In this article, you will learn how to compare companies for your investment goals and where to get the information you need.
How and Where to Research Stocks: 5 Simple Ways for Beginners
You know the theory, and you know that you need to start buying stocks to become a successful investor. You open the app and… get lost. There are thousands of companies, millions of shares, hundreds of ratios and indexes, and you have no idea where to start. Specifically, how do you research stocks to invest in while avoiding common pitfalls and really hit the profitable spot when you are a total beginner in the field?
We’ve got some great news: you do not have to spend days analyzing each index of every single company you see to make a successful purchase. In this article, we describe an algorithm that will help you to become a pro in evaluating stocks and finding the best enterprises for investment. Let’s take a closer look and find out how to research stocks for beginners.
How to Analyze Stocks and Common Types of Stock Analysis
In order to start efficiently researching stocks, you need to get your specifics straight and figure out what major approaches to stock analysis are there. In a nutshell, stock analysis is like doing your research before buying a house or a car. It is a collection of efforts focused on learning the main properties, quality, reliability, and long-term benefits of the investment opportunity. Exploring the ground before going for actual stock trading is more than necessary in the field, where you can easily fail to make profits simply by making a poor investment decision.
The process of getting familiar with all the main aspects of, say, a company you are looking to invest in is called fundamental analysis. It helps to make sure the investment opportunity is demanded and prosperous enough in the market to consider it in the first place.
A range of tools is available to aid you in your endeavor, which you most certainly should employ for thorough technical analysis. This approach can help you gain insights and create predictions (e.g., of price shifts) based on historical data related to stocks (their past prices, drop rates, and common patterns).
Then, there is a quantitative analysis, which helps you acquire even more insights to drive your stock research by digging into statistics. Statistical and mathematical models are created with the help of a range of metrics to give you a number-based outlook on your investment opportunity.
These three major approaches are your best ways to research stocks, as they have been well tried and tested through the years in practice. Here’s an algorithm for you — start with fundamentals (get to know a company’s profit margins, revenue rates, and market growth patterns), then reinforce your fundamental research with technical details and quantitative analytics to achieve the deepest insights.
How to Research Stocks in 5 Steps
One of the most important things is to identify your goals and diversify your portfolio. One of the main rules of investment is to trust in what you buy. If you’re a true geek and love technology, keep IT startups in mind while researching a stock to buy. If you are a green person and want to contribute to saving our planet, go for it. Your beliefs and ideas should align with your investments: it is important that you enjoy reading the latest company news and watching the numbers. Ideally, you should know the market and be aware of the latest trends and discoveries in this field.
So, let’s say you’re fond of the sustainability topic and want to analyze stocks to buy the best green power company. Solar energy or green transportation — you decide. Let’s discuss how to research a stock before you buy one.
Let’s say you picked two companies, and now you have to identify which one is worth buying. In your stock market research, this step is one of the most important. Let’s take Tesla — number one in green transportation (and yes, we all love Elon!) and something less obvious, for example, the company First Solar, one of the big players in Solar energy systems.
Before diving deep into the world of numbers and indexes, explore and figure out a few simple aspects directly related to the company you want to invest in.
Step #1 — Define a company’s business model
Is it transparent enough? For example, in the case of many Asian companies, there are many political factors and risks involved. Also, be aware of single-person companies where all the profits are the outcome of one man's charisma because it implies the risk of them leaving the company. During the research, when buying stocks, look at the company’s performance during the latest crises. Some companies that tended to be conservative in the past easily adapted to the new reality and can add value to your portfolio.
Step #2 — Learn what makes it unique
For example, we all know what makes Tesla unique. Considering investment opportunities, first, we think of outstanding companies that are widely known for their advantages. In the case of Solar First, what can be more in demand in the 21st century than solar panels?
Step #3 — Identify its management’s reliability
When you evaluate stocks, do not forget that management changes may be dramatic and directly influence a company's numbers. For example, First Solar had hard times when many companies opened up cheap manufacturing in China, but they survived the competition and doubled their capacity. They are stable and growing now. However, if you’re not a conservative investor, there are many promising startups in the industry worth considering.
Step #4 — Find out what can make this company go bankrupt
Death of a leader, war, or a new pandemic? Do not be afraid to think of the craziest scenarios and try to imagine which company will most likely survive the storm if you’re aiming for long-term investments.
If you're a short-term investor, think about what needs to happen for this company to bloom or go bankrupt.
If, according to this first-glance research, you still want to invest, let’s move on to the numbers.
Step #5 — Move on to technical and quantitative analyses
Once you get to know the company you're planning to invest in through first-glance research — its way of doing business, unique selling points, executive powers, and the main risks it may face — it’s time to move on to figures and metrics.
A good set of proven tools will serve as the main indication of how to research companies to invest in down to the bottom. But what particular metrics should you study with their help?
What are the most important metrics to check when conducting your stock research
- Start from the revenue or total amount of income generated. The best approach is to compare the revenue of different companies in one sector. One of the companies we used for our research of stocks to buy is First Solar. Let’s take one more company from this sector to compare results — Jinkosolar Company. The total revenue of First Solar is $2,711B, and the total revenue of Jinksolar is $5,09B, which is better. The point is that these numbers don’t say anything if we don't compare them.
