How to Research Stocks: Be Your Own Equity Analyst

Researching stocks is a fundamental step for anyone looking to invest in the stock market. Understanding how to research what stocks to buy can empower you to do what’s needed to hit your financial goals. This process involves analyzing various aspects of a company, including its financial health, industry position, and market potential.

In thus guide, Techopedia uncovers the seven key steps you were looking for to build your own effective stock research approach.

Key Takeaways

  • Combining quantitative and qualitative analyses provides a holistic view of potential investments, utilizing financial data and company fundamentals to gauge stock viability.
  • Accessing various resources, including earnings statements, financial news websites, and stock screeners, equips investors with the necessary tools for thorough research.
  • Understanding and applying different types of stock analysis—technical, fundamental, and sentiment—enables investors to assess stocks from multiple dimensions.
  • Identifying a personal investment style and consistently applying a chosen research approach is critical for developing effective and sustainable investment strategies.

How to Research Stocks

A thorough stock research process includes examining financial statements, understanding the valuation, and assessing the company’s future prospects.

Stock valuation involves determining the intrinsic value of a stock to ascertain whether it is undervalued or overvalued in the market. This analysis can help you decide if a stock is a suitable addition to your investment portfolio.

Techopedia explains portfolio investment

Types of Stock Analysis

When researching so they can invest in stocks, investors typically employ three main types of analysis: technical, fundamental, and sentiment.

Fundamental Analysis

Stock fundamental analysis helps investors evaluate whether a stock is overvalued, undervalued, or fairly priced.

This technique is the main focus of this article since it is the mainstay of stock market research. It delves into a company’s financial statements, market position, and overall economic health to determine its stock’s intrinsic value.

A chart showing a guide to fundamental analysis

Technical Analysis

Alternatively, you can choose to focus on price movements and trading volumes to forecast future stock price action.

This method analyzes historical market data, including price charts and various market indicators, to identify patterns and trends.

A chart showing the 5 types of technical analysis indicators

Sentiment Analysis

Sentiment analysis gauges the market’s mood or opinion regarding a particular stock or the market as a whole.

This approach can involve analyzing opinion polls, market data like volatility and breadth as well as social media to capture the public’s attitude.

While sentiment analysis can be more subjective, it offers valuable context.

Nadia El Bilassy, Senior Market Analyst at Equiti Group, told Techopedia that her approach is to combine all these types of analysis into her process. She said:

“The best way to find good stocks is to identify trends in the market and understand the fundamentals of why certain stocks are good picks. At this point investors want in, the trend even if it’s overbought.”

Become Your Own Stock Analyst: 7 Steps to Research Stocks Like a Pro

Step 1. Confirm Your Investing Style

Confirming whether you lean toward growth investing or value investing is a pivotal first step.

Growth investors typically look for companies with strong potential for future expansion and earnings acceleration, whereas value investors seek undervalued stocks that are trading below their intrinsic value.

A growth investor might focus more on forward earnings estimates and industry growth trends, whereas a value investor might emphasize financial ratios and company fundamentals.

Equally important is determining your investment horizon. Are you a short-term investor looking for quick gains, or are you in it for the long haul, aiming for gradual appreciation? Your time frame will influence the types of stocks you consider and the depth of research required.

For those pondering how to know what stocks to buy, recognizing your investment style helps you filter through myriad investment options and focus on those that align with your financial objectives and risk tolerance.

Step 2. Decide Top-Down vs. Bottom-Up

The next step is to choose how to do research on stocks: starting at the top or the bottom. This decision influences how you conduct your investment research and which stocks you ultimately consider.

In a top-down approach, you start by analyzing macroeconomic indicators and sector trends to identify promising industries.

This method allows you to understand the broader economic environment and how it affects different market segments.

By focusing on macro and sector trends, you can select stocks that are well-positioned to benefit from these overarching dynamics.

A chart showing the differences between a top-down vs. a bottom-up approach

Conversely, the bottom-up approach involves a deep dive into individual companies, irrespective of their sector or the current economic climate.

This method requires a thorough examination of a company’s fundamentals, such as its financial health, competitive position, and growth potential.

When you focus on individual businesses, your goal is to uncover undervalued companies with robust prospects for success based on their intrinsic qualities.

Step 3. Gather Your Resources

Here’s a breakdown of key resources that can aid your analysis:

Financial Statements and Earnings Calls

These documents and events are goldmines of information, providing insights into a company’s financial health and strategic direction. Earnings statements reveal crucial data like revenue, expenses, profits, and earnings per share.

