Want to jump straight to the answer? If you are ready to start investing in the stock market, but aren't sure of the first steps to take when investing in stocks according to our experts you should follow those easy steps:
- Step 1. Gathering all your relevant stock research materials.
- Step 2. Narrowing your focus.
- Step 3. Engaging in qualitative research.
- Step 4. Putting your research into context
- Step 5. Picking the right right trading platform for you
Effectively Researching Stocks
Though the evaluations on different stocks we offer here are based on solid facts and are totally impartial, they cannot and should not be considered and acted upon as investment advice, because they represent our own opinion on each stock presented and are mainly meant to raise your understanding and awareness of the stock market and stock investment. The information thus, should be viewed more as educational content rather than investor advice or recommendation.
If you are seriously considering to become a stock investor, then it is imperative that you do conduct your own stock research so that you will be able to correctly evaluate companies and wisely and safely arrive at the decision of whether a specific stock is worth adding to your own investment portfolio.
To further illustrate why your choice of stock is definitely a personal matter, varying from person to person, let us say that it is similar to choosing which car you would like to buy. When looking to buy a car, you will obviously look at the technical specifications of the vehicle and its engine performance, however, most of us also take into account the reputation of the manufacturer, the look and feel of the car and even if its available interior features match our taste, or are friendly and suitable for our kids and pets.
Similarly then, when selecting a stock to invest in, you should not just look at plain numbers, stats and graphs, but rather adopt a more integrative approach. Effective stock research then, is the one taking on the form of solid fundamental analysis, an analysis which looks a big range of factors pertaining to each company and extends far beyond its mere financials. Such factors include evaluating its competitors and the company’s leadership team. Only when all such factors are evaluated effectively you will be more certain if a stock indeed deserves a place in your own investment portfolio, provided it suits and matches your own plans, strategies and aspirations as an investor.
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The comprehensive guide to stock trading
As already discussed, anyone considering stock trading as an investment option should be prepared to engage into some serious stock research, as this is necessary to be able to effectively evaluate stocks and thus enhance the chances for success for your stock trading endeavours. Below you may read the four key steps to follow when evaluating any stock.
Prior to presenting these steps however, it is useful for aspiring stock investors to keep in mind that stocks carry a substantial risk and should be considered as long-term investments. Long-term gains are possible for those who have the luxury to allow enough time for the stocks they invest in to fluctuate and they can endure any ups and downs in prices, which are bound to occur. In short, you should only invest in stocks funds that you do not immediately need to use and which you can commit for a relatively long period, say at least a few years.
STEP 1. Gathering all your relevant stock research materials
The process of evaluating different companies to decide whose stock you shall be investing in, requires you to be able to effectively compare the performance of different companies against each other. Since to be able to draw valid conclusions you will need to base them on accurate financial information, for your quantitative research you will need to gather together some official documents prepared by the companies themselves and submitted to their respective financial watchdogs. Such information is contained in annual reports, where the key financial statements included are independently audited, and thus are reliable. In a company’s annual report, you can view a company’s balance sheet and learn about its revenues and expenses, as well as all its sources of income and how this income is handled.
Another useful source of information are the quarterly updates issued by public companies, where you can obtain an up-to-date overview of operations and financial results.
If you don’t have the necessary time to gather and study all these reports, you can locate highlights on dedicate financial news websites or even on the website of your trading brokerage.
STEP 2. Narrowing your focus
Company financial reports usually contain a great wealth of different numbers and, especially if you are inexperience and unfamiliar with such documents, it is easy to get lost and confused. To mitigate this danger, here are the most important items and numbers you should focus on when studying a company’s performance through their annual report:
Revenue
The first number you usually see on a company’s income statement corresponds to its revenue, and this number denotes the amount of money a company has brought in over the reported period of time. Often revenue is distinguished into “operating revenue” and “nonoperating revenue”, the latter being the income generated from a company’s core business operations, while the latter stemming from one-off activities, such as the sale of an asset.
Net income
As opposed to revenue, the net income figure is listed at the end of an income statement, because it represents the total amount of money a company has made, following the subtraction of operating expenses, taxes and depreciation from the revenue figure.
Earnings and earnings per share (EPS)
Another important set of figures is that of earnings and earnings per share, which is the outcome of the division of total earnings by the number of shares available for trading. When a company’s profitability is expressed through a per share earnings figure, then comparisons between stocks that interest you become much easier and clearer. When you look at a total earning number however, be aware that this number reveals nothing about how well, effectively or efficiently, each company actually uses this capital, whether it reinvests it to fuel future growth or simply pays out dividends to shareholders.
