If you plan to get into stock picking, you had better know how to research a stock.
It is a well-established fact that I am a boring investor. I'm not much of a stock picker; I'm more of a fund kind of gal. I do have a few dividend stocks, but, for the most part, I stay away from stock picking.
But, even though I make it known that I mainly stick to the boring aspects of investing, I still get questions from readers about individual stock picking. One of the questions I recently received via email was pretty simple:
I want to know how to research a stock. What should I look for?
When figuring out whether any asset is a good investment, it's important to consider the fundamentals, and to consider value, as well as whether or not the investment “fits in” with your investment goals and your existing portfolio. But there are more specific items you can consider.
Things to Consider as You Research a Stock
As Warren Buffett points out, you shouldn't invest in things that you don't understand. Learning how to research a stock is a good first step in making sure you “get” what you're investing in. Here are some of the things to consider as you research stocks:
- Market Capitalization: This is basically what others would pay to acquire the entire company if it were for sale. It's a way at looking at “cost.” It's figured by taking the quoted price per share and then multiplying it by the number of shares. So, if there are two million shares, and the quoted price is $30 a share, the market capitalization is $60 million. You can then compare companies with similar market caps and see which one is making a larger profit.
- P/E Ratio: You can compare P/E ratios of different stocks. This is basically an expression of the stock price relative to its earnings. It can give you an idea of what sort of value might be there.
- Earnings Growth: How much has the company grown in terms of earnings? Is growth steady over time? Or has it been in fits and starts? Is the grown sustainable, especially when compared to other companies in the sector? Take a look at the stock, and its earnings, and decide whether or not this is something that you would still have confidence in 10 years down the road.
- Dividends: A solid, reliable company can afford to pay dividends over time, modestly increasing payouts as years progress. This is one of the reasons that I like dividend aristocrats. They are companies that husband their resources and growth, and are likely to increase their payouts each year. Watch out for companies that offer high dividend yields, but that haven't been around for very long; that kind of offer might not be sustainable, and might not make a solid long-term stock investment.
Look at company financial statements for information about assets and liabilities, as well as other information that can help you make a decisions. Companies that are financial healthy, and that have a reasonable expectation of growth, are usually good bets.
Get Started with Stock Research
The good news is that there are tools that can help you as you learn how to research a stock. There are investment research sites?that can provide you with good information to start from, public financial statements that companies have to disclose, and there are even stock screeners that can help you narrow down your search by different criteria.
Don't rely on “hot tips” from people you know, and don't follow the herd when it comes to investing. Instead, do your own investment research, and get to know different stock choices. Then you can choose stocks that really are better for your portfolio, especially if you are looking for long-term investing success.
What do you look for when you perform investment research?
3 thoughts on “How to Research a Stock”
Stock research my end is a rigorous affair. In addition to the dividends, earnings growth and P/E ratios, am also interested in the nature of business the company is in…whether I understand how they make money and whether their future outlook has anything rosy about it.
I love this! Great information for beginners or someone who has invested but never knew what to look at.
Great post. I agree going with the heard might prove to be an expensive mistake while investing in stocks. You need to do your research and draw your own conclusions. Guess the extensive number crunching that is required to evaluate stocks make investing bit dull and boring?..