Stock research entails combining multiple sources of data, deductions, and strategies, all while markets are constantly changing. Stock traders and investors need to know what information is relevant to them and how to conduct stock research in the most efficient and accurate manner possible.
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
WHERE DO YOU BEGIN YOUR STOCK RESEARCH?
Prudent investors rarely make investments without first conducting research or obtaining evidence as to why the stock is appealing for purchase. In general, stock research begins with an understanding of three key facts about a company:
- Present financial health
- Current management
- Future vision and roadmap
Many investors, crucially, fail to align a company’s values with their own, which is critical for identifying the best investment that meets their specific objectives. As a result, thinking about your investment strategy and why you want to invest in stocks can help you make better decisions.
A STEP-BY-STEP GUIDE TO STOCK RESEARCH.
In addition to understanding a company’s current and future position, effective stock research must consider the following factors to assist investors in reaching 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
The time horizon is critical because it allows investors to determine which types of stocks are most likely to meet their objectives. Many young investors with long time horizons, for example, are willing to take on more risk in their investment portfolio. These people are more likely to favor more aggressive portfolios, which may include growth stocks with higher valuations.
These investors can usually tolerate larger market swings due to their longer time horizon. Shorter time horizons (under five years) are the polar opposite, as these investors have a lower tolerance for large portfolio drawdowns, as larger adverse market movements can have a long-term impact on someone nearing retirement who may need to start drawing income from the portfolio soon.
2. Risk levels
Investors use these two components together to help identify which types of stocks to invest in, so risk is linked to time horizon. Growth stocks, such as Amazon or Tesla, are often preferred by high-risk investors, whereas risk-averse investors prefer value stocks, which have lower P/E ratios. These value stocks could be considered undervalued and thus appealing for long-term investment.
Regardless of investment style, it’s critical to practice good risk management so that an investor can maximize upside potential while minimizing downside risk.
3. Type of stock industry/sector
Many investors are familiar with a particular stock sector, which makes researching stocks in that sector potentially easier. Understanding an industry enables more in-depth research into variable inputs and nuances that are difficult to extract from financial statements.
4. Understand the company product/service
Familiarizing oneself with the company’s product/service will aid in the competitor analysis process later on. For future forecasts, it’s critical to understand what makes the company’s product/service unique, which includes the cost factor.
Because many companies offer a wide range of products and services, this step becomes even more important in stock research. With multiple products/services, for example, investors must understand how each one affects the company in terms of cost, revenue, and future potential.
5. Financial reporting
Financial reports are published by publicly traded companies and provide a quantitative overview of the company. Earnings Announcements are one example, which provide a wealth of information about a company’s financial health and performance. Investors can identify potential red flags/risks within the company, management capability, debt management, and income sources from the company’s publicly filed reports.
The current financials aren’t the only documents to look over. Investors can gain a better understanding of a company’s history and how it reacted to previous market conditions by looking at historical data. Fundamental analysis, on the other hand, necessitates advanced techniques, a thorough understanding of financial statements, mathematical formulas, and a solid overall understanding of financial markets.
6. Competitor and industry analysis
It is not uncommon for businesses to have direct competitors with the same or similar business models. As a result, investors should compare and analyze stocks among these competitors to look for discrepancies that could lead to additional investment opportunities.
The same can be said for the entire industry. Occasionally, a company within an industry outperforms the industry as a whole and its competitors, or vice versa. Investigating why these seemingly perplexing patterns appear can help you gain a better understanding of how a stock or industry behaves under different circumstances.
When researching stocks, competitors and industries are obvious comparisons to make, but it’s also a good idea to look at other markets. Royal Dutch Shell Plc, for example, may conduct direct competitor analysis against BP Plc, but another comparison could be to overlay these companies with the underlying oil price. Because this major commodity (oil) is so closely linked to the business model, looking beyond the equity markets may yield some useful information.
7. Follow industry experts
Following industry experts, such as well-known equity analysts, is a great way to expand your stock research. These experts frequently publish in-depth stock research, which can help you compare individual and expert analyses. By studying the analyst’s approach and what they look for in making investment decisions, investors can broaden their equity analysis techniques.
8. Research platforms and terminals
Bloomberg and other research platforms and terminals can provide investors and analysts with a wealth of additional analytical tools and techniques. These can aid investors in terms of efficiency and comparative access to a variety of other financial markets and stocks.
Quantitative tools are also available for more complex types of analysis on such platforms. These platforms can be expensive, so before investing in one, the investor should weigh the cost versus the expected benefit.
9. Stock order types
Following the completion of the research, investors must place a buy order for the stock. Understanding how order types work in the stock market can help investors focus their strategy execution.
Another concept that can result in varying spreads and pricing is liquidity. The ease with which company shares can be bought and sold without experiencing large price fluctuations is referred to as stock market liquidity. Large companies with high liquidity, such as Apple Inc, have tighter spreads because they have a larger volume of shares available to buy/sell at a given price.
10. Broker fees
Broker fees or commissions are an important but often overlooked aspect of the stock investment process. Brokerage fees vary, so investors should become familiar with them to avoid any unpleasant surprises. These should be transparent and available on the broker’s website.
KEY TAKEAWAYS FROM RESEARCH ON STOCKS.
Stocks can be purchased after extensive research, and taking into account as many variables as possible can assist the investor in making a better investment decision. This can take a lot of time, but putting in the effort will allow investors to make better decisions. To help streamline the stock research process and employ appropriate portfolio management practices, keep the steps outlined above in mind.
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