Price-earnings ratio (P/E)
Another interesting figure, though not completely reliable as a stand-alone metric, is the trailing P/E ratio of a company, which is derived by dividing the current stock price by the earnings per share over a specific period, usually the last 12 months, allowing you to know how much investors would be willing to pay to get $1 of the specific company’s current earnings. You can even have a forward P/E if you divide the stock price by forecasted earnings, but the outcome may be flawed and lead to wrong conclusions in case such forecasts prove unrealistic and unreliable.
Return on equity (ROE) and return on assets (ROA)
Return on equity is a figure expressed in percentage points, which shows how much profit a company generates with each dollar invested by its shareholders, since in this context equity refers to shareholder equity. The ROE is derived by dividing the annual net income of a company by the money invested by shareholders. If the same net income is divided by the monetary value of a company’s assets, then we get the Return on assets ratio, which portrays what percentage of its profits the company generates with each dollar of its assets. Both these percentages are also indicative of the efficiency of each company in terms of profit generation.
STEP 3. Engaging in qualitative research
Since when you buy stock you acquire a personal stake in the company you choose to invest in, quantitative research alone will not suffice to help you reach valid conclusions and make wise investment choices. Relying on financials and numbers alone is only half the picture, so to have a more completely view and opinion about a company’s operations and true future prospects, you will also need to engage into qualitative research, which will add to your perspective and knowledge and provide you with a more detailed and complete insight into the company you plan to invest in.
As part of the screening process, your qualitative research should provide you with the answer to the following crucial questions:
How does the company make money?
A good tip, especially for novice investors is investing in companies they truly understand and whose operations make sense in their mind. Sometimes how a company makes money is obvious, but other times it is not. For example, a fast-food company’s main income source may not be from the sale of burgers and fries, but rather from franchise selling fees. Thus, as part of your qualitative research make sure you understand the companies you are considering to invest in.
Does this company have a competitive advantage?
Ideally the company that wins your preference should be one that can beat its competitors by proposing a unique selling point, something that makes it stand out and that others cannot easily equal or imitate. Such competitive advantages may be a company’s strong and popular brand, a unique business model, a superior ability for innovation at a fast pace, operational excellence or superb distribution channels, to cite but a few examples. If a company excels in a way that its rivals cannot match, then your investment would be much more likely to yield positive results.
How good is the management team?
Strong leadership is essential for the success of a company, so do check out the leadership team in every company you are considering to buy shares of. Company leaders must be able to devise solid growth strategies, while reacting fast to changes and being able to steer the company away for trouble if the need arises, by predicting and foreseeing threats and challenges and being prepared to combat them. Moreover, also evaluate a company’s board of directors, paying particular attention to its members, since these are the people representing all shareholders in the decision-making process. Favour companies whose boards also include independent outsiders, rather than just company insiders, since they would be much less likely to be able to resist and prevent any wrong actions and decisions by company management.
What could go wrong?
As part of your research it would be also expedient to identify the potential threats to the company’s future health and prospects and try to assess that whether the company is in a position to effectively address them. The stepping down of an CEO, fierce competitors emerging or new technological advancements that may render the company’s offering obsolete, are a few examples of the potential red flags to consider in the process, assessing the company’s preparedness in each eventuality.
STEP 4. Putting your research into context
Even when you get access to detailed metrics and ratios and learn and evaluate a company’s position and leadership team through qualitative research, you may be able to calculate and evaluate the intrinsic value of stock, but still need to asses it against the biggest, wider landscape in order for your conclusions drawn to be more valid. Thus, perhaps the most crucial key factor to be aware of before buying any stock and committing any of your funds into a partnership with any firm, tying your financial well-being with theirs, is the general overall context and how well a company fits into it.
To be able to clearly see the longer-term context you will need to look at historical data so that you can assess the company’s actual ability to deliver shareholder value over time. To reliably evaluate this ability, check out how resilient the company has proven to be during difficult times, how quickly and effectively it has managed to react to challenges and adversities and how successful it was to improving its performance when needed.
To complete your awareness of the bigger picture and how the company you are assessing fares into it, you must compare its numeric performance to industry averages as well as the results of other competitive companies in the same niche. Luckily, many brokerages offering stock trading services also provide their trader clients with handy research and comparison tools which make this process easy and fast.
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A final word: Picking the right right trading platform for you
You now know what growth stocks are and how to effectively and successfully perform the stocks research necessary before venturing into the promising and potentially lucrative world of investing in stocks. Your final step before starting your stock trading journey would be to select the most suitable broker to partner up with and armed with your newly found knowledge on stocks and which stocks to add on your watch list you will be better equipped to meet with stock trading success.
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