Researching stocks involves using a variety of sources of information, reasoning, and strategies as markets are constantly transforming. Stock traders and investors need to know what information is useful to them, as well as know the most efficient and accurate way to research stocks.
HOW TO START STOCK RESEARCH
Prudent investors don’t often make an investment without researching or justifying why a stock is attractive to buyers. Researching stocks in a general sense begins with understanding three key details of a company:
- Real financial health
- Current management
- Future vision and roadmap
It is important to note that many investors do not know how to align company values with their own, which is important for finding the best investments that meet their specific goals. Hence, understanding your investment strategy and the reasons why you are going to invest in stocks can help you in your decision.
STEP-BY-STEP GUIDE TO STOCK RESEARCH
In addition to understanding the current and future position of a company, effective stock research must take into account the following factors to help investors make decisions to achieve their goals and desired strategy:
- Investment time horizon
The time horizon is important because it allows investors to determine which types of stocks might fit their goals. For example, many young investors with longer time horizons are willing to take more risks when it comes to portfolio investments. Such people often prefer more aggressive portfolios, which may include more expensive growth stocks.
Due to the longer time horizon, these investors usually suffer from strong market fluctuations. The opposite will be true for shorter time horizons (less than five years), as these investors are less tolerant of large portfolio drawdowns, as stronger adverse market movements could have a long-term impact on an approaching retirement person who may soon have to start drawing portfolio income.
- Levels of risk
The risk is associated with the time horizon as investors use these two components together to determine which types of stocks to invest in. Higher-risk individuals often prefer growth stocks like Amazon or Tesla; while risk-averse investors tend to look for lower value stocks, which often have lower P / E ratios. These securities can be viewed as undervalued and potentially attractive for long-term investment.
Regardless of investing style, it is important to practice good risk management so that the investor can try to capitalize on the upward movement while trying to minimize the downside risk.
- Type of stock industry/sector
Many investors are familiar with a particular sector of stocks, which could potentially make it easier to research stocks in that sector. Understanding the industry allows for more in-depth research in terms of variable inputs and nuances that are often impossible to extract from financial statements.
- Understand the product (service) of the company.
Familiarization with the company’s product (service) will help at a later stage in the analysis of competitors. Knowing what makes a company’s product/service unique, including the cost factor, is critical to future projections.
Many companies offer a variety of products/services, making this step more important for inventory research. For example, when there are several products/services, investors need to understand how each proposal affects the company in terms of costs, revenues, and future potential of each.
- Financial reporting
Public companies publish financial statements that provide a quantitative overview of the company. These include income statements, which provide a wealth of information about a company’s financial condition and the results of operations. From the company’s public records, investors can identify potential red flags/risks within the company, managerial ability, debt management, and sources of income.
The current financials are not the only important documents that need to be analyzed. Past data can offer investors deeper knowledge and understanding of where the company came from, as well as how it has responded to previous market conditions. In doing so, the fundamental analysis includes sophisticated methods and a deep understanding of financial statements, mathematical formulas, and a solid general understanding of the financial markets.
- Analysis of competitors and the industry.
On a regular basis, there are cases when companies have direct competitors with the same (similar) business models. Therefore, investors are encouraged to compare and analyze the stocks of these competitors in order to find discrepancies that may further reveal potential investment opportunities.
The same is true for the industry as a whole. There are often times when a company in an industry is ahead of the industry and its competitors, or vice versa. Exploring why these seemingly incomprehensible patterns can occur can broaden your understanding of how a stock or industry behaves under certain conditions.
Competitor analysis and industry analysis are seen as obvious comparisons to be made when researching stocks, but it may be useful to analyze other markets as well. For example, Royal Dutch Shell Plc may conduct direct competitor analysis for a company such as BP Plc, but another comparison might be to superimpose these companies on the benchmark oil price. This main commodity (oil) is highly correlated with the business model, so looking outside the stock markets can provide some valuable insight.
- Follow industry experts.
A great way to continue your research into stocks is to keep an eye on industry experts such as reputable stock analysts. These experts often publish detailed studies of the reserves, which can be a good way to compare the results of individual and expert analyzes. It is also a good way for investors to expand their capital analysis methods by exploring the analyst’s approach and what they are looking for when making investment decisions.
- Research platforms and terminals.
Leveraging research platforms and terminals like Bloomberg can provide investors/analysts with many complementary analytical tools and techniques. They can help investors improve performance and gain access to many other financial markets and stocks for comparative purposes.
Quantitative tools for more complex types of analysis are also available on such platforms. These platforms can be expensive, so before investing in one of them, an investor must consider the cost factor relative to the expected benefit.
- Types of warehouse orders.
After completing the study, investors will need to place an order to buy the stock. Knowing how the order types perform in the stock market can help investors better focus the execution of their strategies.
Liquidity is another concept that can lead to different spreads and prices. The liquidity of the stock market means the ease with which the shares of a company can be bought and fixed without significant price fluctuations. Large companies with high liquidity like Apple Inc will often have tighter spreads with more stocks available to buy/sell at a given price.
- Brokerage fees
An important but often overlooked part of the stock investing process is brokerage fees or commissions. Brokers have different fees, so investors should check the fees to avoid unwanted surprises. They must be available on the broker’s website and must be transparent.
HOW TO DO STOCK RESEARCH: KEY FINDINGS
Investors can buy stocks after careful research, and taking into account as many variables as possible can help the investor make a more adequate investment decision. It can take many hours, but investing time can help investors make better decisions. Keep in mind the steps outlined above to streamline the stock research process and use appropriate portfolio management techniques.