How To Research Stocks Before Investing: A Beginner's Guide

 

Stock research is the first step to assess a stock and determine whether it is worth including in your portfolio.

 

It involves evaluating a company's financials, management team, and competition to determine if you want to invest.

 

This step-wise guide helps you determine the best way to research stock to increase your chances of picking a good one.

 

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1. Why To Learn Stock Research?

 

Learning how to research stocks is helpful as:

 

• It can help you form better long-term investments.

• Knowledge of your investment can help you hold onto your plan.

• You are less likely to impulse purchase or sell during market fluctuations.

 

 

2. How To Do Research About A Stock?

 

Before investing, it is essential to understand the company from top to bottom. 

 

So, here you will learn what you need to know to research a stock.

 

 

Step 1: Understand The Company’s Business and Revenue Generation

 

Read up on the company’s business activity available on their website.

 

Investors can also use metrics and ratios to evaluate their financial health and compute the stock’s intrinsic value. 

 

 

 Step 2: Check Out Its Financial Condition

 

Financial reports are an excellent means to access a company’s financial data, including earnings, financial projections, sales, and already-calculated ratios like the current ratio.

 

Reading financial reports can help you understand the following:

 

• Operating Revenue: Is the cash flow a company generates from its core business.

• Nonoperating Revenue: Is a company's cash flow from one-time business activities like asset sales.

• Net Income: It is the income after taxes, operating expenses, and depreciation.

• Earnings and Earnings per Share: These show a company's profitability. Investors use it to compare a company’s profitability with other companies.

• Price-Earnings Ratio (P/E): It tells how much investors are ready to pay to earn $1 of the company’s current earnings.

• Return on Equity (ROE): It indicates how much profit a company produces with each dollar of shareholder’s investment.

• Return on Assets (ROA): It shows what profit percentage the company makes with every dollar of its assets.

• Dividend Yield (The Dividend per Share/ Share Price): A company distributes a portion of its profits as dividends to its shareholders. So, if a company performs well, its dividend yield will be high.

• Liquidity Ratio: The company can repay its short-term debts quickly.

 

 

 

Step 3: Check About The Company's Competitors and Competitive Advantage

 

Study various aspects of the company to find its competitive advantage.

 

Watch out for the following that gives a solid competitive advantage to a company:

 

• Business model

• Brand

• Research capabilities

• Patent ownership

• Ability to innovate

• Operational excellence

• Superior Distribution abilities

 

 

Step 4: Learn About The Company's Management

 

Annual reports are the best resource to help you learn about a company's management.

 

Reading transcripts of company conference calls is also beneficial to gain valuable insights about the company’s board of directors and boardroom members.

 

 

Step 5: Use Price Charts To Identify Significant Trends

 

Price charts help explore an investment opportunity. It tells you about medium to long-term trends in the share price history of a company.

 

 

Step 6: Monitor The Stock

 

Adding stocks to the watchlist makes monitoring them easier and deciding whether it is the right time to invest. You can easily access charts, share price moves, news, and other essential details.

 

 

Step 7: Look Beyond Statistics

 

Besides studying a company’s financials, pay attention to any changes to its goals, events or economic conditions, and sudden developments that could affect the company and its investors.

 

 

3. What Is The Best Way To Analyse Stocks?

 

Stock investing can be rewarding when you extensively research the issuing companies.

 

There are two main stock analysis methods, as discussed below:

 

 

1. Fundamental Analysis

 

The basis of fundamental analysis of stocks is that the stock price reflects the company’s growth.

 

In other words, the value of the share rises when the company grows. It assesses the underlying company’s fundamentals, business, financial health, and management. It includes:

 

• Business segments

• Financials- financial ratios - P/E ratio, net profit margin, return on equity, profit and loss statement, balance sheet, cash flow statement, debt, etc.

• Past performance

• Earnings, revenue, and future growth

• management, and stakeholders, along with their holdings in the company

 

 

2. Technical Analysis

 

Technical stock analysis is ideal for short-term investors and traders. It is based on the belief that the stock price largely depends on the demand and supply of the company’s shares, which determines the stock value.

 

The analysis focuses on the trend in the stock price. It also believes that past stock price movements reflect its future performance. Technical analysts aim to profit from the short-term stock price movement.

