A Quick Guide To Stock Research For Investors

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The stock market remains one of the greatest wealth-building vehicles in today’s economy. It allows businesses to fund their expansion, for savers to beat inflation, and for small investors to invest in the economy and create new wealth. 

Since the S&P 500’s inception, it has delivered an average annual return of 10.7%, presenting an excellent long-term opportunity for investors. However, many active investors prefer to do their stock picking to beat the market, which means exceeding the S&P 500 benchmark. 

On Wall Street and beyond, skillfully picking individual stocks has rewards, making stocks research worth learning.

While beating the market goes against the statistical norm and is not easy, it can still be possible with the right strategy and tools.

While intimidating to beginners, stock research and analysis are achievable for anyone interested. You don’t need to work on Wall Street to understand the basics of how to pick stocks. With patience and diligence, any ordinary investor should be able to conduct a basic fundamental analysis of equities to improve their investment decision-making. 

Opportunities in The Stock Market

In 2021, the stock market was the largest engine of wealth creation, especially for millionaires and the wealthy—a record year where the S&P 500 gained 27 percent, and the Nasdaq went up by 21 percent. 

The number of Americans with $1 million or more in investable assets increased to 14.6 million in 2021 from 13.3 million in 2020. By far, it was the strongest year for wealth creation we've seen recently, and the wealth creation goes for all segments, even though the highest gains were concentrated at the top.

Recently, it has presented a different picture. Risks remain skewed to the downside for equities. Inflation has probably peaked but could remain sticky as investors remain hesitant. Value at the moment still has much further to run. 

This situation doesn’t mean anyone wanting to invest in the stock market should be discouraged.

In 2023, trillion-dollar wealth manager BlackRock noted the return of alpha. Due to increased market dispersion, there is a more significant gap between top and bottom performers. Skilled stock pickers can take advantage of the current growing gaps in ROE (return on equity)  and valuations in individual stocks to create portfolios that deliver growth.

Mastering in-depth stock research will benefit you, even as a DIY or retail investor.

Approaches to Stock Research

Stock research entails analyzing stocks based on certain factors such as a company’s financial data, leadership, structure, management, and competition. It helps evaluate whether a stock is worth adding to a portfolio.

"There is no magic formula to stock research and investing. Picking stocks can be pretty risky—doubly so for the inexperienced," says Riley Adams, CPA, the founder and CEO of WealthUp, a finance site. "The most highly regarded hedge fund managers armed with the most sophisticated algorithms still fail at it. Beginners should be focused instead on understanding how to pick stocks to protect their money and investments." 

No one gets to become an expert overnight. Your goals must be less about beating hedge funds at their game and more about learning to tailor stock investing to personal financial goals.

Steps To Researching Stocks

Ash Rogovy, Registered Investment Adviser (RIA), said, “Equity research is an art, not a science.” Still, it is rooted in solid data points. 

Stocks are considered long-term investments because they carry considerable risk. You need time to even out the sharp volatility that can often come with stocks and benefit from long-term gains.

Every public company is unique, and it is vital to understand how it works. You need to arm yourself with a toolkit with the correct resources and tools to access the proper information and later decide whether to include a stock in your portfolio.

Review the company financials

The first step is quantitative research. You dig into the financial data of the company or companies you are interested in.

Quantitative research involves gathering documents companies must file with the US SEC, such as Form 10-Q and Form 10-K. Form 10-K is a report issued annually, and it includes independently audited financial statements. 

Using this form, you can evaluate a company’s balance sheet, income sources, cash flow, revenues, and expenses. Form 10-Q, on the other hand, is a quarterly update on the publicly listed company’s financials and operations.

Check financial websites

The US SEC’s EDGAR, which stands for Electronic Data Gathering, Analysis, and Research, provides a searchable database of the forms mentioned above. When researching stocks, EDGAR is an excellent place to start. To learn to use EDGAR, visit the SEC page on researching investments.

Besides EDGAR, there are several reliable financial websites with stock information you can use to support your research.

Review stock research platforms

Research platforms provide a wealth of information and are especially helpful for DIY investors. Such platforms offer a comprehensive view of investments and the stock market. For individual companies and stocks, they provide key company statistics, financial statements, individual stock quotes, relevant news, and more.

Beyond stocks, these platforms also provide information on ETFs, IPOs, annuities, sectors, industries, mutual funds, and bonds. They can also give information on earnings conference calls, comparisons, and average analyst ratings. If you access a premium subscription, these platforms may give you access to exclusive investment insights that provide you with an investing edge.

Learn the schools of thought in stock investing

Seasoned analysts developed ways to research stocks as a shortcut to uncover their actual value. While these methods are not perfect, they have nonetheless risen to prominence. Those interested in researching stocks must take note of the main approaches to stock investing.

There are two major schools of thought in researching and analyzing markets and securities: fundamental and technical analysis. These approaches help identify investment opportunities. Some traders prefer to mix both to allow for a more comprehensive view. 

Fundamental analysis

Fundamental analysis evaluates assets for their intrinsic value—the actual worth—of a stock or security, a market, or a sector. In the case of company stock, investors use fundamental analysis to review balance sheets, income statements, expenses, assets, liabilities, and cash flow. 

Those searching for long-term value might find fundamental analysis better suited for their objectives. Using this method, you try to predict future versus present net value. If a company trades below its perceived intrinsic value, it is deemed promising. As an outcome of this analysis method, you decide to buy, hold, or sell a security. 

The main tools of fundamental analysis include economic indicators, financial statements, interest rates, news and events, and qualitative information.

Technical analysis

Technical analysis or TA focuses on the volume data and historical price of stocks, currencies, or commodities. While fundamental analysis hones in on an asset's intrinsic value, technical analysis reviews a stock's price and volume over time.