Listening to earnings calls can also offer deeper context, as company executives discuss results, answer analyst questions, and sometimes provide guidance for future performance.

Financial Platforms

Websites like Google Finance and Yahoo Finance serve as essential tools for investors, offering a wealth of data, including how to calculate stock prices, historical performance, financial statements, and news updates.

These platforms can help you track stock valuation, market trends, and industry news, facilitating a comprehensive approach to stock research.

Broker Research

Many brokers provide their clients with research reports, market analyses, and investment recommendations. These resources can offer valuable insights, though it’s important to remember they may carry biases and should be cross-referenced with other data.

Newsletters

Subscribing to investment newsletters can provide you with regular updates and expert opinions on market trends, specific stocks, or sectors.

Reputable sources can enrich your understanding and keep you informed about the latest developments.

Stock Screeners

Stock research and analytics tools allow you to filter stocks based on specific criteria such as market cap, sector, or financial ratios. Stock screeners are invaluable for identifying potential investment opportunities that meet your criteria. Among the most popular screeners is Finviz.

An image of a stock screening dashboard
Stock Screening Dashboard. Source: Finviz.com

Industry News

Regularly reading business news websites or subscribing to industry-specific publications can provide you with timely information that might impact your investment decisions.

Amr Zaki, Senior Market Analyst at ONEPRO, confirms the importance of good data and quality tools. He told Techopedia:

“One of the most important ways for investors to search for stocks is the research platform provided by the broker, as it provides financial data for companies and important statistics for major companies as well as individual stock prices. This tool helps beginner and small investors as well as large and experienced investors.”

By assembling a diverse toolkit comprising these resources, you enhance your capacity for thorough investment research.

Step 4. Ask Key Questions

Ask yourself the following questions in order to truly get to understand the business you are considering investing in:

  • What are the revenue sources for the company?
  • What is driving the demand for the company’s products or services?
  • What is the company’s historical performance track record?
  • Does the company have a leadership team with proven expertise and experience?
  • What are the prospects for the company’s growth and profitability?
  • What is the extent of the company’s indebtedness?

Additionally, you should assess the company’s sectoral alignment and its exposure to various risks:

  • What is the current state of the industry in which the company operates?
  • What key challenges and hurdles does the company encounter?
  • Is the company susceptible to any economic, political, or cultural vulnerabilities?

David Kindley, Market Analyst at Orbex, laid out the crux of what investors should be trying to achieve in his chat with Techopedia.

“Do your due diligence on the company behind the stock, make sure they are solid enough to get a good return on your investment. Look for fundamental headlines that could affect the stock market. Apple and Microsoft, for example, could release a new piece of hardware, prices tend to fluctuate depending on the success of the announcement.”

Step 5. Conduct Quantitative Research

This forms the backbone of effective stock analysis, providing a data-driven foundation for evaluating investment opportunities. Central to this approach is the analysis of financial statements.

Financial Statement Analysis

At the core of quantitative research are three critical financial statements: the income statement, balance sheet, and cash flow statement.

  1. The income statement provides insights into the company’s revenue, expenses, and net income, revealing profitability trends.
  2. The balance sheet shows the company’s assets, liabilities, and shareholders’ equity, offering a snapshot of its financial stability.
  3. The cash flow statement, meanwhile, sheds light on the company’s liquidity by detailing the inflow and outflow of cash, crucial for understanding its operational efficiency and financial health.

Key Metrics to Learn

To conduct thorough quantitative research, you must familiarize yourself with several key financial metrics:

Metric Formula Reason to Use Drawback
Earnings Per Share (EPS) Net Income / Number of Outstanding Shares Indicates a company’s profitability on a per-share basis, useful for comparing profitability across companies and industries. Can be affected by non-operational factors and doesn’t account for company debt.
Price-to-Earnings Ratio (P/E) Market Value per Share / Earnings Per Share Assists in evaluating whether a stock is over- or undervalued relative to its earnings, a key for stock valuation. Can be misleading during economic downturns or for companies with no earnings.
Return on Equity (ROE) Net Income / Shareholders’ Equity Measures how effectively management uses the company’s assets to create profits, reflecting financial efficiency and growth potential. High ROE could be due to high debt rather than operational success, potentially obscuring financial health.
Debt-to-Equity Ratio (D/E) Total Liabilities / Shareholders’ Equity Indicates the level of financial leverage and risk, showing how much debt is used to finance assets. A very industry-specific metric; high leverage may be normal in some industries but alarming in others.
Operating Margin Operating Income / Revenue Shows what percentage of revenue is converted into operational profit, assessing operational efficiency. Doesn’t account for non-operating expenses like interest and taxes, possibly providing an incomplete profitability picture.

