Let’s say you have an investment idea. You think that, for example, green energy is the next big thing, and you recently heard a television analyst talking about a specific company that manufactures solar panels. He thinks that this company is in a good position to capitalize on an increasing public demand for green energy sources. Since you think that this stock might have investment potential, you want to do more research. But where do you start?
This is a question that many investors struggle with. There are literally thousands of websites that provide information about stocks. You can find stock screeners, financial documents, analyst reports, charts, industry information, blogs, forums, and much more.
Many investors are overwhelmed by all of this information. Some might not do enough research before buying a stock. Others might spend too much time focusing their research on the wrong things. Yet others might simply hear a stock recommendation
from a colorful television analyst and decide to invest in that stock without doing any of their own research at all.
But what exactly is focused research? Before we address this question, let’s gain some perspective by learning a little bit about how the financial industry makes money from you and how this relates to your success as an individual investor.
Let’s assume that your stock broker made a recommendation about a particular stock, or gave you a “hot tip”. He urged you to buy a stock
quickly before you missed out on the opportunity. How would you know that the stock that your broker presented in his “hot tip” was actually a good investment? Well, to keep it simple, most people didn’t. They had to trust that their broker would recommend the right stocks.
At the time, researching a stock was much more difficult. You didn’t have access to all of the free information that is now available online. Since your broker was incentivized to make money for himself by convincing you to buy stocks, you couldn’t be sure that he had your best interest at heart when he recommended a stock. The only thing that was certain was that he was trying to earn as much commission as possible. The result of this system was that, if you were lucky enough to have a trustworthy broker who made good stock recommendations, you were able to make some money. But if you didn’t have a good broker, and you didn’t know how to find one, it was much more difficult to invest successfully.
Determining what is important to you in an investment isn’t easy. If, after spending some time thinking about this, you still don’t feel like you know enough about investing to understand what is important, You are suggested that you read a book or two on the topic before proceeding. To give you some basic ideas, here are some steps below that are typically used by investors.
* Review the company’s profile and some basic measures. This is a screening step that helps me to get an idea of whether I’m interested in the stock in the first place. There are a number of sites that post basic company profiles.
* Analyze financial documents, including the balance sheet, cash flow statement, and income statement. This step helps me determine the financial health and overall profitability of a company.
* Check for revenue and income growth over time. If I see that these measures are increasing over time, it is typically a good sign that the stock price could follow.
* Research the Industry and Compare the Stock to Its Competitors. I like to do some basic research about the competition and industry to gauge whether a company is in a favorable competitive position.
* Browse SEC filings, including the annual report and recent quarterly reports. There is a good deal of incredibly useful information in these documents that companies are required to disclose at regular intervals.
* Listen to the most recent investor conference call. The investor conference call is typically held each quarter, following the company’s quarterly earnings release. The investor conference call is a great source of both subjective and objective information about a company.
* Read recent news stories and research recent developments. Understanding what is going on right now with a company is also important to me. Therefore, reading news stories and researching recent developments helps me to gauge if a company is on the right track.
* Review trading volumes and insider buying activity. I like to look for recent institutional and insider buying.
* Review key financial ratios and numbers. A few of the key items that I review include the PE Ratio, PEG Ratio, ROI, ROA, ROIC, and a few balance sheet ratios.
* Research dividend history. The dividend is important to me because I think it tells you a good deal about a company’s financial health. I like companies that have been increasing their dividend payout ratio over time.
* Research the effectiveness of the management team. Does the management team have a solid track record of being able to improve profits? If the management team is new, I like to research their past performance at other companies or in prior roles.
* Analyze the stock price. I like to look at not just the stock price itself, but also the company’s historical stock price compared to its PE ratio. This gives me a better idea of whether I should buy a stock now or wait until it becomes a better value.
This is a question that many investors struggle with. There are literally thousands of websites that provide information about stocks. You can find stock screeners, financial documents, analyst reports, charts, industry information, blogs, forums, and much more.
Many investors are overwhelmed by all of this information. Some might not do enough research before buying a stock. Others might spend too much time focusing their research on the wrong things. Yet others might simply hear a stock recommendation
from a colorful television analyst and decide to invest in that stock without doing any of their own research at all.
But what exactly is focused research? Before we address this question, let’s gain some perspective by learning a little bit about how the financial industry makes money from you and how this relates to your success as an individual investor.
Let’s assume that your stock broker made a recommendation about a particular stock, or gave you a “hot tip”. He urged you to buy a stock
quickly before you missed out on the opportunity. How would you know that the stock that your broker presented in his “hot tip” was actually a good investment? Well, to keep it simple, most people didn’t. They had to trust that their broker would recommend the right stocks.
At the time, researching a stock was much more difficult. You didn’t have access to all of the free information that is now available online. Since your broker was incentivized to make money for himself by convincing you to buy stocks, you couldn’t be sure that he had your best interest at heart when he recommended a stock. The only thing that was certain was that he was trying to earn as much commission as possible. The result of this system was that, if you were lucky enough to have a trustworthy broker who made good stock recommendations, you were able to make some money. But if you didn’t have a good broker, and you didn’t know how to find one, it was much more difficult to invest successfully.
Determining what is important to you in an investment isn’t easy. If, after spending some time thinking about this, you still don’t feel like you know enough about investing to understand what is important, You are suggested that you read a book or two on the topic before proceeding. To give you some basic ideas, here are some steps below that are typically used by investors.
* Review the company’s profile and some basic measures. This is a screening step that helps me to get an idea of whether I’m interested in the stock in the first place. There are a number of sites that post basic company profiles.
* Analyze financial documents, including the balance sheet, cash flow statement, and income statement. This step helps me determine the financial health and overall profitability of a company.
* Check for revenue and income growth over time. If I see that these measures are increasing over time, it is typically a good sign that the stock price could follow.
* Research the Industry and Compare the Stock to Its Competitors. I like to do some basic research about the competition and industry to gauge whether a company is in a favorable competitive position.
* Browse SEC filings, including the annual report and recent quarterly reports. There is a good deal of incredibly useful information in these documents that companies are required to disclose at regular intervals.
* Listen to the most recent investor conference call. The investor conference call is typically held each quarter, following the company’s quarterly earnings release. The investor conference call is a great source of both subjective and objective information about a company.
* Read recent news stories and research recent developments. Understanding what is going on right now with a company is also important to me. Therefore, reading news stories and researching recent developments helps me to gauge if a company is on the right track.
* Review trading volumes and insider buying activity. I like to look for recent institutional and insider buying.
* Review key financial ratios and numbers. A few of the key items that I review include the PE Ratio, PEG Ratio, ROI, ROA, ROIC, and a few balance sheet ratios.
* Research dividend history. The dividend is important to me because I think it tells you a good deal about a company’s financial health. I like companies that have been increasing their dividend payout ratio over time.
* Research the effectiveness of the management team. Does the management team have a solid track record of being able to improve profits? If the management team is new, I like to research their past performance at other companies or in prior roles.
* Analyze the stock price. I like to look at not just the stock price itself, but also the company’s historical stock price compared to its PE ratio. This gives me a better idea of whether I should buy a stock now or wait until it becomes a better value.
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