Investing is an important part of building a successful financial future. As you work to build wealth, learning how to research stocks can help you build a portfolio to propel you towards your financial goals.
Luckily, learning how to research stocks is completely possible. Although it will take a bit of time and effort, building this skill set can help you build the portfolio you want. Let’s take a closer look at the ins and outs of researching individual stocks.
How to research stocks
Should you be buying individual stocks? This is a common investing question and effective stock research can help you build an investment portfolio that is aligned with your financial goals. That being said, here’s what you need to know when learning how to research stocks.
Determine what kind of investor you are
Before you can dive into the nitty-gritty details of stock research, you should take some time to understand what type of investor you are. You also want to understand the type of investments that will work well for your financial goals. Essentially, you need to know what you are looking for. Otherwise, it will be more difficult to find stocks that will fit into your portfolio.
With that, you should take some time to consider your long-term wealth accumulation goals. Additionally, think about how your risk tolerance will play into your investment choices.
Not sure where to get started? Take advantage of our free risk tolerance quiz.
Get familiar with investment terms
The next step is to get comfortable with common investment terms. To get started, you should understand the difference between fundamental analysis and technical analysis.
With fundamental analysis, you will dive into the financial details of the company and seek to determine if the current price of the company accurately reflects the potential future value of the company.
On the other hand, the technical analysis considers market activity factors such as price fluctuations to determine when it is the right time to buy.
In order to build a portfolio that lasts for the long term, it is a good idea to focus on the fundamental analysis. This approach essentially helps you focus on the long term versus playing a timing game. With that said, let's explore the components of fundamental analysis in more detail throughout this piece.
How to conduct fundamental analysis as you research individual stocks
Here are the numbers you’ll need to dig into as you conduct your fundamental analysis on a potential investment:
This is basically how much money the company is bringing in. This is typically measured on an annual basis.
The sum of revenue minus all expenses, taxes, and depreciation will show whether or not the company is making a profit. This is defined as net income.
Earnings per share (EPS)
Earnings per share can be determined by dividing the earnings by the number of shares available for trading. This number will shed light on the profitability of a company on a per-share basis.
Price to earnings ratio (P/E)
The price to earnings ratio considers the current stock price based on its recent earnings.
Return on Equity (ROE)
The return on equity highlights the amount of profit a company can create per dollar of investment.
Each of these numbers will play an important role in determining the overall financial health of the company. Want to take a closer look at how to examine these numbers? Take advantage of our free investing course.
Use any extra tools available to research stocks
When you sign up for a brokerage account, it is likely that the platform will offer tools to help you conduct your stock market research. As you learn how to research stocks, take some time to explore the tools available to you.
Since many brokerage accounts offer extra tools, you might find that your platform offers particular tools that allow you to streamline your stock market research. As you continue to research stocks, take advantage of any tools that help you visualize the important financial details of a company. You can also check out our list of the best stock research websites.
Don’t invest in a company you don’t understand
Beyond the basic numbers that reflect the finances of a company, you should have a basic understanding of how the company earns an income. As you dive into the research of a particular company, you should take the time to ensure that you understand how the company is earning an income. What are its core products and services?
It is possible to make a great return on investment without understanding how a company earns its money. But without even the most basic understanding, an investment in the company could be risky. After all, it should be fairly obvious how a company earns money. If it’s not, then it could be a red flag.
If you have any doubts, then it is a good idea to invest your hard-earned money elsewhere. It's also a good idea to know when you need to sell a losing stock.
Look beyond the numbers
The numbers of any investment are a critical piece of the puzzle. But you should take the time to look beyond the financial details of a company before making an investment.
Review company leadership
You should consider who in charge of running the company. Once you do the research to find out who is in charge, consider whether or not you trust what you know about the management team. Without trust in the company, an investment could be a stressful experience. You want to invest with the knowledge that the management team will do everything in their power to generate a great investment return for you.
Assess company values
Finally, ask yourself whether or not you agree with the company values. These are the beliefs and principles from which the company operates. If you don't agree with them, then you shouldn’t move forward with an investment. There are countless companies out there.
With that, you can likely find a company that will align your values with their company morals. You don’t want to invest in a company that furthers a cause you disagree with. Even if the financial details of a company are outstanding, you might decide that the mismatched moral values are not worth the headache.
The bottom line on how to research stocks
An investment portfolio is an important part of your financial future. With that, taking the time to build a portfolio that aligns with your investment goals and personal values is an important undertaking.
As you learn how to research stocks, don’t rush into anything. Take your time as you learn the basics. If you want more guidance as you learn to research stocks, then consider taking our completely free investment courses. You’ll learn how to build an investment plan for your future and research investments on a variety of levels.