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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.
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.
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.
Related: 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 stock analysis involves determining whether the current price of a stock or security accurately reflects the company’s future value.
This means you’ll need to spend a lot of time researching the company’s quantitative data and looking at future projections.
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 based on many market factors.
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, cash handling documents, 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 factors you should analyze.
- Balance Sheet: A company’s balance sheet gives you detailed financial information about its earnings, costs, operating expenses, and more. It’s where you’ll find many of the below values (but not all).
- Income Statement: The income statement tells you how much money the company made in terms of income from its primary business operations (i.e. retail sales, subscription sales, etc.).
- Cash Flow Statement: A company’s cash flow tells you how much money is moving in and out of the business, not how much profit it is making. Think of it as both profits and expenses added together.
- Revenue: The revenue for a company is how much money it brought in during a certain time period, whether it’s 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 costly 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 last year. 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 based on shares.
- 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 this ratio is how much money the company would be worth if everything was liquidated, including its stocks.
- 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 for necessary costs and payments. 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.
But the P/E ratio is commonly used for comparing companies in the same industry as it tells you how much your target company is being traded for relative to its actual earnings.
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?
- 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 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 differentiate its product or service to win over market share.
- 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.
- 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.
- 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 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.
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.
Learn More: Motley Fool Review
Morningstar is 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.
#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.
Related: Best Stock Research Websites
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.
#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.
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#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.
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