Introduction
There are many reasons why carefully researching stocks is sacrosanct. First, the stock market is quite large; in the US alone, there are at least over 3,300 stocks listed on the NASDAQ, and another 2,400 on the NYSE. Choosing which stock to invest in then becomes a rather complex affair. And, picking a random stock is definitely not advisable.
Furthermore, not all stocks are worth investing in. To decide which to invest in, you surely need to carry out stock research. Carrying out this research will help determine if the stock is worth adding to your stock portfolio, especially bearing the fact that capital to allocate to stocks is limited, while the stocks to be invested in are somewhat not so. But how do you actually go about this?
Methods of Researching a Stock
There are generally two approaches to carrying out stock research – fundamental analysis and technical analysis. Technical analysis specifically involves paying attention to mathematical phenomena such as formulas and charts to predict the price moves of a stock. It is typically meant for sophisticated investors and traders, and usually applied when trading more risky products like derivatives, including options. Furthermore, technical analysis is more often identified with short-term investing or trading, rather than buying and holding for the long haul.
However, our focus here as regards stock research will largely revolve around investing for long durations. Thus, we will be discussing fundamental analysis as the approach to stock research.
Before Embarking on Research
It is important that before you set out to research stocks, you should have a number of stocks you want to take a look at. With this, you know that which you are going for:
- Start with Using Tools
To carry out quality research, there is a lot to know about and it can become overwhelming. However, you don’t really need to go about doing this again when you can access everything you need by leveraging the right tools. You can get some dedicated research tools from your online broker, while there are also dedicated sites, both free and paid, including Morningstar, Yahoo Finance, Zack Research, Bloomberg, and much more.
- Study the Industry.
Sometimes, you might not have a specific stock in mind, but may be interested in certain industries. For instance, do you believe blockchain or 5G is the future? Or do you feel personalized care will boom? Then, you can take a look at the industries with a view to investing in one or more stocks in those sectors.
Every company operates within a specific industry. For instance, Apple is in the computer hardware, software and consumer electronics industries. Amazon is primarily in cloud computing and e-commerce. Tesla is in automobiles and energy. A company can also be in multiple industries. Nonetheless, every company usually has one or a few core industries it is mostly engaged in.
You should consider the place of the particular company in the industry. Is it a market leader, or is it on course to achieving a sizeable stake in the Industry?
- The Financials
The preeminent indicator of company performance is often its financials, and one of the most important factors in your research. While there are various financial metrics, the most critical to look at is the balance sheet which will present the assets, liabilities, and equity of the company. The income statement indicates the company’s earnings and the cash flow statement exhibits how cash moves in and out.
More than anything, it is important that you pay attention to the rate and trajectory of growth. Is the company growing its finances or is there a decline? It doesn’t, however, stop there. The financials offer insights into such things as the P/E ratio, profit margins, return on equity ratio, and price-to-book ratio, amongst many others. You can then contrast these figures to those of comparable companies.
- Company Reputation and Other Parameters
Whether a company will succeed is not only down to the financials and mathematical ratios. At times, the company may have poor financial performance, but hold a lot of potential. In fact, most stocks that have experienced commendable rallies in recent times do not earn massive revenues. Examples include Shopify, Tesla, Snap, Zoom, and others. Thus, you should pay attention to other factors such as the vision of the company, the leadership, the growth trajectory, the opportunity in its industry, amongst others.
Quality stock research will likely deliver quality returns on investment. While there is no single way to go about it, the above tips should serve as an actionable guide. Nevertheless, also consider other non-quantitative factors such as the future direction or course of the company, its place in the markets, and pace of growth and scale, amongst others.