Become Your Own Stock Analyst - Stock Research for Beginners
If you're thinking about investing some of your hard-earned money so that it will work for you while you sleep, but you don’t want to pay for any advisory or brokerage services, you'll need to learn how to evaluate whether an investment is worth it.
Stocks are a standard investment option, and stock statistics show that the global market cap reached a record $95 trillion in 2020. However, for you to get the most out of your stock investment, you'll need a bit of know-how when it comes to how to research stocks.
So, let's cover some basics to give you a headstart for your subsequent research.
Where Should You Start?
Seasoned Wall Street analysts use a range of long-established criteria to research stocks, and you can follow their lead to discern whether the stock you're looking into is worth its price.
If you’re a complete beginner, the very first step is figuring out the industry you’d like to invest in. The next step when researching stocks would be to select one or two publicly traded companies from the same industry, as it is easier to assess and compare when you have a similar set of values to work with.
If you were to trail a stock market analyst as they look into a company, you'd find them researching all available information, including the company’s core business and past performance. They'd learn about the company starting from its financial statements, and they’d also look into its suppliers, competitors, and customers.
Beginners might not need to follow all these steps, but there is one valuable lesson to take away from the experts - you should do stock research in as much detail as possible. You likely won't have any issues finding the information you need to do this since a company’s investor relations are not deemed transparent if all the trading-relevant data is not readily available.
It will take considerable time to go through a company’s performance, but that is the best way to research stocks: slowly and in detail.
Now, let's take a more detailed look at how to research stocks.
What Type of Research Can You Use?
The two most common types of research you can use to help you figure out whether a stock is worth investing in are fundamental and technical. Since they are quite different, one is better suited to a particular type of investment than the other. Fundamental analysis is better suited to long-term investment opportunities.
On the other hand, technical analysis of stocks will work better for short-term investments.
If you’re looking to become a long-term investor, fundamental analysis is the way to go. Value investors typically use the fundamental analysis approach, assuming a company’s current stock price doesn't necessarily reflect the intrinsic value of the underlying business and is likely to yield solid long-term returns.
For this type of independent research, you'll typically use valuation metrics such as revenues, net income, profit margins, return on equity, price-to-sales ratio, price-to-earnings ratio, debt-to-EBITDA ratio, and price-to-book ratio. You'll be able to find these in the company's annual reports and financial statements such as the income statement and balance sheet.
Digging into a company’s financials is called quantitative research, and one of the best resources is the SEC’s Electronic Data Gathering, Analysis and Retrieval website, which offers a database for researching stocks.
Unlike fundamental analysis, which focuses on a stock’s financial metrics seeking to determine its fair market value, technical analysis focuses on a stock’s price.
If you're evaluating your stocks using technical analysis, you are looking at a particular stock’s price through time and searching for trends and patterns. In short, you are looking into the past to predict the future price of a stock.
Still, at this point, we feel like it's worth mentioning that if you’re a beginner who’s looking to invest short term and earn a profit, the best way to start is to go ahead and use a robo-advisor. These affordable tools will do the tough part of the research for you.
Metrics To Look for When Researching a Stock
Since estimating future stock prices is sometimes nothing short of science, some metrics can help you perform this task. These can help you determine the pros and cons of a particular company or industry. Even if you’re going with an investment app to micro-invest in stocks, knowing these terms and what they mean can give you the edge you need to get started.
You can also estimate profitability, performance, and how the company or industry compares to others. So if you’re wondering “what information should you research before you invest?” - all these are essential for making your final investment decision.
P/E ratio, or price-to-earnings ratio, is the metric growth investors will use to estimate the future price of a stock. Essentially, this metric indicates how much other investors are willing to pay for $1 of the company’s earnings.
This ratio also compares a particular stock with others within the industry or niche. Investing in a company with a higher P/E ratio according to stock market data is typically better than going with one with a low P/E.
Earnings per Share
Earnings per share is another metric you could use, even though it is less reliable than others discussed here. Earnings per share indicate a company's profitability on a per-share basis. To get to this number, you'd divide earnings by the number of shares on the market for trade.
This is a solid indicator, but it doesn't tell you or reflect in any way what the company does with its capital. Some companies will reinvest it in the business, others pay it out as dividends to shareholders. To get the most out of this metric when researching stocks, it pays to inform yourself on this matter.
The PEG ratio is essentially an evolved version of the P/E ratio, since it also accounts for growth. This is a much clearer indicator of stocks' performance in the future and is a great metric for long-term investment.
PEG is calculated by taking the P/E ratio and dividing it by the estimated growth rate. The growth rate is also a vague term that is very open to interpretation, especially in the short term. However, a five-year growth rate, for example, helps take the volatility somewhat out of the equation and streamlines your stock analysis.
When looking at a PEG metric, you should know that the baseline is 1. Companies with a PEG ratio higher than that are possibly either overvalued or the market has placed a high growth expectation on the company.