Step 6. Perform Qualitative Research

There is no concise formula for qualitative research so you need to break it down into a concise set of actions you need to undertake to get the information you’re looking for.

Business ModelManagement TeamPotential Risks

Investigate the Company’s Business Model and Competitive Edge

  • Analyze the company’s core operations, revenue streams, and market positioning by reviewing their business descriptions in annual reports and industry analyses.
  • Identify competitive advantages by examining patents, market share data, brand strength assessments, and technological leadership. Such advantages are crucial for the company’s ability to sustain long-term profitability and market dominance.

Evaluate the Management Team

  • Research the backgrounds and track records of key executives by reviewing their bios on the company website, LinkedIn profiles, and industry news mentions.
  • Assess the leadership’s effectiveness by analyzing their strategic decisions, guidance, and results over time, using company press releases, earnings call transcripts, and third-party analysis.

Identify and Assess Potential Risks

  • For operational risks, examine the company’s supply chain robustness, dependence on critical technologies, or any operational bottlenecks by reviewing industry reports and news articles.
  • Evaluate financial risks by looking at the company’s debt levels, interest coverage ratios, and liquidity positions through financial statements and analyst reports.
  • Understand industry-specific risks by analyzing competitive dynamics, regulatory changes, and technology trends, utilizing industry analyses and expert commentary.
  • Gauge broader economic and political risks by considering how macroeconomic conditions, international trade dynamics, or political instability may affect the company, drawing from economic forecasts and political analysis.

Step 7. Check Past Performance

Ultimately, when you buy stocks, you want them to go up. So naturally, knowing that a stock is going up now, or at least has done so in the past, is critical information.

However, note that past performance never guarantees future results.

ChartsCompetitorsMarket

Review Price Charts

How to evaluate a stock could naturally begin by examining the company’s stock price charts over different time frames, such as one year, five years, or even longer, if available.

This review helps identify trends, volatility patterns, and the impact of market or sector-specific events on the stock.

Compare With Competitors

Place the company’s performance in the context of its industry by comparing it with competitors.

Analyze how the company has fared in terms of market share, growth rates, and financial stability relative to its peers.

Evaluate Against Market and Industry Benchmarks

Finally, compare the company’s past stock performance with relevant market indices or sector benchmarks.

This analysis helps determine whether the company has outperformed, matched, or underperformed market or industry trends.

The Bottom Line

Effective stock research combines both quantitative and qualitative analyses, involving a thorough review of financial metrics, company performance, and competitive positioning.

Effective stock research also necessitates utilizing various resources like earnings statements, financial news platforms, and stock screeners. Different types of analysis, including technical, fundamental, and sentiment analysis, play pivotal roles in providing a comprehensive understanding of stock value. Additionally, identifying one’s investment style and deciding between top-down and bottom-up approaches can further refine research strategies.

To truly benefit from how to research stocks, investors must find the strategies and tools that resonate with their investment philosophy and apply them consistently for successful outcomes.

Do your own research and always remember your investment decision depends on your attitude to risk, your expertise in the financial markets, and how comfortable you feel about losing money.

The information in this guide does not constitute investment advice and is meant for informational purposes only.

FAQs

How to learn about the stock market?

Where can I invest in stocks?

How do I know what stocks to buy?

References

Related Terms

Jasper Lawler
Financial expert

Jasper cut his teeth on Wall Street as a stockbroker and honed his analytical skills with the City of London's top trading firms. Today, he applies his financial expertise to content creation as the founder of Trading Writers, a niche content marketing agency for the finance sector. Jasper's articles can be found on Techopedia, Seeking Alpha, UK Investor Magazine, Trade2win, Investing.com, FXStreet, Trading212.com, FlowBank.com, and Capital.com. His analysis has been quoted in prestigious publications such as the Financial Times, Bloomberg, Reuters, AFP, and City AM. Jasper's transition from stockbroker to content creator highlights his deep understanding of the financial markets…