Researching stocks that you're thinking of investing in can be overwhelming and intimidating when you're new to the process. But researching stocks and investments isn't as difficult as it might seem at first glance. Here are 7 ways you can research stocks and manage your investments using online tools—many of which you might already have at your disposal
How to Start Researching Stocks
Most likely, you wouldn't make a major investment in a product—say, a car—without first doing some research on your preferred model and its closest competitors. The same applies to stocks. Buying stock is essentially purchasing partial ownership in various businesses. You shouldn't invest in stocks without knowing something about the companies you want to invest in.
1. Research platform
One of the most helpful, do-it-yourself resources for investors is a research platform. A research platform can provide you with a wealth of information, such as quotes for individual stocks, company financial statements, key company statistics, and much more. Even experienced, advanced investors and traders may be surprised to discover how extensive the tools and resources are that can be found in a particular platform.
For example on Fidelity.com, you will find a powerful research platform within the News & Research tab at the top of the page. This is where you can get access to a lot of information on not only stocks but also sectors and industries, exchange-traded funds (ETFs), mutual funds, bonds, options, IPOs, and annuities.
My favorite research platform to use is Yahoo Finance. Suppose you were considering investing in a stock. You enter a company/security or its ticker symbol in the search bar to find detailed quote containing vital information such as the current stock price, average daily volume, and annual yield. You’ll also be able to look at a chart of the stock’s price, find the latest news and research reports, and see other key statistics (more on all this information shortly).
Essentially, a research platform can act as the gateway to the information you need to make informed decisions, and help determine how a potential investment fits with your time frame, investing objectives, and risk tolerance.
2. Learn the two basic types of stock analysis (Quantitative)
A quantitative approach concentrates on the income statements, balance sheets, and cash flows, and analyzes the relationship between price and intrinsic value . Current valuations are compared to historical valuations and other similar companies.
When it comes to analyzing stocks, there are two basic ways you can approach this: fundamental analysis and technical analysis.
Fundamental analysis is based on the assumption that a stock price doesn't necessarily reflect the true intrinsic value of the underlying business. Fundamental analysts use valuation metrics and other information to determine whether a stock is attractively priced. Fundamental analysis is designed for investors looking for excellent long-term returns. Fundamental Analysis studies all those factors which have an impact on the stock price of the company in the future such as financial statement, management process, industry, etc. It analyzes the intrinsic value of the firm to identify whether the stock is under-priced or over-priced.
Technical analysis generally assumes that a stock's price reflects all available information and that prices generally move according to trends. In other words, by analyzing a stock's price history, you may be able to predict its future price behavior. If you've ever seen someone trying to identify patterns in stock charts or discussing moving averages, that's a form of technical analysis.On the other hand, technical analysis uses past charts, patterns and trends to forecast the price movements of the entity in the coming time.
One important distinction is that fundamental analysis is intended to find long-term investment opportunities, while technical analysis typically focuses on short-term price fluctuations. We generally are advocates of fundamental analysis and believe that by focusing on great businesses trading at fair prices, investors can beat the market over time.
Analyzing stocks helps investors find the best investment opportunities. By using analytical methods when researching stocks, we can attempt to find stocks trading for a discount to their true value, which therefore will be in a great position to capture market-beating returns in the future.
3. Learn some important investing metrics
With that in mind, let's take a look at some important and easily understood metrics you should have in your analytical toolkit:
Revenue: Money coming into a company
Net income: What's left after expenses and taxes
Price-to-earnings (P/E) ratio: Companies report their profits to shareholders as earnings per share, or EPS for short. The price-to-earnings ratio, or P/E ratio, is a company's share price divided by its annual per-share earnings. For example, if a stock trades for $30.00 and the company's earnings were $2.00 per share over the past year, we'd say it traded for a P/E ratio of 15, or "15 times earnings." This is the most common valuation metric in fundamental analysis, and is useful for comparing companies in the same industry with similar growth prospects. There's no specific number that indicates expensiveness, but, typically, stocks with P/E ratios of below 15 are considered cheap, while stocks above about 18 are thought of as expensive.
Price-to-earnings-growth (PEG) ratio: Different companies grow at different rates. The PEG ratio takes a stock's P/E ratio and divides by the expected annualized earnings growth rate over the next few years to level the playing field. For example, a stock with a P/E ratio of 20 and 10% expected earnings growth over the next five years would have a PEG ratio of 2. The idea is that a fast-growing company can be "cheaper" than a slower-growing one. In general, a PEG ratio of less than 1 is considered to be indicative of an undervalued stock and a PEG ratio of more than 1 could imply that a stock is too expensive. However, the PEG ratio is only one piece of the valuation puzzle, and different industries have different average PEG ratios.
