So, if you have finally concluded that investing in stocks is a good financial move, now it is time to do some extensive research. We understand that idea of researching stocks sound daunting and can be an overwhelming task especially for beginners, don’t be afraid you will gradually learn everything.
Researching stocks is similar to buying a new mobile phone. First you decide your budget, then you list your requirements and expectations and then you select some trusted companies. Once you find some suitable options which meet your needs, you do a comparison between them and finally select the best one for you.
Researching stocks requires a similar approach, investors have a term for stock research called Fundamental Analysis.
Fundamental analysis means to evaluate any data which is expected to impact the price or perceived value of a stock. It includes any sort of data that is related to a stock in any manner.
Before you dive in researching stocks, you should know your ultimate goal. You ultimate goal is to create a portfolio which is intended to minimise the risk of losing your investment. Also, it should have the potential to earn you higher returns in the long term.
Although it is a good idea for beginners to diversify their portfolio using mutual funds or ETFs (exchange-traded funds), investing in individual stocks after doing some serious research can be beneficial in the long term. Here are some steps, you can start with.
Step 1. Examine reports of companies
It is a must for publicly traded companies to publish various financial documents, using these document investors are able to find suitable companies which fulfil their requirements. There are two most informative documents for investors, these are Form 10-K and Form 10-Q.
❖ Form 10-K: This is a comprehensive annual report which contains financial statements that have been audited by an independent third party. With this report you can evaluate company’s revenues, expenses, sources of income and balance sheets.
❖ Form 10-Q: This is a quarterly report, which includes unaudited financial statements and provides a continuing view of the company’s financial position during the year.
Although there is an overwhelming amount of data in these 10-K and 10-Q forms, you do not have to evaluate every single thing.
It is normal to get bogged down with the data in these forms, you are required to narrow your focus on following statements.
➢ Net income- You can find this statement listed at the bottom of the income statement. With this you can determine whether the company finished the period with a profit or loss. Net income is the residual amount of earnings after all expenses have been deducted from sales. It is calculated by the formula: Revenue – Cost of goods sold – expenses = Net income.
➢ Price to earnings (P/E) ratio- This is the ratio of company’s share price to the company’s earnings per share. This ratio is used by investors and analysts to determine the relative value of a company’s shares in a similar comparison. If the company has a high P/E ratio, it indicates that company has prospect to grow in the future market.
➢ Return on Equity (ROE) and Return on Assets (ROA)- ROA is a ratio which indicates how efficiently a company generates income using its assets whereas ROE reveals how much profit a company generates with each dollar shareholders have invested, it basically allows investors to judge how their investments are generating income.
Step 2. Understand the company’s industry
Understanding the company’s industry is essential, even if the company is growing but the overall industry is shrinking then chances are your company’s value will also be atrophied.
Take note of the efforts the company is making to grow in its industry and the future of the overall industry.
Take a look at the company’s direct competitors, how well they are growing and how their growth can affect the value of your company. Do the competitors are slowly and slowly catching up, do they offer superior products at a better price? Determine if the competitors have an edge, or they are growing rapidly.
Step 3. Consult a broker or Professional
If you already have a brokerage account, and they offer their opinions and advice, take advantage and utilise their knowledge because they have more experience than probably you have as a beginner.
If you don’t have a broker to consult, maybe you can consult a friend who has some experience in this field or if you can get some words with a professional, consider their advice. Even if you don’t have any friends or broker you can reach out to, there are some websites which offer similar services. Search those websites and learn whatever you can from them.
Step 4. Put your research into use
Analysing all the data and numbers are important but looking solely at these are not enough. Understand company’s attitude, ethics and mission statement. You don’t want to invest in a company whose motive is something you disagree with because your investment might further help the cause you want to stand against.
For long term investments, take a look at company’s past, how they faced challenges, how they stayed resilient in tough times. These factors will help you decide whether you the company is worthy for a long term partnership.
Step 5. Keep monitoring your stocks
After you have invested in stocks for a long term, don’t just sit and wait, monitor your stocks regularly. Keep an eye on market conditions because sometimes general market conditions can change drastically. If the circumstances occur, don’t be afraid to exit and sell your stocks, sometimes this can be the best option. However, don’t sell your stocks because of small market fluctuations, this is a general rule of market “the harder it goes down, the harder it comes up”.