 

Some of the popular technical indicators include:

 

• Stock price charts 

• Bollinger Bands

• Ichimoku Cloud

• Relative Strength Indices (RSI) 

 

 

 

4. How To Research Stocks For Beginners?

 

If you are new to the stock research process, here are five practical ways to learn what stocks to buy for beginners:

 

 

Step 1: Identify What Type of Investor You Are

 

Take time to understand your risk tolerance, primary investment objective, and what kind of investments suit your goals. This analysis will help you find the right asset stocks for your portfolio.

 

 

Step 2: Understand The Types of Stocks Available

 

To find the best shares to buy for beginners in Australia, you need to watch for economic and stock market changes and diversify across different sectors.

 

The following are the types of stocks traded on the ASX:

 

• Blue Chip Companies - S&P/ASX 50 comprises the top fifty well-established and stable companies with a track record of consistent and low-risk returns.

• Speculative Companies - Such stocks lack a long market history and may yield significant returns or losses. They are ideal for experienced investors who risk capital to obtain higher returns.

• Capital Growth or Income: Find out what you expect from your shares – capital growth or regular income. Dividend stocks are best for investors seeking steady income. Such companies tend to be larger companies on the ASX. 

 

On the other hand, if your investment goal is capital growth, smaller companies can be your best bet. Such companies have more potential to grow and increase their market capitalisation.

 

They don’t pay dividends but reinvest their profits in the business, which leads to greater stock price appreciation than income stocks.

 

 

Step 3: Choose Market Sectors

 

Once you decide on the type of stocks, the next important step is to choose which industry you want to invest in. It could be:

 

• Finance — Financial institutions like banks come under this category. Stocks in this sector usually offer consistent income via high dividends.

• Resources — It is a cyclical sector that comprises mining companies. Such stocks usually don’t give high dividends but offer high capital growth potential. The industry performs well when the global economy is healthy and vice versa.

• Consumer — Retail companies constitute this sector. They offer medium-sized dividends and tend to rise or fall as per the country’s economic state.

• International — Such stocks provide access to larger overseas markets, thereby enabling investors to achieve broader diversification. This sector is volatile and offers the potential for higher returns. 

 

 

Step 4: Understand Investment Terminologies

 

Become comfortable with commonly used investment terms:

 

• Revenue

• Net income

• Earnings per share (EPS)

• Price to earnings ratio (P/E)

• Return on equity (ROE)

 

 

Step 5: Buy What You Know

 

Start with an industry/business sector you know. This way, you will get a better chance to recognise whether a company is weak or strong.

 

Look at the ASX list of companies and list companies that interest you. Now check the following:

 

• What is the current market position of the company?

• How does the company compare to others within the same sector?

• What competition does it face?

• Are the company’s services and goods likely to stay in demand in the coming years?

• Are there growth opportunities for the company in the future?

 

 

 

Step 6: Analyse The Stock

 

Once you have finalised the company you want to invest in, you must determine the right time to enter the stock.

 

Most brokers offer technical research tools on their trading websites. Investors can use them to compare key financial details of a company in one place.

 

Trading volume, support and resistance lines, market capitalisation, trend line, and earnings per share (EPS) can help you find the right point to buy the stock.

 

Besides technical analysis, closely look at the company’s yearly reports, price chart, and financials to determine whether it is overvalued or undervalued. This information will help you find the right entry price in the stock.

 

 

Step 7: Get More Insights About The Company

 

Other factors you may consider to pick the best stock for your goals:

 

• Company leadership team

• Company values

• The company's competitive advantage and its competitors

• Market sentiments about the company

• Any significant update or declaration by the company, like change in valuation, acquisitions or mergers, etc., and its impact on investors 

• Potential future growth prospects and risk factors

 

 

5. How Do You Predict If a Stock Will Go up or Down?

 

There could be several indicators; however, finding the stock's valuation is the best indicator of whether it will go up or down in the coming days.

 

If a stock is undervalued and trading at a value below its intrinsic price, then it indicates that it may go up. However, it is essential to know the main reason behind the fall in the share price. If there is a significant problem with the company or the sector in which it operates, the price drop may continue.

 

On the other hand, if a share is trading at a very high price, it may have become overvalued, and the price may drop.

 

However, some shares trade at a very high price due to solid performance and future growth potential, and investors are keen to buy them at higher prices. So, they may fall by a small percentage but stay high.

 

In most cases, undervaluation pulls the share price up, and overvaluation pushes the share price down.

 

 

6. How Can You Determine if a Stock is Overvalued or Undervalued?

 

A company’s stock with a low valuation ratio concerning its industry peers may be undervalued. On the other hand, a company with a high valuation ratio could be overvalued.

