How to Research Stocks in 5 Simple Steps

Learning how to research stocks is a lot like researching anything else you might buy: learn the basics and then narrow down your options. Once you understand the basics of how stocks work, you can find the information you need to start investing in stocks that align with your investment goals.

While there are plenty of ways to research stocks, finding a method that works for you can pay serious dividends. Not only could you minimize your risk. You may also earn higher returns, too. Using our five-step process, you’ll have a process to guide all your future stock research needs.

1. Get comfy with stock analysis basics

Stock analysis is all about how experts look into how a company operates and makes money. Wall Street analysts spend their days pouring over company financials and other market data to predict how a particular stock might perform. The two main ways analysts analyze that data are:

• Fundamental analysis. This type of stock analysis aims to determine whether the company’s current price accurately reflects its future value. It dives into the nitty-gritty of a company’s financials, like annual reports, balance sheets, earnings per share (EPS), price-to-earnings (P/E) ratio and more.
• Technical analysis. This type of stock analysis utilizes data based on market activity, like trading volume and prices, to predict what comes next for a company’s stock price. If you use technical analysis, you’ll use specialized research tools like software, charts and trends to estimate future price movements.

To set a baseline, we’ll focus on fundamental analysis for the rest of this article, as it’s the type typically used for long-term investments. However, those focused on short-term trading tend to employ technical analysis more.

2. Dig into the company’s reports

Every publicly traded company must regularly share certain information with the public. Lucky for you, you can then use this information to find companies that align with your investment interests.

To find these reports, you can start with a company’s website. Many have dedicated “investor relations” pages where you’ll find their latest and historical filings. You also can search the Securities and Exchange Commission’s (SEC) filing database, EDGAR, if you have difficulty finding the reports in other places.

Some of the most helpful reports for stock research include:

• 10-K. This form is filed annually with the SEC and contains financial statements that an independent third party has audited. It’s a comprehensive form that will show you almost everything you need to know about a company. You can find financial data for the past five years, including information about how the company earns money, risk factors the company faces and a discussion about the company by management.
• 10-Q. This quarterly filing gives you access to a company’s unaudited financial statements. It’s less comprehensive than the 10-K form but still a helpful tool. In addition to quarterly financial statements, you’ll find management discussions about the company and information about potential market risks, legal proceedings, internal controls and any unregistered sales of equity securities.

Once you find the above forms, you’ll need to locate the necessary information. For example, to evaluate a company, you’ll likely want to explore:

• Net income. This tells you whether a company finished with a gain or a loss at the end of the reporting period. You can find this number at the bottom of the income statement. It equals total revenue minus expenses, depreciation, taxes and more.
• P/E ratio. You get this figure by dividing the market value of a share by its earnings per share. A company with a relatively high P/E ratio could indicate that the market expects healthy growth in the near future. Compare the company’s ratio to others in the industry to understand where a company stands against its competition.
• Return on equity. Reviewing a company’s return on equity helps you better understand how effectively the company uses investor funds and distributes profits to its shareholders.

While these aren’t the only factors you can use to measure a company’s potential for financial success, they’re an excellent place to start. And remember — a single number can’t determine a company’s true worth or value. Your best bet is to consider multiple factors before deciding that one stock out of the whole stock market is the right one for you.

3. Seek expert advice

Advice comes in many forms, and likely a few you wouldn’t consider being “advice.” But a key part of researching stocks is listening to what experts say — especially since it’s their job to look at every part of a company. Some of the ways you can access expert advice are:

• Online tools. You likely have access to a wide range of research tools if you have an online brokerage account. Look for stock screeners, analyst reports and news feeds linked to individual stocks for insights that can help you whittle down your options.
• Analyst reports. There’s an entire profession dedicated to researching stocks and publishing investment recommendations. You can often find analyst reports on a company’s ticker page at your online brokerage. You can also review individual analyst ratings to see how accurate they’ve been in the past in predicting a stock’s price movements.
• Financial advisors. Working with a financial advisor can help you buy stocks that align with all your financial goals. You can leverage their expertise to help build a well-diversified portfolio filled with stocks that align with your risk tolerance and wealth-building plans.

4. Explore basics, advantages and challenges

In addition to understanding a company’s financial statements, you should also understand how it works. For example, how does it make money? Who are its customers? In which countries does it operate? These are all important questions your stock research should answer.

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? Finally, consider how the company will fit into the industry’s future. Will it be able to adapt to change, or will it fall behind its peers? Does it have any competitive advantages?

5. Do some qualitative research, too

While a company’s financials are essential when researching stocks, so is qualitative research, a less quantifiable evaluation of a company’s caliber. In qualitative research, you’ll explore areas like:

• Leadership. A company can’t endure without top-notch executives at the helm. You can usually find the names and roles of the leadership team on the company’s website. Once you find the leaders, don’t just read the company’s short descriptions — search for their names online. You may be able to find out more about their backgrounds and management styles. In addition, the past actions of these leaders may reflect on their future choices. Ensure that you’re comfortable with the management in charge of increasing your investment’s worth.
• Company values. For some investors, ethical investing is more important than profit potential. You can easily research a company’s values through public statements like mission statements or sustainability statements. If you disagree with what the company stands for or how it conducts itself as a global citizen, you may want to reconsider your investment.

The bottom line

Without a doubt, learning how to research stocks has plenty of moving parts. But with a bit of practice, you’ll find a streamlined system that gives you the confidence to buy stocks that meet your standards.