Basics of stock research
Investing in the stock market requires research. If you’re not willing to take the time to research your investments, then you should stick with mutual funds or other investments run by professionals. Researching your potential investment goals helps you avoid disastrous decisions made in ignorance. For many investors, researching new stocks is half the fun of participating in the stock market. The following tips can help you conduct quality research on potential investments.
1) Before you invest in any company, be sure to check out all the information you can find about that particular company on any of the major search engines and on the company’s website. Learning more about these companies will allow you to make informed decisions.
2) The first place you should always start your stock research is the company’s quarterly and annual financial statements, available through the Securities and Exchange Commission (SEC). Both are available on the SEC’s website through the Edgar search utility. Quarterly statements are known as Form 10-Q reports and annual reports are known as Form 10-K. You will need to thoroughly study the quarterly and annual reports for the previous two or three years.
3) A basic number that should always be evaluated is the price-earnings (P/E) ratio of the company’s stock. This ratio will give you a multiple of how much more the stock is trading compared to how much revenue the company earns. Compare this value to other companies within the same industry. If this number is significantly higher or lower than the others, make sure your investigation leads to a satisfactory answer as to why. Otherwise, don’t invest until you find out why.
5) Another important consideration when evaluating a business is its debt-to-income ratio. This tells you whether or not the company is taking on debt. In general, you want a company that has a relatively low ratio compared to others in the industry. Keep in mind that, in business, having no debt can indicate that a company is not efficiently using its cash to finance operations.
6) Speaking of cash, you’ll also want to carefully study the company’s cash flow and make sure they are cash flow positive. This rule went out the window in the heady days of the dotcom boom and was a direct cause of the dotcom bust! Unless you’re a knowledgeable venture capitalist (why are you reading this article), you shouldn’t invest in risky startups unless you have money to throw around!
These tips cover the basics of stock research. While there are many more advanced techniques for researching stocks, these basic principles should never be ignored. Doing so would be taking some unnecessary risks with your money. Leave that risky business to professionals and speculators!