How to Research Stocks (Step-by-Step)

Written by Kim PinnelliReviewed by Bryan Junus, CFAUpdated: 12th May 2022
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These days, it seems like everyone is learning how to start investing and trying to pick winning stocks that can produce epic profits in no time. Generally, wealth management advisors, industry veterans, and financial professionals do not recommend trying to pick your own stocks. For most people, ETF investing should be the way to go, but if you want to pick stocks, here’s how to do it. 

While people do get lucky from time to time, the truth to consistent success is a lot more academic than choosing stocks with your gut: it takes a lot of effort to research stocks and make accurate market predictions.

There’s a reason why only people with lots of financial experience seem to produce long-term gains when playing the stock market. Want to know how to research stocks step-by-step so you can invest more carefully, or to make sure your retirement funds are well-chosen?

No worries – you don’t need a college degree to know how to research stocks with some measure of success. Let’s get down to it.

Why Do Investors Research Stocks?

Those who make millions or billions of dollars on the stock market don’t do so because of luck alone. Instead, it’s usually because they perform excellent investment research.

Investors research stocks to determine:

  • Whether the stock is a good investment for short-term gains or long-term wealth growth
  • Whether the stock shows signs of diminishing returns
  • Whether, ultimately, they should invest significantly in a given stock

The more stock research you do, the more sound your investments will be. Researching stocks before you make an investment is much smarter than relying on your gut feelings.

While your gut may be correct once in a while, thorough research will produce more consistent gains in the long run.

>> More: Best Stock Picking Services

What is Qualitative Analysis?

Qualitative analysis involves checking out the broader, more abstract details of a company behind a stock or other financial security. Qualitative analysis means you focus on the actual quality of the company the stock is attached to rather than the raw financial information and other quantitative data.

It’s a good analysis to perform if you’re interested in long-term investment and want to actually own a piece of the companies you purchase stocks in.

What is Quantitative Analysis?

Quantitative analysis is the other side of the research coin. It concerns looking at the raw financial data and numbers of a company and the numbers involved with a stock’s performance on the market over a set timeframe. This includes the stock price, company revenue, and more.

>> More: Best Online Stock Brokers

Different Types of Stock Analysis

There are two broad types of stock analysis to perform: fundamental and technical.

You’re often best off performing both types of analysis, but it’s important to know what information each analysis type provides before you make a purchase or sell a stock.

Fundamental Analysis

Fundamental stock analysis involves determining whether the current price of a stock or security accurately reflects the company’s future value. This involves analyzing the business’s fundamentals and its leadership team and understanding the broader factors at hand moving the market. 

This means you’ll need to spend a lot of time researching the company’s quantitative data and maybe even making your own projections.

Technical Analysis

On the other hand, technical stock analysis involves taking data from market activity (or charts) and figuring out where the price of a given stock will go next.

It’s about predicting future price movements for the stock itself, not necessarily analyzing whether the stock is an accurate match for the company behind it.

How to Research Stocks to Invest In

Want to know how you can effectively research stocks to invest in? There are four major steps to any good stock research strategy.

Step #1: Review Company Financial Documents

You should always begin by reviewing a company’s financial documents. These will give you key information about the stock’s value and some qualitative information about the company overall.

  • Form 10-K: A form 10-K is a company’s annual report. It includes various key financial statements that have already been audited for accuracy. These include the balance sheet for a company, income sources, and more.
  • Form 10-Q: Form 10-Qs are quarterly documents used to record updates for company financial results and operational procedures or strategies.

Step #2: Dive Deep into the Metrics

Next, you’ll need to perform some intense quantitative analysis and dive deep into a company’s overall metrics. Let’s break down all of the financial statements and other metrics you should analyze.

  • Balance Sheet: A company’s balance sheet reveals information about its assets, liabilities, and shareholder’s equity. 
  • Income Statement: The income statement tells you how much money the company made from its business operations. It also gives you detailed financial information about its direct costs, operating expenses, and more.
  • Cash Flow Statement: A company’s cash flow tells you how much money is moving in and out of the business. In particular, the cash flow statement highlights the firm’s operating, financing, and investing activities. 
  • Revenue: A company’s revenue is how much money it brought in during a certain time period, for example, a fiscal year or a single quarter. Note that revenue is not necessarily the same thing as profit, since revenue doesn’t consider operating expenses, debts paid, and other cost factors.
  • Price-to-Earnings Ratio (P/E): The price-to-earnings ratio can be found by dividing a company’s current stock price by the earnings-per-share over the year. If you are using last year’s earnings, then this metric is referred to as a trailing P/E. This can give you a rough idea of how much investors might be willing to pay to get a single dollar of the company’s earnings.
  • Earnings per Share (EPS): The EPS rating is found when you divide company earnings by the number of shares that are available to trade. This can be used to find a company’s profitability per share.
  • Price-Earnings-Growth Ratio (PEG): The PEG ratio has you take a given stock’s P/E ratio, then divide that value by the expected annualized earnings growth rate over a few years. It can tell you whether a fast-growing company will be cheaper in the long run than a slower-growing company.
  • Price-to-Book Ratio (P/B): The P/B ratio serves as the net value for all available assets. You can consider the book value to be how much money the company would be worth if everything was liquidated, including its stocks. It is important to note, that this metric is only useful for analyzing stocks in certain industries (for example banks). 
  • EBITDA: EBITDA stands for “earnings before interest, taxes, depreciation, and amortization”. It covers how much money the company has before spending some of that revenue on necessary costs and payments (operating income). If the EBITDA is low relative to company debt, it may be a risky investment and vice versa.

What Metric is the Most Important?

