Investing in stocks may seem like quantum physics at first glance. Risk, of course, always exists, but that does not mean it is impossible. However, before investing, it is wise to research what you plan to invest in, question how much money you can invest, and also be aware of the level of risk you are willing to bear. Techcrunch has summarized expert advice that revealed the first five steps for researching stocks.
1. Understand the Types of Analysis
Before you buy your first stock, it is necessary to research them! However, this is not possible without understanding the three main types of analysis – fundamental, technical and quantitative.
Fundamental analysis is used to predict performance, examining earnings, cash flow, and financial position.
Technical analysis focuses on past prices and trading patterns, aiming to predict future stock price changes.
Quantitative analysis is used to assess stock value, employing mathematical and statistical modeling.
Robert Johnson, president and CEO of Economic Index Associates, believes that fundamental analysis should be the primary tool for assessing stock value.
– Investors should primarily focus on the fundamentals of the company or asset – says Johnson. On the other hand, using technical analysis can reveal irregularities in asset pricing.
– Technical analysis is an assessment of statistics generated by market activity, such as past prices and volume – states Melanie Mortimer, president of the SIFMA Foundation.
Quantitative analysis may sometimes use some of the same metrics as technical analysis, while also incorporating statistical modeling to determine whether a particular stock is a good investment opportunity. – Quantitative funds tend to rely more on valuation metrics and market techniques – says Carl Ludwigson, director of manager research at Bel Air Investment Advisors.
2. Define Your Budget and the Level of Risk You Are Willing to Bear
It is very important to determine the level of risk you are willing to bear, and consequently, the amount of money you are willing to invest.
– In the period leading up to retirement and with fewer financial obligations, an individual has the ability to absorb some volatility in their investment portfolio, knowing that time can help balance any short-term losses with long-term gains or the ups and downs of cycles – notes Mortimer.
However, on the other hand, risk tolerance is more subjective.
– One way to assess risk tolerance is to answer a simple question: If your portfolio suddenly dropped in value by X percent, would your dreams be lost because of it, and would you regret it?
If the answer changes from yes to no if X represents ten percent, then the person does not want to bear significant risk and, frankly, has limited investment options – says Johnson.
The budget is also an important part of investing. A return of 10 percent on an investment of one thousand dollars is not the same as a return of ten percent on an investment of one hundred thousand dollars. In other words, the smaller the budget, the more likely you will have to take on greater risk to achieve the desired return.
3. Study Investment Metrics
Some of the key indicators when investing are: price-to-earnings ratio, price-to-book ratio, net profit margin, free cash flow, return on equity, and return on assets.
However, how important a particular indicator is depends on the investment style. For example, two classic forms of investing are value investing and growth investing. Value investing involves buying stocks that are undervalued and selling at a lower rate. Growth investing involves buying stocks of companies expected to grow at a rate faster than the market.
– Value-oriented managers typically focus on price-to-book, price-to-cash flow, and other measures that indicate a depressed price compared to normalized earnings or the intrinsic value of the business, creating a margin of safety – says Ludwigson.
4. Find the Data You Need for Research
Some of the documents, reports, and tools you can check are SEC reports, company revenues and earnings, online platforms for brokerage research services, press releases, stock screeners, and industry trends. At the beginning of your research on a company, you can check on online brokerage platforms as well as in stock screeners. This way, you can check some important metrics and then further investigate company reports. However, Kevin L. Matthews II, founder of the investment education company BuildingBread, believes there are places where you should start your research.
– Every company you search usually has an investor relations section on its website. If you go to that section, you can find all important press releases, financial documents, and documents filed with the SEC such as 10-K and 10-Q – says Matthews II.
5. Narrow Your Focus and Choose Stocks That Fit Your Portfolio
Tailor your investments to your goals, and once you do that, you can start creating an investment strategy. Certain metrics are more suitable for value investing, while others are suitable for growth investing.
You can evaluate stocks based on your risk tolerance and budget, all to decide whether to invest your money. You can continue the evaluation using future quarterly and annual reports to ensure you still want to invest in that company, writes Techcrunch.
