, but it is good for forming a snapshot analysis of how a company is currently performing against the previous quarter, and the same quarter last year.
At the very least you will want to know what a company takes in. This will be found in the revenue section of quarterly and annual reports. Of course, you will still need to find out how much of that is profit.
This is where you will find out how much of that revenue is profit. The net income is the revenue minus costs and tells you how much a company is left with when all’s said and done. Look out for unnecessary costs and what these may tell you about the company.
Earnings & earnings per share
What portion of the company’s earnings are allocated to each share? You will want to know that before buying in. This is commonly abbreviated as EPS in some reports.
The price to earnings ratio (P/E ratio) is a quick way to evaluate a company. It looks at its current share price and measures it against its per-share earnings. This quickly tells you the dollar amount you will have to invest in a company to get $1 worth of earnings.
The P/E ratio is often looked at as a standalone tool for assessing a company, but it should not be seen as such and should be taken into account with other metrics.
Return on equity/assets
This formula allows you to quickly estimate how much profit a company makes on one dollar invested by dividing the net income by the shareholder’s equity.
This is yet another very interesting insight, but should never be used alone and should be considered as part of a holistic picture.
Look at a company’s debt and assess whether or not it’s at a healthy/sustainable level. Some debt is good as it allows for expansion, investment, and growth, but too much is bad. Likewise, no debt is equally bad as it means the company probably isn’t investing and stretching itself.
Look at the historical reports and glean as much information as you can. Try to form a picture as to whether the company is consistently profitable, or whether it has just recently started making money.
Don’t be put off if you see that a company has recently begun losing money. Look at the possible reasons. Has it just made a major investment in the future? Or is there something more fundamental at work such as poor management or bad decisions? Try to think long term, again, and look for the opportunities and pitfalls neutrally.
5 – Who is the competition and what are they like?
You need to build a profile of that company’s main competitors so you can figure out what this company’s competitive edge is, and how it is going to beat those competitors going forward.
If you really want to go deep and get a crystal clear picture of where the company stands in relation to its competitors, you might consider performing fundamental analysis on them, too.
6 – How good is management?
Look at the company’s management and assess its track record.
7 – What is the industry like overall?
No company can succeed and have a profitable future if the overall industry it’s a part of is in decline. You need to thoroughly assess the environment in which the company you’re interested in operates to form a clear picture of its future.
These are all the sorts of questions you should be asking before buying into any company.
To find this information you can look in trade magazines and any other publications related to the industry, whether they be online or in print.
You can also learn a fair amount from watching TV programs related to investing since many analysts will give information on their industries during interviews. If the CEO of the company you’re looking at is due to be interviewed, that’s definitely worth a watch.
Learn about industry growth and trends, and learn about what the future holds. Is the company under pressure from new, high-tech alternatives, or is it on the cutting edge? Again, knowledge is power, and the more you know, the better your investing decisions will be.
Now that we have covered what to research, let’s take a closer look at where the information can be found.
Your broker’s research platform
Most decent brokers have tools which allow you to research stocks, companies, and markets. You will usually be able to access this quickly and easily by logging into your account – in many cases, it’s just a click away from where you place your orders.
You can find out a wealth of information about a company from its customers. Why do they prefer this company over its competitors? Websites like ConsumerReports or Yelp can give you insights into customers thoughts about a firm.
If you want to save time and come up with a shortlist of potential stocks to research further, use a stock screener. This is like a search engine with specific filters you can set to bring up matches based on your criteria. This is a good way to find potential buys, but you will still need to do further research.
News / research reports
Professional publications like the Wall Street Journal, the New York Times Business section, and CNBC can provide invaluable information. These are usually best for gathering broader industry information and the basic information you need to build a picture of a company before delving deeper with professional tools.
Both Google Finance and Yahoo Finance provide lots of very useful information including price trends, historical and real-time graphs, industry news, and recent news stories related to the company itself. To find the latest information you just need to type the company’s ticker symbol into the search box.
Morningstar will keep you abreast of the latest market developments and has several useful tools such as calculators specifically for investing, stock screeners, comparison tools, and historical charts and price data.
The Motley Fool
The Motley Fool is an all-in-one investors hub, giving you information and reviews on just about everything from brokers to stocks themselves. You can use some of the Motley Fool’s tools such as its stock tracker, can read the professional analysis of said stocks, and can even pay for a professional opinion before buying.
Nasaq.com is a professional level site that gives detailed information on any stock you wish to know about. From fundamental analysis to company news and press releases to fundamental reports and analysis, Nasdaq.com has it all and the information is guaranteed to be accurate and up-to-date.
MarketWatch is a great resource for the latest news on what’s going down on Wall Street. The news bulletins are round the clock and a site like this has a huge advantage over traditional newspapers and publications in that it can be updated constantly. This is definitely worth keeping an eye on.
Finviz is much more data driven than some of the others mentioned here, and the first thing you will be presented with is graphs and rows/lists of numbers showing price changes. This may be better for those who already have a firm grip on investing. It’s not visually attractive or easy to digest and may be off-putting to those relatively new to investing in stocks.
That said, Finviz is a goldmine of information and if you feel comfortable using the site you can find out anything you want to know about virtually any stock or currency.
Zacks is a website with a focus on stock analysis and opinion pieces by professional investors and traders. It does have useful tools like screeners across multiple categories such as stocks, ETFs, bonds, etc, and it does provide some great data, but Zacks is primarily a great place to educate yourself about investing and what the pros think. Check out the ‘educational’ section of the site if you’re still finding your way in the world of investing.
As in all areas of life, knowledge is power when it comes to investing, and the more information you have, the more you know.
While it’s important not to fall into the habit of overanalyzing and missing opportunities due to hesitation, it’s important to look at the above-mentioned points at the very least.
If you dedicate the time to researching them, you will make better informed and ultimately more profitable investment decisions.