None of these metrics can be used as a single catchall value to determine whether a given stock will be a good investment. The P/E ratio is commonly used for comparing companies. It can help you understand how expensive a company is relative to its peers. 

Researching stocks is a rigorous process that takes time, discipline, and a keen eye for detail. If this seems like a daunting task, then consider working with a financial advisor or opening an investment account with a robo-advisor

Step #3: Look Beyond the Numbers (Qualitative Analysis)

Next, you’ll need to do some qualitative analysis to determine whether the company is really worthwhile. Look at the following factors when performing your qualitative analysis.

  • Management: First, take a look at leadership – who runs the company, what are their visions for the future, and do they have a good track record? What are their incentives? 
  • Competitor Analysis: How are competitors doing in the chosen stock’s current industry? Competitors doing well could show signs that your prospective investment company could bloom or face challenges in the current market. At the same time, the reverse is true if competitors are also struggling. Moreover, competition is also a clear sign that your company will need to offer consumers a compelling product to drive growth and improve the bottom line.
  • Competitive Advantages: See whether a given company has some competitive advantages, such as faster streaming, better infrastructure, a more efficient pricing model, and more.
  • Diversified Revenue Streams: Generally speaking, companies with diversified revenue streams are more stable and less susceptible to bankruptcy. Companies that get all their revenue from a single source are riskier investments. However, a company that is heavily diversified and lacking product focus could also face challenges in the market. To articulate this point further, think about Apple before Steve Jobs cut most of the products to focus on a few profitable products. He realigned Apple’s strategy and focus which saved the company. 
  • Growth Potential: Does the company have real potential to grow over the next few years? If it does, it may be a good long-term investment.
  • Industry Trends: Examining the wider industry for certain trends is a good idea. A company making a lot of profit now may not be worthwhile in a year or so if the industry overall is set to evolve in a direction opposite from its business model. Public companies need to adapt to consumer and industry trends to remain relevant and competitive. 
  • Technology: What technology does the company have, and what does that technology cost?
  • Company Values: A company’s overall social values can tell you whether it’s set to grow in the near future or if it’s something of an economic dinosaur and may eventually be replaced.

Step #4: Document Your Research

Lastly, be sure to document all the findings from your research. It’ll help you keep better track of a company’s data without having to look back and check again and again.

  • Pen and Paper: Write down all of your numbers and learned information using a pen and paper as you discover them.
  • Excel: Next, transfer the numbers to an Excel file for better storage and easier organization.
  • Ask for Second Opinions: Be sure to ask other financial analysts in your social network, or use online forums, to see what others think of your results and conclusions. However, take this with a grain of salt – form your own opinions. Analyst reports online might issue buy recommendations because they have an incentive for doing so. Trust but verify. 

Stock Picking Services to Consider

If doing all of this work sounds like a hassle – it is! In that case, you might want to rely on a stock picking service.

Stock picking services can provide you with high-quality analytical information to help you choose ideal stocks for your financial goals by doing all the research for you. There are lots of different services to choose from.

#1. Motley Fool

The Motley Fool is one of the best-known stock picking services available due to its successful history and wide range of investing-related products. Podcasts, books, and even learning courses are all offered by this company.

>> More: Motley Fool Review

#2. Morningstar

Morningstaris one of the most well-known investment analysis firms in the industry. This service actually provides investment information and financial data to other companies all the time.

You can subscribe to Morningstar’s data packages to perform your own analyses or just let them recommend certain stocks from time to time.

>> More: MorningStar Premium Review

#3. Zacks Investment Research

Zacks Investment Research is another great analysis organization that provides key stock picks to subscribers.

It also offers a range of financial data and stock analysis tools to perform your own research and gradually become more skilled in this financial arena.

>> More: Zacks Review or Motley Fool vs Zacks

4 Brilliant Stock Research Tips

Should you choose to perform your own research or combine your research with some of the stock-picking services mentioned above, you’ll benefit from remembering these key tips.

#1. Take Your Time

For starters, never try to rush your stock research. It may be tempting to jump onto certain “hot” stocks that everyone’s crazy about, but you should always try to take your time and learn everything you can about a potential investment before making a purchase.

The more time you spend researching a stock, the better you’ll understand it and the more confident you’ll be when investing.

>> More: Best Stock Research Websites

#2. Do Not Be Biased

Similarly, don’t let your personal biases lean you against or toward a given stock. Some companies that you may not be too thrilled about on a personal level could be excellent investments and vice versa.

#3. Research Competitors

To learn more about a given stock, do some research about its competitors. You’ll often learn more about whether a certain security is a good investment by seeing how its main competitors are doing and comparing the stocks against one another.

>>More: Best Financial Magazines

#4. Consider Value Investing

Above all, it might be a good idea to invest for value rather than for quick profits.

In a nutshell, value investing means investing in stocks that may be trading for less than their actual value.

In this scenario, you’ll buy stocks that are technically at a discount, then be able to sell them later down the road when they are much more profitable.

Value investing depends on intense research to be successful. Using the above strategies can help you practice smart value investing without getting hoodwinked with certain “meme” stocks.

Bottom Line: How to Research Stocks

Ultimately, understanding how to research stocks effectively and accurately is a big deal. It can help you solidify your investment portfolio and make tons of money, provided you make the right choices and invest in stocks at the right time.

Kim Pinnelli
Kim Pinnelli

Kim Pinnelli is a Senior Writer, Editor, & Product Analyst with a Bachelor’s Degree in Finance from the University of Illinois at Chicago. She has been a professional financial writer for over 15 years, and has appeared in a myriad of industry leading financial media outlets. Leveraging her personal experience, Kim is committed to helping people take charge of their personal finances and make simple financial decisions.