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 to Invest in
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. 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 will describe an algorithm that will help you to become a pro in finding a company for investment. Let’s take a closer look to find out how to research stocks to buy.
How to Research Stocks for Beginners?
One of the most important things is to identify your goals and make your portfolio diversified. One of the main rules of investment is to trust in what you buy. If you’re a true geek and you love technology, while researching a stock to buy, keep IT startups in mind. If you are a green person and you 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 watch the numbers. Ideally, you know the market and you’re aware of the latest trends and discoveries in this field.
So let’s say you’re fond of the sustainability topic and you want to research 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, let’s answer a few simple questions.
What is their business model?
Is it transparent enough? In the case of many Asian companies, for example, there are many political factors and risks involved. Also, be aware of single-person companies where all of the profits are the outcome of one man's charisma because it implies the risk of him or her leaving the company. While researching stocks to buy look at the company’s performance during the latest crises. Some companies that tended to be conservative easily adapted to the new reality and canadd value to your portfolio.
What makes them 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?
Who owns it?
When you evaluate a company, do not forget that changes in management 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.
What has to happen for this company to 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.
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 the 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 — the main difference from revenue is that this ratio is about profit only. Tesla's revenue is $31,536B while net income is just $690M.
- Now we’re reaching slightly bit less obvious ratios that are still very important when researching stocks. СAGR is one of the most important parameters for individual investors. This ratio shows the annual growth of investments over a certain amount 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.
This graph shows the price to ratio of Tesla over the last 5 years.
The last ratios that are important to mention when talking about the best way to research stocks would be 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 their assets to generate income.
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 dollar debt the company has negative cashflow numbers and is losing to other auto giants. If you love cars, not only Elon and as an investor, you should be looking for something stable and profitable—German car-makers would be a better decision.
Talking about debt again is one more ratio — 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 shows that the company pays off their 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.
Where to Research Stocks?
Let’s talk about the best way 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 important information and track multiples in a convenient and personalized way.
Stock screeners. It is one of the best ways how to research a company for stock. There are technical 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. Watch the trends regularly.
Newsletters, expert blogs and channels with updates. Watch the industry and the market. If you’re fond of green technologies and you 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 significant things.
Let’s sum it up with a quick exercise using some of the ratios we talked about.
Let’s take companies from one industry. Remember, that your decision should be based not only on 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 an impressive Year-over-Year revenue growth of 43%. Both companies are definitely a good choice, however, some of the forecasts and ratios in the table below would be more on FirstSolar's side.
Can I research stocks for free? Where to research stocks?
For sure: most of the ratios can be found on company websites as well as in the reports of the 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, do your own research. Even big experts make mistakes. Ask Gainy how to research a company for stocks: 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 economical background?
Awesome news – more than a 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. Step by step learn most important metrics, read and ask, do not be afraid to look stupid - most of the Harward graduate economists were not able to predict 2008 crisis. Be curious! We are here to provide you with the latest trends and updates.
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