Before investing in the stock market, you must do extensive research first. Just like you wouldn’t plan a trip without researching your destination, you shouldn’t put your money into the stock market without knowing what you’re doing. Learning to research stocks can solidify your strategy and help you decide which shares to invest in.
We understand that conducting stock market research is often daunting, especially for beginner traders. That is why we decided to help you start on the right foot for your first stock investment using this ultimate guide.
In This Article
How to Research Stocks for Investing: Step-by-step Guide
How to Find the Right Stock
You’re not alone if you’re trying to figure out the best way to evaluate stocks. With thousands of stocks listed on major stock exchanges, deciding which ones you should invest in can be challenging. That being said, here are some tips to help you find the right stocks for your portfolio.
You may have heard trading enthusiasts on social media platforms or market experts on financial TV channels talk about “buying the dip.” Investors who buy the dip look to purchase stocks that have declined sharply while waiting for the price to recover and surpass the purchase price.
Several factors can cause stocks to drop suddenly. For example, a company may cut its dividend, post weak quarterly results, or announce the departure of a key executive. Generally, a significant drop in a stock’s price can present a buying opportunity if investors expect it to recover and reach its previous levels. However, keep in mind that a significant price decrease may indicate a change in the stock’s fundamental factors, and there is a possibility that it may not return to its prior high.
Being objective when investing in the stock market requires an analytical and systematic approach rather than relying on personal biases or emotions. It is essential to develop clear and specific investment goals. Set the amount of return you want to achieve and the timeline for achieving it. You should be able to determine when to close a position to lock in profit rather than stay on and take a gamble, hoping that a stock will continue to increase in value. Having a solid strategy serves as a guide for your investment decisions.
Next, gather and analyse data and information on the stocks you want to own. Look at historical performance, market trends, company financials, and industry analysis to understand the investment risks and opportunities involved. After that, you can create a strategy matching your investment goals based on the information.
Remain disciplined and stick to your strategy, even when faced with short-term losses or market volatility. Remember, emotions can cloud your judgement and lead to impulsive decisions.
If you want to do good stock price research, you must know how to calculate the intrinsic value of a stock. The intrinsic value of a stock represents its true worth. There are several ways of estimating the intrinsic value of a stock relative to its market value. However, the price-to-earnings (P/E) ratio is the most commonly used method.
The P/E ratio is calculated by dividing the price of a stock by its most recently reported earnings per share (EPS). This ratio is simple to use, and the data needed is readily available. A lower P/E ratio implies the stock may be under-priced and could have room for gains.
Companies experiencing rapid growth have higher P/E ratios than established companies with slower growth rates. Value investors are more likely to buy stocks with low P/E ratios, while growth investors prefer high P/E ratios.
You shouldn’t put your money in a stock simply because it’s on sale. As Peter Lynch once cautioned, “never invest in any idea you can’t illustrate with a crayon.” Remember, owning stock is like becoming part of a business, so you should always conduct extensive due diligence to fully understand it before making a final decision.
- While conducting your research, check a company’s financials, industry trends, competition, and management team for clear insights. It is also essential to keep an eye on a stock’s performance using tools such as stock charts. Most importantly, stay abreast with developing news and events that might affect its performance.
How to Research Stocks in 5 Steps
As mentioned earlier, there are many types of stocks available to trade. Therefore, you should narrow your focus and only invest in stocks that align with your financial goals. Ask yourself why you’re investing.
Are you putting money in stocks to support your life after retirement or to buy a house? What is your budget? What is your investment time horizon? How much volatility and loss are you willing to accept? After answering these questions, you can identify stocks that meet your standards.
Once you have narrowed your list to only stocks you think suit you, it is time to analyse each stock deeply. You can do this by compiling publicly available earnings reports that companies file with authorities such as the FCA or SEC. Earnings reports shed light on a company’s expenses and income, indicating how its stock might perform soon.
These reports typically provide crucial information such as revenue, net income, and earnings per share (EPS).To understand a company’s future, you must pay attention to its earnings report. You can attempt to forecast how the company and its shares will perform through the report.
You’ve evaluated a company’s earnings reports and examined its revenue, EPS, and other projections. While this due diligence is crucial when researching stocks, it is also essential to incorporate technical indicators into your decision to maximise your potential returns.
