How To Research Stocks | Stash Learn

How to research stocks

Published: Jun 07, 2024

• Updated: Aug 27, 2024

It all comes down to research. Investors rely on some key strategies, sources, and data to identify which opportunities are right for their unique needs and portfolios. There isn’t any one “right” research method that applies to every investor, but these tools can give you the perspective you need to decide what’s right for your investment goals.

If you don’t have access to a stock advisor or analyst who can determine fair value for stocks and provide you with recommendations, it’s up to you to research individual stocks before you buy them. This guide will walk you through how to research stocks, even if you’ve never ventured into investing before.

What is a stock?

Before learning how to research stocks, make sure you understand what this kind of investment is. Stocks are securities that represent partial ownership of a public company. Publicly traded companies sell a limited number of stocks, which investors then trade on the stock market. Stocks, also called shares, come with different risks and potential rewards, and no two stocks perform exactly the same. That’s why it’s so important for investors looking to purchase individual stock in a specific company to perform stock analysis before they buy shares. You might also want to brush up on important stock market terms before you get started.

Where to research stocks

When you’re researching stocks, you want to look at a company’s financials, leadership, and the industry at large. That can be a lot to think about, and there are lots of places to dig up the info.

When you’re looking into a specific company, you can get a wealth of details about its finances. Public companies are required to file a couple key forms with the U.S. Securities and Exchange Commission (SEC):

Form 10-K: This annual report is a comprehensive overview of a company’s financial condition, including their audited financial statements, balance sheet, and cash flow.
Form 10-Q: This is a quarterly review of a company’s financial performance.

This financial data is then made available to investors. You can easily find these forms for any company you’re researching by using the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) website.

All that in-depth financial data can be very useful for stock analysis, but it can get very technical. Looking to other sources for context and key information can make it easier to evaluate stocks for beginners and seasoned investors alike. Here are some handy places to start:

Your brokerage: Most brokerages provide key financial data on their websites, including stock price and price history, stock charts, and tools that allow for performance comparison or even industry trends research.
Financial news and research reports: Major company changes, like layoffs, acquisitions, losses, or other market-moving news, can impact a company’s stock performance. As a potential shareholder, you’ll want to know about them. Your brokerage may have a “news” section, and you can usually find important announcements on any major financial media outlet.
The company’s website: Visit a company’s website to learn about its leadership team, mission, and direction, and any recent news or press releases. This can give you a sense of how the company competes and innovates.
Stock screeners: If you’re not yet sure which companies you’re interested in, you might use a stock screener to find potential good stocks to buy for your investing goals. These websites can help you find stocks, mutual funds, and ETFs that match your investing criteria; then you can research the individual stocks more deeply.

The two types of stock analysis

There are two major types of stock analysis: fundamental analysis and technical analysis. Each approach has its fans and detractors; the best way to study stocks depends on the type of investing you do.

Fundamental analysis

Fundamental analysis assumes that the stock price doesn’t necessarily reflect the intrinsic value of the business. Primarily used by value investors looking to hold shares long-term, fundamental analysis uses value metrics in financial statements and economic indicators to assess a stock’s value. This includes a company’s profitability and liquidity, interest rates, the state of the market, news, and business information.

Essentially, investors use fundamental analysis to make an investment decision by looking at as many factors impacting a company’s success as possible and attempting to predict its future performance versus its current worth. It’s a way to assess whether a company seems to be stable, growing, or losing ground.

Technical analysis

Technical analysis, on the other hand, assumes that stock prices do reflect the stock’s true value. With this approach, investors research stocks primarily by reviewing historical price and volume data. They believe that you can predict future behavior by understanding patterns in a stock’s price history.

Be aware that technical analysis is largely used by short-term investors who are hoping to take advantage of transient price fluctuations. This is a common strategy for day traders and penny stock investors. Such short-term stock investing is generally much riskier than long-term investing.

Key investing metrics

Whether you’re reviewing a company’s 10-K or browsing a brokerage’s website, you’ll have a lot of info to work with. It can quickly get overwhelming. Luckily, you don’t need to work through every bit of financial data. There are a few key numbers and ratios you’ll want to focus on as you do your stock research.

Keep in mind that none of these metrics alone will give you a complete picture of a stock’s potential performance. Understanding what each means and considering them together, though, may provide useful insight for your analysis of a stock you’re researching. You can generally find this data in the company’s financial statements and stock chart; the chart will also provide some additional data points and visualizations of trends over time.

And don’t forget, the data you see can help you analyze a company’s health, but you’ll never be able to predict its long-term growth with complete accuracy.

Revenue

You may already be familiar with the idea of revenue; it’s simply the amount of money a business brings in over a specific period of time, usually a year or quarter. Most often, revenue is the first thing you’ll see on a company’s income statement. Revenue that’s increasing over time can be an indicator of growth, but stable or decreasing revenue alone is not necessarily enough to discount a stock entirely. It can be driven by other factors like seasonality, market-wide trends, or temporary situations in the national or global landscape, such as a natural disaster.

Net income

Revenue and net income might seem similar, but they’re actually very different concepts. Net income is a company’s revenue minus all the company’s operating expenses, taxes, and depreciation. Essentially, it’s the actual profit a company makes. When you research stocks, you might consider net income as a measure of how the company is spending its profits. Companies that are heavily investing in their products, like those innovating, acquiring businesses, or in their startup phase, are likely to have a lower net income because they’re spending a lot of their revenue on growing the business. Stable, well-established blue-chip stock companies tend to have high net incomes because they focus more on scaling and efficiency; these companies often distribute some of their revenue to shareholders through dividends, which provide a stable source of fixed income for investors.