 

Market sentiment around the stock or its operating sector could explain its current valuation.

 

 

7. What Is The Most Popular Stock Indicator?

 

Traders frequently employ not just one, but four widely used stock indicators when engaging in stock trading:

 

 

Moving Average

 

It is a technical analysis tool that creates a continuously updated average price to even out price data.

 

The average is taken over a certain period - 10 days, 20 minutes, 30 weeks, or any custom period. Long-term trend followers and investors often use the 50-day, 100-day, and 200-day simple moving average.

 

 

Moving Average Convergence Divergence (MACD)

 

The moving average convergence divergence (MACD) is another popular indicator that helps traders find stocks that follow a trend and have an increasing short-term momentum.

 

 

Relative Strength Index

 

Another widely used momentum indicator is the relative strength index. It measures the magnitude of the latest stock price changes, whether overbought or oversold.

 

This oscillating indicator oscillates in the range of zero to 100. When the indicator is above 70, the stock price is "overbought" - and is due for a correction. On the contrary, when the indicator is below 30, it shows the stock price as oversold and due for a bounce.

 

 

 

On-Balance Volume (OBV)

 

The on-balance volume (OBV) is another commonly used indicator that takes considerable volume information to measure cumulative buying and selling pressure in a stock.

 

 

8. How Do You Know If A Market Is Bullish or Bearish?

 

One of the main things differentiating a successful trader from an average trader is knowing whether the market is bullish or bearish. Evaluating the relative strength of the market is the key to determining it.

 

Here is how to find whether a stock is bullish or bearish:

 

 

Bullish Stocks

 

The main attribute of a bullish stock is strong uptrend behaviour. The strength and length of their price increase are often more significant than that of other stocks. 

 

Additionally, their prices hardly drop when the overall market takes a break. And even when the market is going down, these top-performing stocks increase in price.

 

 

Bearish Stocks

 

They show substantial weakness and quick price decreases even in a bull market or when the general market index rises. After a much longer price decline, the stock may move slightly higher again but is often tiny.

 

Such stocks represent a good profit-earning opportunity, provided that you make money with a suitable trading strategy.

 

Here are the two best methods to spot strong or weak stocks:

 

• 50-day moving averages 

• Compare the stock price action with that of the leading stock market index.

 

 

9. Where Should You Research a Company Before Investing?

 

After you figure out what to look for in a company's stock, the next step is to find out where to get the information you need to make your investment decision.

 

Here are some of the places to find stock research materials:

 

 

1. Annual Reports

 

The annual report is a business's report card. Start your research by reviewing the company’s present and last year's reports on its website. It helps you compare a company’s progress based on:

 

• Future prospects

• Core business activities

• Is the company generating profit or loss

• Company strategy

 

Annual reports include:

 

• Form 10-K: It includes significant financial statements that are independently audited. You can review the company's income sources, balance sheet, cash handling mechanism, expenses, and revenues here.

 

• Form 10-Q: The form shows you the quarterly report of the company's operations and financial results.

 

 

2. Company’s Prospectus

 

You should check the company’s prospectus if a company issues shares for the first time.

 

 

3. Brokerage Website

 

Critical financial ratios are found on the brokerage firm's website or significant financial news websites like "afr.com."

 

It will help you compare a company’s performance against others for your investment dollars. Your broker can also provide research reports on companies of interest.

 

 

4. Stock Research Websites

 

Stock research websites are a beneficial resource to learn how to research stocks. Some of the best stock research websites are:

 

• Australian Securities Exchange

• Market Index

• Simply Wall ST

• Morning Star

• US Security and Exchange Commission (SEC)

 

 

 

5. Use Stock Screeners

 

Most brokers also offer educational and research tools like stock screeners that enable you to compare companies. You can also find several free stock screeners online.

 

 

10. Frequently Asked Questions (FAQs)

 

 

What Do The Numbers Mean When Looking at Stocks?

 

The numbers next to the stock price indicate how well the stock is doing. For instance, if you see two numbers alongside the stock price – one is the current price, and the other shows how much it has gone up or down since the last closing.
 

For example – Stock Name; current trading price (Up arrow or Down arrow); price point by which share price has increased or decreased from the previous close (Percentage change in share price from the last close).

 

ANZ Group Holdings Ltd (ANZ): 25.04; (Up arrow); 0.24; (0.97%)

 

This indicates that the stock is trading at a current price of $25.04 and has increased by $ 0.24 or equivalent to 0.97% from the last close.