Investors usually use technical indicators to identify good stock entry and exit points by analysing the long-term trend. Technical indicators are mathematical patterns that use historical price, volume and open interest information, etc., to forecast the direction of a stock.
Investors generally plot indicators on price charts to indicate price directions. Indicators can be grouped into trend, volume, momentum, volatility, and breadth indicators. Besides predicting the direction of a stock, a technical indicator can also show you how to profit from price fluctuations.
Although past performance does not guarantee future results, you can use it to analyse stocks. However, you should look at past performance with a longer time horizon. If a stock rallies 20% in one year, it only tells you how it performed during that year.
But if a stock has recorded average annual returns of 10% for over 20 years, it’s a good sign. There’s no guarantee you will profit by investing in that stock. However, a stock that has survived 20 years of bull and bear markets might be a good option for long-term investors. In short, focus on ten years or more of returns when analysing past performance.
Stock research isn’t just about evaluating a company’s revenue, net income and EPS. Good research should also include qualitative factors that are not so obvious but still impact a company’s performance and, thus, its shares.
Qualitative analysis of a company includes determining how it makes money, its uniqueness versus the competition, and employee and customer satisfaction. Other issues that fall under qualitative research include management trustworthiness, brand value, institutional participation, and supplier relationships.
Risks of Investing in Stocks
No financial investment is without risk. Risk is the possibility of losing the money you invest in an asset. Here are some of the risks stock traders and investors often face.
Market Risk: This is the possibility of an investor experiencing losses due to overall market volatility and declining stock prices.
Liquidity Risk: The risk that you cannot sell a stock at its market price due to a lack of buyers.
Inflation Risk: The risk that rising inflation will hurt the value of investments over time.
Regulatory Risk: The risk that regulatory bodies will implement or announce measures that will negatively affect stocks
Interest Rate Risk: The risk that changes in interest rates will negatively impact the stock market.
Unforeseen risk: This is the risk of unexpected events such as natural disasters, wars, and pandemics affecting stocks.
A Broker is Your Assistant in Finding Good Stocks
A stock broker can certainly assist you in finding good stocks to invest in, but it’s important to remember that brokers are not financial advisors. Their primary goal is to facilitate transactions between buyers and sellers. Here are some ways a UK stock broker can help you find good stocks.
- Provide research and analysis reports – Brokers may provide research reports, analysis, and recommendations on stocks to their clients. This can help you gain a better understanding of the stock’s potential and help you make more informed investment decisions.
- Offer investment advice – You can also benefit from a broker’s investment advice based on your investment goals and risk tolerance. They can provide recommendations on stocks that may be suitable for your portfolio.
- Facilitate transactions – Brokers can facilitate transactions between buyers and sellers in the stock market. They can help you buy and sell stocks, and execute trades on your behalf.
- Provide access to investment tools – Many brokers offer access to investment tools such as stock charts, financial news, and market analysis. These tools can help you monitor the performance of your investments and stay up-to-date on market trends for the best decisions.
FAQs
You can find important information about every stock by looking at the financial statements and disclosures publicly traded companies file with regulators such as the SEC or FCA. Another good source for stock research is online financial news providers. Websites like Yahoo! Finance and Google Finance allow you to research historical data, such as price charts that go back several decades.
First, it often involves charges and commissions, which can consume a considerable portion of your investment. Second, there’s no guarantee you’ll make money on a stock. Losses are inevitable in this volatile market since a stock’s value can fluctuate dramatically for many reasons.
When selecting a broker, you should ensure that the broker is licensed and regulated by top-tier authorities such as the FCA, SEC or CySEC. Additionally, you should consider brokers with a wide range of securities to help you diversify your trading portfolio and minimise risk. Moreover, the broker should have excellent research tools, educational resources, and reliable customer service.
Dividend stocks, shares of profitable companies, and those of large companies are all suitable for beginners. However, there’s no guarantee you will make money when you invest in these stocks. Therefore, always conduct thorough market research and analysis before taking a plunge.
Conclusion
Successful stock investors and traders typically have excellent research skills they use to build their portfolios. Learning how to evaluate a stock doesn’t have to be overwhelming. With a bit of dedication and the help of an online stock broker, you can find the right stocks and maximise your potential returns.