Earnings per share (EPS)

EPS is the portion of a company’s profit allocated to the outstanding shares of common stock. By breaking profitability down to a per-share basis, investors get a clean number to compare across companies. You might use EPS to compare the profitability of different companies in the same industry when you research stocks.

52-week range

The 52-week range is the highest and lowest stock price over the past 12 months. These two numbers tell you where the current stock price lands between the top or bottom of its price range over the last year. The 52-week range might give you a sense of a stock’s volatility, or how much its price tends to vary over time, as well as provide some insight into whether the stock’s value seems to be rising or falling.

Price-to-earnings (P/E) ratio

The P/E ratio is used in fundamental analysis to make educated guesses about whether a stock’s price at the moment is a good deal or possibly overpriced. Investors calculate the P/E ratio by dividing the company’s share price by its EPS. For example, a stock trading at $10 with an EPS of $2/share would have a P/E ratio of 5. This is primarily used to compare companies within the same industry, apples to apples, where many of the external drivers are the same.

Price/earnings-to-growth (PEG) ratio

The PEG ratio is a company’s P/E ratio divided by its annual earnings per share growth. This can help investors see beyond the P/E ratio to consider expected earnings that have not yet been realized.

Price-to-book (P/B) ratio

The P/B ratio compares a company’s stock price to its book value, which is the net value of all its assets. Like the P/E ratio, this is generally used to compare businesses in the same industry.

Debt-to-EBITDA ratio

Debt isn’t necessarily a bad thing for businesses; borrowing money can be a fruitful strategy for growth. But just like people, businesses have credit scores, and bad credit or too much debt could pose problems, from spending too much on interest to being unable to fulfill its financial obligations in tough economic times. EBITDA stands for earnings before interest, taxes, depreciation, and amortization, and the debt-to-EBITDA ratio can indicate how much capacity the company has to pay its debts.

Qualitative stock research

Once you have a good sense of the financials, it’s time to get into the less quantifiable factors investors should consider. These are the non-financial elements that can make or break a company’s performance. If investors only looked at financial statements, they could miss major red flags in a company’s future prospects. Or, they could miss big green flags in a company that is growing but hasn’t hit significant returns yet.

Historic performance: Historic performance is more than the numbers. Does a company innovate? Is it still growing, or is it stagnant? Has it been a market leader, underdog, or second-tier competitor? Understanding a company’s history can give you a sense of where it’s going.
Competitive advantage: If you’re investing long-term, your success depends on buying stock in companies that will sustain or grow market share over the long term as well. Factors like patents, innovative technology, or a well-known brand can sustain a company, but not forever. This is why keeping an eye on industry trends is so valuable. What was once a competitive advantage could become a weakness if a company doesn’t keep up. Remember Blockbuster Video? The massive market leader crumbled pretty quickly when it failed to seize on streaming video and Netflix capitalized on it to gain competitive advantage.
Management: A company with a great product can still lose value because of poor management. If a company has had a lot of executive turnover or has inexperienced executives, some investors see it as a sign of turbulence to come. You might want to look at leadership experience and whether or not executives receive stock-based incentives when reviewing a company’s executive team.
Growth analysis: Unfortunately, you can’t see the future. But sometimes, you can make educated guesses with what you already know. How much potential growth is there in the company or industry? Are they expanding into new industries, acquiring companies, or extending their reach? What do their profit margins look like?

Industry trends

No company lives in a vacuum, not even a vacuum company. The future performance of a business is impacted significantly by shifting industry trends. You can find publicly available industry information in a number of places, including a company’s own reports, news sites, trade magazines, financial sites, and often in your brokerage. If you’re interested in investing within a particular industry, consider subscribing to relevant news to stay updated on trends.

As you research stocks, placing the individual company information within the context of the industry gives you a bigger-picture perspective. Consider changes to laws, consumer trends, trade regulations, and other factors that can impact the performance not just of a single company, but of all the businesses within that industry. When an industry overall is thriving or diminishing, or if changes loom on the horizon, there’s likely a fair chance the specific stock you’re considering may be affected, for better or worse.

Your risk tolerance

Now that you understand how to research stocks, it’s time to decide how to pick the ones that offer the balance of risk and potential reward you’re comfortable with.

Risk is the degree of uncertainty of your investment’s future returns. All stock trading comes with some degree of risk, and there’s no guarantee of returns. Your risk tolerance is how much risk you’re willing to endure in pursuit of potentially earning a profit. Factors that go into your level of risk tolerance include your age, income, and investing goals.

As you do your stock analysis, you can begin to assess how risky any given stock might be. That will guide your investing decisions. For instance, value stocks and growth stocks occupy opposite ends of the risk/reward continuum. Conservative investors may be most comfortable with more stable value stocks that have lower potential returns. On the flip side, aggressive investors might find growth stocks appealing because they may have much higher returns, even though there could be a higher risk of losing money.

Ready to research stocks and start investing?

Now that you’ve learned how to research stocks, you might want to move from analysis to action. To start investing in stocks, you’ll need to do a few things:

Decide how much you should invest . This will be determined by your income, your goals for investing, and your time horizon for reaching those goals.
Open a brokerage account . You can’t buy stocks directly on the market; you’ll need to open an account with a brokerage that will execute trades on your behalf.
Put together an investment portfolio . Your portfolio is the mix of all the investments you make, including stocks, bonds, and funds. This is where you’ll really put your stock analysis skills into practice as you select stocks for your portfolio.

Knowing how to research stocks is an important first step to becoming a savvy investor. But you don’t have to undertake your investing journey alone. You might want to speak to a financial advisor for advice specific to your situation. And your brokerage may provide tools to help you build and manage your portfolio, like a robo-advisor. The sooner you start, the greater your potential returns.