Researching stocks involves incorporating multiple sources of information, deduction and strategies, all whilst markets are constantly transforming. Stock traders and investors need to know what information is useful to them as well as the most efficient and accurate way to go about stock research.
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
Just getting started in the stock market? Read our guide to stock trading basics
How to get started with your stock research
Prudent investors do not often make investments without prior research or substantiation as to why the stock is attractive for purchase. Stock research in a general sense begins with an understanding of three key details about a company:
- Present financial health
- Current management
- Future vision and roadmap
Crucially, one thing many investors fail to do is align a company’s values with their own, which is important for finding the best investment that meets their specific goals. Therefore, being mindful of your investment strategy, and why you are looking to invest in stocks can help to guide your decision-making processes.
A Step by Step Guide to Researching Stocks
As well as understanding the current and future position of a company, effective stock research needs to consider the following factors to help investors reach a decision in the effort of meeting 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
Time horizon is important as it allows investors to identify which types of stocks may align with their goals. For example, many young investors with long time horizons are willing to take on more risk when it comes to an investment portfolio. These types of individuals will often prefer more aggressive portfolios which may include growth stocks that carry more expensive valuations.
Because of the longer time horizon, these investors can usually tolerate larger swings in the market. The opposite would be true for shorter time horizons (under five years) as these investors have less tolerance for large drawdowns in the portfolio, as larger adverse market movements can create a long-lasting effect for someone nearing retirement that may need to soon begin drawing income from the portfolio.
2. Risk levels
Risk ties in with time horizon as investors use these two components together to help identify which types of stocks to invest in. Higher risk-seeking individuals will often prefer growth stocks such an Amazon or Tesla; whilst risk-averse investors usually head towards value stocks which often carry lower P/E ratios. These value stocks might be considered as undervalued and potentially attractive for long-term investing.
Regardless of investment style, it’s important to practice good risk management so that the investor can aim to benefit from upside movement while attempting to minimize downside risk.
3. Type of stock industry/sector
Many investors are familiar with a certain stock sector which can potentially make researching stocks in that sector easier. Understanding an industry allows for more in-depth research in terms of variable inputs and nuances that cannot often be retrieved from financial statements.
The stock market is often divided into eleven sectors, uncover stock sectors for a more structured method to stock research
4. Understand the company product/service
Familiarising oneself with the company’s product/service will assist in the later step of competitor analysis. Knowing what makes the company’s product/service unique, which includes the cost factor, is crucial for future forecasts.
Many companies have a diverse product/service offering which then makes this step more central to stock research. For example, with multiple products/services, investors need to understand how each offering affects the company with regards to cost, revenue and the future potential of each.
5. Financial reporting
Publicly traded companies publish financial reports which give a quantitative overview of the company. These include Earnings Announcements, which provide vast amounts of information about a company’s financial health and performance. From the company’s publicly filed reports, investors can identify potential red flags/risks within the company, management capability, debt management and income sources.
Explore the foundations of earnings season and how it fits into stock research
Current financials are not the only important documents to review. Past data can offer investors deeper knowledge and appreciation of where a company comes from as well as how it reacted under previous market conditions. This being said, fundamental analysis involves complex techniques and a thorough understanding of financial statements, mathematical formulas and a solid overall grasp of financial markets.
Uncover some basic tools to help you value a stock !
6. Competitor and industry analysis
There are regular instances whereby companies have direct competitors with the same/similar business models. Therefore, it is a good idea for investors to compare and analyse stocks between these competitors to find discrepancies which could further uncover potential investment opportunities.
The same applies to the industry as a whole. Often there are times where a company within an industry outperforms the industry and its competitors, or vice versa. Delving into why these seemingly perplexing patterns may occur can broaden understanding of how a stock or industry behaves under certain conditions.
Competitor and industry analysis are seen as obvious comparisons to make when researching stocks but, it may be prudent to analyse other markets as well. For example, Royal Dutch Shell Plc may do direct competitor analysis against a company such as BP Plc, but another comparison may be to overlay these companies with that of the underlying oil price. This major commodity (oil) is heavily correlated to the business model, therefore looking outside the scope of the equity markets may uncover some valuable insight.
7. Follow industry experts
A great way to further stock research is by following industry experts, such as highly regarded equity analysts. These experts often publish in-depth stock research which can be a good way to draw comparisons between individual and expert analysis. This is also a good way for investors to broaden equity analysis techniques by studying the analyst’s approach and what they look for in making investment decisions.
8. Research platforms and terminals
The use of research platforms and terminals such as Bloomberg can give investors/analysts a plethora of additional analytical tools and techniques. These can help investors with efficiency and access to many other financial markets and stocks for comparative purposes.
Quantitative tools are also available on such platforms for more complex types of analysis. These platforms can be costly, so before investing in one, the investor should make sure to consider the expense factor relative to their expected benefit.
9. Stock order types
After the research has been completed, investors will need to place the order to buy the stock. Knowing how order types work in the stock market can help investors to better focus the execution of their strategies.
Liquidity is another concept that can result in varying spreads and pricing. Stock market liquidity refers to the ease at which the company shares can be bought and solid without experiencing large price fluctuations. Large companies with high liquidity such as Apple Inc will often have tighter spreads with a larger volume of shares available to buy/sell at a given price.
10. Broker fees
An important but often overlooked portion of the stock investment process is that of broker fees or commissions. Brokers have differing fees so investors should become familiar with fees in order to avoid any unwanted surprises. These should be available on the broker website and should be transparent.