Book value is another helpful metric that represents the net value of all of a company’s assets. Essentially, this is the amount of money the company would have if it sold everything it owned. The price-to-book (P/B) ratio, which you'll often encounter when doing your company stock research, compares the company's stock price and book value.
Return on Equity and Return on Assets
Return on equity (ROE) and return on assets (ROA) are two additional metrics to pay attention to. ROE can show how much profit the company makes on each dollar invested by shareholders. It is calculated by dividing the company’s net income by its shareholder equity.
On the other hand, ROA discloses the percentage of the company's earnings that it generates with each dollar of its assets. Both can tell you a lot about the company's efficiency when it comes to generating profits and its overall stock valuation.
Still, this is not always "natural," so these indicators can be misleading. Companies can tweak these metrics artificially, for example, by taking on a loan or by buying back their shares from shareholders.
What Are the Questions To Start Your Analysis With?
If you are a beginner, you can streamline the screening of your new investment by asking yourself the following questions:
Do I Understand This Company?
Understanding precisely what the company you're looking to buy stock in does can make all the difference. Learning about the company’s product or services, its share float percentages, history, and plans for the future can influence your process of analyzing a stock more than you know.
How Does the Company Make Money?
This is sometimes fairly obvious. For example, if you're investing in Domino's, you’ll be well aware that selling pizza is how the company makes money.
It’s not always so simple though, and you should understand how the company creates its revenue and what its competitive advantage is. Once you have that information, you can assess how scalable it is and whether or not it’s worth your investment.
Why Is This Company Better Than Its Competitors?
No company is an island. To make a good judgment, you have to find out for yourself where the company stands in comparison to other companies in the same industry. This is one of the key elements to understanding stocks.
Does the company you're looking to invest in have something unique that others don't? Is it difficult to imitate or improve its brand or business model? Does it have superior distribution capabilities? Does it have a visionary management team? The harder it is for the competition to dethrone your company, the greater the chance your investment will pay off.
Are There Any Red Flags?
It can be frustrating to invest in a company only to find out that its management has changed and taken things in another direction. Looking into all the "what ifs'' that could go wrong before investing is a good idea.
While it’s not really a measurable source of information on stocks, this way, you get to at least consider whether or not you’d be comfortable with the worst-case scenario. If the doomsday scenario looks grim, it might be best to invest in a different company.
Finally, Compare All Your Options
By now, if you’ve considered and processed all the information we've been mentioning throughout this guide, you'll have a decent understanding of whether or not you should purchase a particular stock. However, before you do that, make sure to put everything in the proper context.
If you’re still unsure of how to analyze a stock for investment based on the competition, then make sure you focus on gathering data about a certain company and comparing it to industry averages. In the process, you’ll also need to look into other companies operating in the same sector.
This will put those astounding numbers into perspective, and you'll be able to better estimate how valuable the company actually is.
Where Can You Actually Buy a Stock?
These days you have two options when it comes to purchasing a stock. You can either purchase it with your stockbroker or use one of the many reliable online brokers and open your own online brokerage account.
Summing It Up
Hopefully, at this point, you have all the metrics you need to analyze stocks and figure out whether purchasing shares in a public company is worth it.
You want to know about the company's revenue, news about changes within the company, its investment strategies, and all the historical data you can find. Lastly, put this into perspective by comparing your research with other key players in the industry.
These are the basics of analyzing stocks for beginners. Once you combine all of this information, you should have a complete picture that will help you decide whether or not the investment will be worth it.
What is the best way to research a stock?
The best way to research stocks and make investment decisions depends on whether you’re looking to purchase the stock long-term and hold or buy short-term and sell for a profit.
For those looking to buy and sell for a profit in a short timeframe, the research should focus on the stock's historical price. By looking at the historical prices, you'll be able to find a pattern and estimate its future price.
For long-term investments, it pays off to learn more about the company itself, as that will help you make a judgment about the stock's potential performance in the future.
How do you analyze a stock before buying?
Typically, the first thing you should look into when researching the stock market is the stock price, both current and historical. Revenue growth, earnings per share, the industry the company operates in, and analyst reports are all worth considering.
Analyzing a stock takes time and effort; you’ll need to look at several essential metrics and learn how to interpret stock charts to evaluate the underlying business’s financial health and decide whether its stock is worth buying.
What is the best stock research site?
The most popular websites that can help you with your stock research are Yahoo Finance, Bloomberg, and the Motley Fool. It’s vital that you evaluate your priorities for the "best stock research websites" and find the one that matches those the best.
I have always thought of myself as a writer, but I began my career as a data operator with a large fintech firm. This position proved invaluable for learning how banks and other financial institutions operate. Daily correspondence with banking experts gave me insight into the systems and policies that power the economy. When I got the chance to translate my experience into words, I gladly joined the smart, enthusiastic Fortunly team.
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