The two approaches have their merits and flaws. Those who use technical analysis begin from the perspective that markets are inefficient. Thus, you exploit trends in market data and price patterns for potential profit. 

Technical analysis involves carefully examining charts—these can be bar, line, or candlestick charts displaying historical price movements. TA experts use these charts to look for trends, patterns, potential chart formations, and support and resistance levels.

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Technical analysis tools include volume analysis, relative strength, chart pattern analysis, candlestick pattern analysis, trend analysis, support and resistance, and technical analysis indicators based on momentum or mean reversion.

The two approaches have their merits and flaws. Those who use technical analysis begin from the perspective that markets are inefficient. Thus, you exploit trends in market data and price patterns for potential profit. Technical analysis involves carefully examining charts—bar, line, or candlestick charts displaying historical price movements. TA experts use these charts to look for trends, patterns, potential chart formations, and support and resistance levels.

While traditional methods of stock research and analysis are critical, the advent of technology has introduced new tools that cater to various investment styles and preferences. Among these, robo-advisors have emerged as a popular tool, especially for investors interested in impact investing. Robo-advisors use algorithms to manage investment portfolios, often with lower fees than traditional investment advisors. They can be particularly useful for investors who are looking for a hands-off approach but still want to align their investments with their personal values, such as environmental sustainability or social responsibility.

Zoom in on critical information

Stock prices are influenced by many factors—too many to consider and account for. Investors note key indicators in financial statements to make things easier. With adequate knowledge of the main approaches to stock valuation, you can further hone your skills in investing by knowing what to look for in financial statements and SEC documents.

While SEC documents may seem intimidating, you should learn to be comfortable with them, extract data, and maximize your research efforts. The following are critical numbers that you should not ignore:

Revenue or "top line"

Revenue refers to the first line in the income statement. It denotes the total income generated by the company. You can divide revenue into two metrics—operating and non-operating revenue streams. The operating revenue stream comes from the company's core business. The non-operating revenue refers to income from one-time deals or business activities.

Earnings per share (EPS)

Earnings per share indicates a business's profitability on a per-share basis. Investors divide a company's earnings by the number of outstanding shares to get this figure. It is not a perfect metric and should never be used alone. However, it gives a ballpark figure that you can use to compare different stocks with different total outstanding shares.

Net income

Net income is the last line item on an income statement. Hence, it’s being referred to as the “bottom line.”The name also suggests that it represents the money left over after all taxes, operating expenses, and costs have been subtracted from the gross revenue.

Price-to-earnings ratio

The price-to-earnings ratio compares the company’s share price to its earnings per share. This price-to-earnings-per-share ratio helps investors determine whether stocks are overvalued.

Price-to-earnings growth (PEG) ratio

You won’t typically find this figure on financial statements. You can, however, calculate the price-to-earnings growth ratio using specific metrics you find in company reports. First, divide the share price by its earnings per share or EPS. 

Second, use the result and divide it by the EPS growth rate. The resulting price-to-earnings growth or PEG ratio provides you insight into the future profitability of the company you are reviewing relative to each share.

Price-to-book ratio or P/B ratio

The P/B ratio compares a stock’s current market value to its book value. A company’s book value is defined as its worth according to its balance sheet, subtracted by amortization, depreciation, and other costs that devalue its assets. The P/B ratio allows investors to value a company’s equity against its assets. Note that a P/B ratio below one is generally considered to be an acceptable or good value. 

Debt-to-EBITDA ratio

EBITDA stands for earnings pre-deduction: “Earnings Before Interest, Taxes, Depreciation and Amortization.”

The debt-to-EBITDA ratio gives investors insight into whether a company can pay off its debts. The ratio assesses this capability based on how much income the company has available that it can use to pay down its known debt before counting interest, taxes, depreciation, and amortization. 

Do qualitative research

After understanding the financial information, investors should move on to qualitative research. This next step has more to do with how the business operates.

At this stage of stock research or evaluation, you need to answer questions like how the business works, the level of management experience, the size of a company’s moat, the potential risks, the company’s values, and whether they align with yours. 

Qualitative research goes far beyond SWOT analysis. It looks into customer satisfaction, employee satisfaction, and supplier satisfaction. The bottom line for qualitative research is: what makes a company great?

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Factor in investment goals and level of risk tolerance

When researching stocks, analyze whether the stock's profile aligns with your investment goals, financial plans, investment horizon, and risk appetite. Your time horizon is critical in deciding whether a stock is right for you. Short-term goals are those that are less than five years into the future, which means it might be too short to recover from a market drop. Intermediate-term goals range between five to ten years into the future, and long-term goals exceed ten years. When you invest in higher-risk stocks, a long-term horizon cushions you from the volatility and sharp fluctuations associated with such investments. 

Master Stocks Research To Navigate Markets With Confidence

Mastering stocks research and analysis takes time, but it is worth every effort. With patience, you can develop a better process to help you make sounder investing decisions.

Stock research websites are excellent tools to help you get the information you need. Each platform’s approaches can vastly differ, so it’s important to know what you’re looking for and what direction you’re taking. Once you’ve narrowed down the information you want to focus on, you can select your resources better.

In the world of stock investing, remember that information is power. Therefore, be sure to have access to high-quality information and work at honing the skills necessary to process that information correctly. Both will eventually give you the ability to invest with confidence. 

Author

Emma Lee

Emma Lee is a finance writer with a focus on cryptocurrency, derivatives, and high finance. Her background in economics and finance informs her insightful analysis of market trends and complex financial instruments. Emma’s work primarily addresses the evolving landscape of the crypto market and the intricacies of derivatives trading. She aims to provide clear, factual information, making high-stakes financial concepts accessible to a broader audience. Her articles are valued for their direct approach and relevance in today’s fast-paced financial world.