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Though investors may find it easier to build a diverse portfolio using exchange-traded funds (ETFs) or mutual funds, investing small amounts in individual stocks can be a good way to learn the intricacies of the market. However, it usually isn’t enough to just throw your money into the market — you’ll need to do some research first.
If you invest your money strategically using a method that works for you, you could minimize your risk and maybe even earn higher returns. Here are some steps to take as you learn how to research stocks before choosing which ones to invest in.
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Before diving into the actual research of a particular stock, you’ll want to understand the different types of stock analysis, what they consist of and which route is best for you. In general, there are two broad categories of stock analysis:
This article generally focuses on aspects associated with fundamental analysis, as it is used more for long-term investments, while technical analysis typically is used more for short-term trading.
Every publicly traded company is required to publish reports. Using that information, investors are able to find companies that align with their investment interests. If investors did not have access to this information, they would be unable to make educated decisions about their investments.
To find these reports, you can look at each company’s website — many have special pages for investors. You also can search the U.S. Securities and Exchange Commission’s (SEC) filing database, EDGAR, if you have difficulty finding the reports in other places.
Some of the most informative reports include the following:
Once you find the above forms, you’ll need to locate the pertinent information. Each form has an overwhelming amount of data, but if you know what you are looking for, it should not seem as daunting. Here’s some of the most important information for investors to look for:
This is not a comprehensive list of factors to measure a company’s potential for financial success, but it is a good place to start. Remember — a single number will not be able to determine the worth of a company. You need to consider a variety of factors before deciding.Find a Financial Advisor
If you have opened a brokerage account, utilize the resources that come with it. Most brokerage firms offer tools to help you research stocks. Whether the firm offers in-depth reports or a database of information, take advantage of those resources.
Additionally, you may have access to a qualified broker through your account. It may be a good idea to ask their opinion about a potential stock purchase.
If your brokerage firm doesn’t offer any useful options for researching stocks, you still have access to sites like Yahoo Finance, which provides investment news and customizable stock screeners.
In addition to understanding the financial statements of a company, you should understand how it works. Make sure you know where the revenue comes from. Does it come directly from consumer sales, advertising revenue or elsewhere? Who are the company’s biggest customers?
It’s also important to look at the basics of the industry the company operates in and how the company fits into it. Is it an established giant or a young company trying something new? Are there regulatory issues the industry must overcome? Think about how the company will fit into the future of the industry. Will it be able to adapt to change, or will it fall behind its peers? Does it have any competitive advantages?
While the financials of the company are an essential component to the research, so is qualitative research, which is a less quantifiable evaluation of a company’s caliber. While part of your qualitative research might include looking at some of the factors outlined in the step above, it can also include looking at factors such as:
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