Price-to-book (P/B) ratio: A company's book value is the net value of all of its assets. Think of book value as the amount of money a company would theoretically have if it shut down its business and sold everything it owned. The price-to-book or P/B ratio is a comparison of a company's stock price and its book value.
Debt ratio: The debt ratio for a given company reveals whether or not it has loans and, if so, how its credit financing compares to its assets. It is calculated by dividing total liabilities by total assets, with higher debt ratios indicating higher degrees of debt financing. Debt ratios can be used to describe the financial health of individuals, businesses, or governments. Investors and lenders calculate the debt ratio for a company from its major financial statements, as they do with other accounting ratios.In general, many investors look for a company to have a debt ratio between 0.3 and 0.6.
4. Look beyond the numbers to analyze stocks (Qualitative Analysis)
The qualitative approach concentrates on the quality of the company. Emphasis is put on the company’s products, services, management, competitors, etc. Special attention is given to finding companies with sustainable competitive advantages .
This is perhaps the most important step in the analytical process. While everyone loves a good bargain, there's more to analyzing a stock than just looking at valuation metrics. It is far more important to invest in a good business than a cheap stock. With that in mind, here are three other essential components of stock analysis that you should watch:
Durable competitive advantages: As long-term investors, we want to know that a company will be able to sustain (and, hopefully, grow) its market share over time. So it's important to try to identify a durable competitive advantage -- also known as an economic moat -- in the company's business model when analyzing potential stocks. This can come in several forms -- a trusted brand name can give a company pricing power, patents can protect it from competitors, and a large distribution network can give it a cost advantage over peers, just to name a few.
Great management: It doesn't matter how good a company's product is or how much growth is taking place in an industry if the wrong people are making key decisions. Ideally, the CEO and other main executives of a company will have successful and extensive industry experience and will have financial interests that align with shareholders'.
Industry trends: Investors should focus on industries that have favorable long-term growth prospects. For example, over the past decade or so, the percentage of retail sales that take place online has grown from less than 5% to more than 11% today. So e-commerce is an example of an industry with a favorable growth trend. Cloud computing, payments technology, and healthcareare just a few other examples of industries that are likely to grow significantly in the years ahead.
5. News and research reports
Being aware of potentially market-moving news can make a big difference when you are deciding when to buy or sell a stock. For instance, what if you did all the research you wanted to do, and then a major news report was released, but you didn’t know about it? The news could have a major impact on the stock price—something that could affect your decision to buy or sell the stock.
Having easy access to news reports can be an invaluable resource.
There are more ways to access news than ever before. Social media, for example, is increasingly being used by investors to get the latest information. You can also sign up for StockTwits to get access to the latest tweets about a particular stock.
Just as news reports can be a market-moving event, so too can analyst research reports. Influential stock analysts—experts whose job it is to focus entirely on a particular sector or industry of the market—often have a valuable understanding of a company. While you may be researching stocks only when you have the time outside of your workday, analysts spend all their working time evaluating these stocks. Consequently, their views often can carry significant weight; analysts can move a stock with their recommendations alone, just like an important piece of news.
6. Getting started with Stock Screener
You can use a Stock Screener to help find something you're familiar with or are interested in exploring more, then with just a few clicks you'll be provided with a list of companies to further research
When it comes to searching for investing ideas, filtering through all the opportunities that are available can be an arduous task—if you don’t have the right tools. Enter the power of the screener.
A screener is a tool that can help you quickly find investing candidates at the click of a button. Screeners sort through the market to find matches based on an array of characteristics. Do you prefer stocks that have strong growth potential, or would you rather look for those that generate a relatively higher level of income payments? A screener can help you narrow the list of stocks that you want to do further research on.
While screeners are extremely powerful tools, it’s important to realize that they do not replace the need for further analysis. Just because a stock or other security shows up in a screen you’ve run, that does not mean it is worthy of an investment. Screeners can simply act as an efficient vehicle to get you started down the road looking for opportunities in the market that meet your desired objectives and risk tolerance.
7. Practice and review
Understanding your investing goals and risk tolerance, and knowing how to research stocks and other investments that meet those objectives, is the first step. Where the rubber meets the road is when you actually make an investment, and then how you manage that position over your investing time frame.
As the saying goes, "practice makes perfect." One way that you can learn how to make your investments is through paper trading. A paper trade is a simulated trade that allows an investor to practice buying and selling without risking real money. When you open a paper trading or demo account with a broker like Webull, you’re taking no monetary risk.
Webull’s promotions include a free share of stock valued at $2.50 to $250 per share for successfully opening a Webull trading account. If you open an account with a minimum of $100 or more, you’ll have the opportunity to receive a share of stock worth between $8 and $1,600.
Once you've made your investment choices, managing them is critical to being successful. You can use all the tools mentioned above to monitor and research your open positions. There are also ways to determine whether the stocks you’ve researched and chosen are a good mix when looked at as a whole.
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