 

 

Who Is The Most Accurate Stock Predictor?

 

Fundamental analysis is the most popular way to predict stock prices in the long run. However, technical analysis is ideal for short-term stock price prediction.

 

 

Which Algorithm Is Best For Stock Prediction?

 

Due to the market’s dynamic nature, accurate stock price prediction is often a challenge for even experienced traders. However, a few algorithms give a fair estimate of stock price movement in the near term.

 

You can use technical analysis, machine learning techniques like Support Vector Machines and Artificial Neural Networks, and traditional time series forecasting algorithms to assist in predicting and understanding stock price changes.

 

Each algorithm has its method to learn patterns and predict. Artificial Neural Network is the most popular method incorporating technical analysis to predict the financial market’s performance.

 

Always seek the help of a professional financial advisor before making any investment decision. Investing carries risk. The above are just some general options for educational purposes. All these options come with risk. This is not financial advice.

 

 

How Do You Analyse A Stock Before Investing?

 

The following are the simple steps to analyse a stock:

 

• Research the sector in which the company operates

• Understand the business and operation of the underlying company

• Look at the company’s finances 

• Study the company’s leadership team

• Evaluate the future growth prospects of the company

• Compare individual stocks with their peers

• Find out the stock’s valuation – undervalued or overvalued

• Do risk assessment

• Track the company’s performance

 

 

How Do You Know If A Stock Is Good?

 

Whether a stock is worth buying depends on an individual's different timelines, portfolios, personal situations, and risk appetites.

 

Follow the below steps to determine whether you should consider investing in a stock:

 

 

Step 1: Get the Basic Information About a Company From Its Website

 

It includes earnings reports, management changes, key metrics, capital raises, significant updates like stock valuation, and product announcements.

 

Some of the documents you should check include the following:

 

 

 

Quarterly Earnings Reports

 

• Balance sheet 

• Income statement 

• Cash flow statement

 

 

Annual Reports 10-Ks

 

The US Securities and Exchange Commission (SEC) publishes this report annually.

 

It gives information about the financial performance of all US publicly traded companies. It includes information about a company’s earnings per share and how it generates income, organises its business, pays its executives, etc.

 

 

Press Releases and Market Announcements

 

Listen to companies’ press conferences, commentaries, etc., where companies inform the market about any good or bad thing that happens within the company and could impact its share value.

 

 

Step 2: Gain The Public Views and Insights

 

Cross-check what you have understood with what people think to make the best decision you can. Understanding different viewpoints for each stock may help strengthen your case for buying the stock or consider other stocks you are interested in.

 

A few sources to get alternative insights and views are:

 

• Financial press: Online newsletters, stock analysis websites, news, and financial journalists.

• Broker research reports on specific sectors or companies. 

 

 

Step 3: Find Out Whether The Company Suits Your Goals

 

It is essential to build a portfolio you feel confident and comfortable with. Add the company to your watchlist to determine whether it aligns with your broader portfolio strategy, investment timeframe, and risk tolerance.

 

 

How Do Traders Know When A Stock Will Go Up?

 

As a general rule, if a stock is overvalued, it is likely to correct and become cheaper and vice versa.

 

Here is how traders predict the market:

 

 

Fundamental Analysis

 

This method works by calculating a company’s intrinsic value and analysing the factors that may impact its future worth to determine whether its stock price is undervalued or overvalued.

 

Fundamental analysts use the following parameters to calculate a company’s intrinsic value:

 

• The overall economy and industry conditions

• Company’s financial weaknesses and strengths

• Company’s management

• Company’s revenue, earnings, and debt balances

• Company’s operating cash flow and revenue margins

• Company-specific metrics

 

 

Technical Analysis

 

Technical analysis gives you an idea of when a stock is about to rise in the short term. Technical analysts study chart patterns, trading signals, and trends to find short-term trading opportunities and form predictions.

 

Most investors choose a mix of technical and fundamental analysis and only trade stocks with robust fundamentals.

 

This allows them to confidently hold a day or swing trade for an extended period without concerns, as they have faith in the solid fundamentals of the underlying stock.

 

 

11. Conclusion

 

Stock research involves collecting suitable materials from the right websites, evaluating key numbers (quantitative stock research), asking critical questions (qualitative stock research), and analysing how a company compares to its industry peers and past performance.

We hope this comprehensive guide has given you a clear understanding of how to research stocks and find the right one for your investment goals.  

 

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