- Net Income. Figuring out how to research shares, keep in mind that the main difference between net income and total revenue is that the latter ratio is about profit only. Tesla's revenue is $31.536B, while its net income is just $690M.
- СAGR is one of the most important parameters for individual investors. Now, we are considering slightly bit less obvious ratios, which, however, are still pretty significant when researching stocks. This ratio shows the annual growth of investments over a certain period of time. So basically, this number will show you the growth of your investments over time.
- Price-to-earnings ratio. This one lets you identify if a certain stock is overvalued or undervalued. How do we do that? We divide the share price by earnings per share. Or check these metrics in Gainy and compare with those of their competitors. Remember that the higher price-to-earnings ratio, the more overvalued the company is.
The above graph shows the price-to-ratio of Tesla over the last five years.
The last ratios that are important to mention when talking about the best ways to research stocks would be ROE and ROA.
Figuring out ROE and ROA
Return on equity (ROE) and Return on Assets (ROA) are two important metrics for evaluating the success of a company's performance, i.e., how well they handle what they have. ROE = Shareholder Equity / Net Income, and ROA = Total Assets / Net Income. If the company is in huge debt, these indexes will show this. If you did your first-hand research about the company's management, but it is still unclear, this is what you need. These ratios show how the company uses its assets to generate income.
Some real-world examples
We love examples. The best way to research stock is to look at real companies’ numbers. The ROE of Tesla is 9.64%, and ROA is 0.70%. What is interesting about these numbers? With more than 10B dollars in debt, the company has negative cash flow numbers and is losing to other auto giants. If you love cars, and not only Elon, as an investor, you should be looking for something stable and profitable — German car-makers would be a better decision.
There is one more ratio when we are talking about debt — Debt-to-EBITDA (EBITDA represents a company's earnings before taxes, amortization, and interests). Debt is usually easy to find in annual reports. What you really need is debt-to-EBITDA — the ratio that shows whether a company is capable of paying its debts. A declining ratio indicates that the company has paid off its debts. If the number is increasing, it means that debt is getting bigger than the amount of income.
This main research provides a picture of where a particular company stands. However, ratios are not the only important element of how to do stock research. Zoom out and take a look at the whole picture: is this company a good fit for your portfolio? Gainy will help you to build a perfectly balanced one and give you a pretty clear idea of how to research stocks on your own.
Where to Research Stocks
Let’s talk about the best mediums to research stocks:
Your own first-hand research. Never miss this step. If you've been reading so far, you already know how to pick a company and which ratios you need to look at first. You do not have to conduct fundamental research to find out the main points. If you like a systematic approach, open a new excel sheet and compare companies in a table, writing down all the pros and cons you see. If it seems like too much work to do, use Gainy to find all the critical information and track multiples in a convenient and personalized way.
Stock screeners. This is one of the best ways to research companies to invest in. There are technology platforms that automatically compare up-to-date company data. Be careful here: you know which ratios you need, and do not get confused and overwhelmed by all the numbers you see.
Run your own channel checks. Monitoring relevant trends on a regular basis is the main pro tip on how to research stocks in a long-term efficient manner. Turn regular reviews of the channels related to your investment field into a professional routine rather than an occasional whim.
Newsletters, expert blogs, and channels with updates. Watch the industry and the market. If you’re fond of green technologies and want to invest in them, make sure you know the main challenges and ideas to be implemented in the industry. You do not have to be a great expert, just be in the flow of the main information so as not to miss any important things.
Let’s sum up our take on how to research stocks on your own and profit with a quick exercise using some of the ratios we talked about.
Take companies from one industry. Remember, your decision should be based not only on the numbers you see, but also on what you read in forecasts and industry statistics. For example, if you read about First Solar, you would know about their ambitious project in India that may turn out to be a great success. SunPower showed impressive Year-over-Year revenue growth of 43%, so both companies are definitely a good choice. However, some forecasts and ratios in the table below would be more on First Solar's side.
Basically, that is how you pick a more promising option out of two investment opportunities. With all the examples and pro tips provided above, it is high time you try your hand at making profitable investment decisions.
And if you are still trying to figure out how to research stocks on your own, pick the path of professional assistance. Contact Gainy specialists to get a team of investment research veterans to back up your investing initiative with field experience and expertise.
Can I research stocks for free? Where do you analyze stocks?
Wondering whether there are methods on how to research stocks on your own for free? There surely are: most of the ratios can be found on company websites as well as in the reports of consulting agencies. These reports are open to the public and have most of the information you need as an individual investor looking for a good addition to your portfolio.
Is there a simple way to build my portfolio without losing money as a beginner?
Do not rush into the decision to buy: read numbers and graphs, and do your own research. Even big experts make mistakes. Ask Gainy how to research companies to invest in: we’re here to help you to get through the complicated world of the stock exchange and make the right choice.
How do you research stocks to buy without an economic background?
Awesome news — more than half of investors did not major in economics in college. Forget your high school economics and its boring problems. You’re not a student anymore, you’re an investor, and your money will serve a purpose. Learn the most important metrics step by step, read and ask, and do not be afraid to look stupid — most of the Harward graduate economists were not able to predict the 2008 crisis. Be curious! We are here to provide you with the latest trends and updates.
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