How to become your own Stock Analyst
If you are tired of super cheesy brokers or you are a kind of person who wants to make their fortune themselves or you have been cheated by some brokers and you have decided to become your own stock analyst, Congratulations! You have the courage to go out of the box but let us tell you there are some qualities you must possess if you want to become your own stock analyst.
• You should have the hunger to learn and if you are a person who believes in making your fortune yourself you can give it a shot.
• You have to learn and study a lot. So, if you have the discipline to stay consistent and learn, go for it.
Becoming your own stock analyst has some handsome benefits. You don’t have to pay a commission fee to brokers for their advice, you can choose the best stocks as per your requirements. Now, let’s go through a step by step process to become your own stock analyst.
Step 1. Study like crazy
What separates stock brokers from general population is the knowledge of stock market they posses. To become your own stock analyst you have to learn a lot, read as many articles you can, watch videos on social media platforms. To enhance you knowledge and understanding of stock market, we recommend that you to read these books.
- “One up on the Wall Street” by Peter Lynch
- “The Intelligent Investor” by Benjamin Graham
- “The little book of the sense Investing” by John C. Bogle
- “Irrational Exuberance” by Robert J. Shiller
- “ The essays of Warren Buffet” by Warren Buffet
Step 2. Study Analyst reports
Analyst reports probably holds the most significance in determining which are the best stocks to invest in. These report are written to offer guidance for investors to buy, hold or sell shares of a particular company. Focus you attention on industry comparisons, price justifications and future prospects.
Step 3. Analyse industry and Business models
The annual report of a company gives a good overview of the Industry. These reports gives you an insight on major and minor competitors of the particular industry.
Analyse the business models of companies, their strengths and weaknesses. Evaluate their business modes from websites or magazines.
Step 4. Listen to Professionals
There are hundreds of podcasts of famous investors out there waiting to be seen, go and watch them, take notes. Analyse their point of view on stock market, see their attitude and patience levels. Listen to their success stories and start implementing the tips they give you.
What Information should you research before you invest
Before investing in a stock, there are some key elements you should look for. As an investor, you should check for the latest facts wherever you can. Whether it be news channels or magazines or through social media. The most information you can get is through annual reports. Annual reports can be easily accessed by anyone through SEC’s official website. The key information you should look for in an annual report are quarterly reports (10-Q) and 8-K reports.
If the company has important news to announce for investors between their 10-k and 10-Q report filings, they do so by publishing an 8-K report. These reports generally contain important information for investors. Read these reports thoroughly and understand the company’s perspective.
Understanding the financial strength of a company is one of most essential factors in researching a stock.
Because if you can not understand finances, you can not become an analyst. You should be good with understanding commerce because you have to analyse balance sheets, income statements and cash flow statements. Understanding these numbers can be like reading a thousand words of annual reports. If you are not familiar with numbers and can not read these balance sheets etc., we highly recommend that you to start learning now, slowly get comfortable with them.
Another critical element in a company’s future is its management. There is a saying that a company’s future is decided by only 10-15 managers running it. Although every worker connected to a company is important, the management of the company ultimately decides its growth. You can analyse the company management and their quality of board members by doing some basic research on the Internet. There is so much information available on the internet about one single company, one just needs the desire to analyse it.
Some companies publish special presentations for their investors on their websites, if you can find presentations like those, watch them thoroughly. If you really want to be sure about your decision of investing in a particular stock, you can follow the CEO of the company and you can judge company’s success by his/her capabilities.
Stock analysis is a process
Analysing stocks is a gradual and ongoing process, you can not learn everything about stocks and stock market in a span of months. You have to keep updating yourself with time. New companies are growing every day at astonishing rates, nobody knows when they can become a competition for the field leaders.
To become an analyst, you have to think like an analyst. You have to find out what to sell at what price. Instead of trying to be a multitasker, focus on a particular industry and keep your focus around it. After selecting a particular industry evaluate the best ones and focus on them. Make a list of companies and deeply probe the affairs of those companies. Of course, you can not directly go and probe the company for details but there are other ways as well, and we have discussed a lot of them earlier. You can do this by analysing their financial statements and information about the company wherever you can find. To go even deeper, you can probe the core of the companies by following the affairs of company’s suppliers, customers, and competitors.
But if you are just starting, we recommend that you to concentrate your focus on only just two or three firms. See if you can analyse them and handle the information and then slowly if you want, you can start analysing more and more firms.