Conducting stock research is akin to purchasing a vehicle. While you can rely on technical details, it’s equally vital to assess the driving experience, brand reputation, and practical aspects, like whether the interior color hides pet hair effectively.
What is stock research?
Stock research involves analyzing equities based on factors such as a company’s financial health, management, and market competition. This evaluation aids investors in determining whether or not to buy a particular stock.
5 Steps to Research Stocks
It’s important to remember that stocks are generally regarded as long-term investments due to their inherent risks. Time is essential to navigate fluctuating markets and realize substantial gains, suggesting that investing in stocks is best reserved for money you won’t need for at least five years. There are more suitable options for shorter-term savings.
1. Get to Know Your Research Tools
When examining stocks, it’s beneficial to utilize an array of research tools. Many brokerage platforms provide valuable resources, which are essential since a brokerage account is needed to purchase stocks. Free online stock screeners can also be employed for research not tied to any brokerage.
2. Gather Your Stock Research Materials
Start with a company that piques your interest, either for its product or its potential due to broader market trends. Begin by looking at the company’s financial documents—this involves quantitative research that includes important filings with the U.S. Securities and Exchange Commission (SEC) such as:
- Form 10-K: This comprehensive annual report offers crucial financial statements that have been audited. It reveals insights about a company’s balance sheets, revenue streams, cash flow, expenses, and overall financial performance.
- Form 10-Q: This document provides quarterly updates on a company’s operations and financial results.
3. Narrow Your Focus
The financial documents may present overwhelming data, so it’s important to focus on key metrics that clarify a company’s operations:
Revenue: Represents total income for a specific period, typically the first figure in the income statement. This can be dissected into “operating revenue” and “nonoperating revenue.”
Net Income: This is the total earnings after deducting operating expenses, taxes, and depreciation. It’s often referred to as the “bottom line.”
Price-Earnings Ratio (P/E): This ratio, calculated by dividing the stock price by earnings per share, indicates how much investors are willing to pay for every dollar earned by the company.
4. Turn to Qualitative Stock Research
While quantitative research offers clear numerical insight, qualitative research provides a deeper understanding of a company’s operations and future potential. Consider questions such as how the company generates revenue, its competitive advantages, the quality of its leadership, and potential risks that could hinder growth.
5. Put Your Stock Research into Context
While there are numerous metrics available to assess a company’s financial health, relying on a single year’s data can be misleading. Before making any stock investment, it’s crucial to create a comprehensive narrative about the company and understand its historical performance, resilience in challenging times, and how it stacks up against industry averages.
Is “due diligence” the same as researching stocks?
Generally speaking, “due diligence” and stock research are often used interchangeably. Professional investors, such as financial advisors, have an obligation to act in their clients’ best interests, which includes conducting thorough research on investments before making any decisions.
Does well-done stock research cost money?
While paid tools can make the research process easier and may provide access to specialized stock data not readily available for free, essential information like SEC filings and key valuation metrics can be accessed at no cost through various reputable websites.
The Bottom Line on How to Research Stocks
Researching stocks involves collecting proper documents, examining key metrics (quantitative analysis), posing significant questions (qualitative analysis), and contextualizing the company’s performance. By following these steps, you will gain valuable insight into stock evaluations and investment decisions.
