How to Research Stocks: A Step by Step Guide (Part 1)
Pipscollector.com - Researching stocks involves incorporating multiple sources of information, deduction and strategies, all whilst markets are constantly transforming. Stock traders and investors need to know what information is useful to them as well as the most efficient and accurate way to go about stock research.
This article will explore key aspects of researching stocks:
- How to get started
- A step by step guide to stock research
- Stock research toolbox
- How to do research on stocks: Key takeaways
HOW TO GET STARTED WITH YOUR STOCK RESEARCH
Prudent investors do not often make investments without prior research or substantiation as to why the stock is attractive for purchase. Stock research in a general sense begins with an understanding of three key details about a company:
- Present financial health
- Current management
- Future vision and roadmap
Crucially, one thing many investors fail to do is align a company’s values with their own, which is important for finding the best investment that meets their specific goals. Therefore, being mindful of your investment strategy, and why you are looking to invest in stocks can help to guide your decision-making processes.
A STEP BY STEP GUIDE TO RESEARCHING STOCKS
As well as understanding the current and future position of a company, effective stock research needs to consider the following factors to help investors reach a decision in the effort of meeting their goals and desired strategy:
- Time horizon for investment
- Risk levels
- Type of stock industry/sector
- Understanding the company product/service
- Financial reporting
- Competitor and industry analysis
- Following industry experts
- Using research platforms and terminals
- Stock order types
- Broker fees
1. Investment time horizon
Time horizon is important as it allows investors to identify which types of stocks may align with their goals. For example, many young investors with long time horizons are willing to take on more risk when it comes to an investment portfolio. These types of individuals will often prefer more aggressive portfolios which may include growth stocks that carry more expensive valuations.
Because of the longer time horizon, these investors can usually tolerate larger swings in the market. The opposite would be true for shorter time horizons (under five years) as these investors have less tolerance for large drawdowns in the portfolio, as larger adverse market movements can create a long-lasting effect for someone nearing retirement that may need to soon begin drawing income from the portfolio.
2. Risk levels
Risk ties in with time horizon as investors use these two components together to help identify which types of stocks to invest in. Higher risk-seeking individuals will often prefer growth stocks such an Amazon or Tesla; whilst risk-averse investors usually head towards value stocks which often carry lower P/E ratios. These value stocks might be considered as undervalued and potentially attractive for long-term investing.
Regardless of investment style, it’s important to practice good risk management so that the investor can aim to benefit from upside movement while attempting to minimize downside risk.
3. Type of stock industry/sector
Many investors are familiar with a certain stock sector which can potentially make researching stocks in that sector easier. Understanding an industry allows for more in-depth research in terms of variable inputs and nuances that cannot often be retrieved from financial statements.
The stock market is often divided into eleven sectors, uncover stock sectors for a more structured method to stock research
4. Understand the company product/service
Familiarising oneself with the company’s product/service will assist in the later step of competitor analysis. Knowing what makes the company’s product/service unique, which includes the cost factor, is crucial for future forecasts.
Many companies have a diverse product/service offering which then makes this step more central to stock research. For example, with multiple products/services, investors need to understand how each offering affects the company with regards to cost, revenue and the future potential of each.
5. Financial reporting
Publicly traded companies publish financial reports which give a quantitative overview of the company. These include Earnings Announcements, which provide vast amounts of information about a company’s financial health and performance. From the company’s publicly filed reports, investors can identify potential red flags/risks within the company, management capability, debt management and income sources.
Current financials are not the only important documents to review. Past data can offer investors deeper knowledge and appreciation of where a company comes from as well as how it reacted under previous market conditions. This being said, fundamental analysis involves complex techniques and a thorough understanding of financial statements, mathematical formulas and a solid overall grasp of financial markets.
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