How to Research Stocks – A Step-by-Step Guide

You must learn how to research stocks properly if you want longevity as a trader or investor. The approach might differ depending on your long-term investment goals. However, primary considerations like vital financial ratios, chart patterns, trends, and management analysis are foundational.

This guide will cover the stock market for beginners and how you can research it for informed trading decisions. You’ll also learn what to look for when buying stocks to avoid scams and losing trades. With that in mind, let’s begin with learning the stock market metrics.

Importance of Stock Research

One brilliant thing about today’s world is its accessibility to information. You don’t need to go to the library or buy newspapers to capture information about the stock market. Your smartphone is powerful enough to bring you everything you need to know before trading.

We recommend adding alternative data services to your research tools. Of course, news platforms are also crucial to stock research.

You can rely on expert trading opinions and follow trends. Most trading platforms allow experts to post their trades for copy trading, while others include a social chat feature. Notwithstanding, you’ll miss out on developing a trading strategy that works with or without expert opinions.

We’d rather have you research a stock before trading than rely solely on AI or experts. The latter can fix you up for a quick trade. However, you must know how to value a stock to settle in for the long run.

Significance of Informed Decision-Making

You can get away with making mistakes in virtual trades. eToro offers a $100,000 virtual trading account that can accommodate your mistakes until you master how to research stocks. Nonetheless, real-world trading decisions will cost you real money.

Informed decision-making relies on facts, not emotions or opinions. It doesn’t matter whether you feel a stock’s value will rise or not. What matters are the facts that support your feelings or opinions.

Informed decision-making doesn’t guarantee successful trades, but you’ll dodge several sinkholes. This approach prevents you from trading on impulse.

We recommend trading with an amount you don’t mind losing. Even so, you cannot afford to lose it when research could’ve helped you avoid the wrong decisions.

The significance of informed decision-making goes beyond one trade. You’ll develop a trading pattern and strategy that’ll keep you afloat in the long run. Unnecessary losses can quickly drain your account, leaving you nothing to trade with.

Role of Research in Mitigating Investment Risks

Stock trading comes with risks, even for seasoned traders. The same applies to other markets like commodities, metals, cryptocurrency, forex, indices, ETFs, etc. Hence, traders try to eliminate as much risk as possible, reducing it to a bearable level.

Investing research time in the stock market mitigates investment risks. For example, you’ll see if a company has a looming scandal that can destroy its stocks. You wouldn’t mind looking elsewhere after discovering such news.

Another example is reviewing technical indicators like the MACD indicator and oscillators. These tools can help you identify swing points in a stock’s price movement. We are certain you’ll know when to enter and exit the market with such details.

You’ll easily identify large and small-cap stocks with adequate research. These have different risk levels for investments.

Research identifies risks that price chart overviews might not indicate. Like the example above, a stock might be enjoying a bull run when setting up for a sideways and bear market.

Consider research like a magnifying glass. We’ll show you how to know which stocks to buy and give you the research approach for further use.

Long-Term Benefits of Diligent Stock Research

Your decision-making will improve as you rely more on facts than on impulse. For example, a market might be in a bear run while the trading volume steadily increases. That means the sentiment is positive, and a price swing is about to occur, taking the stock upwards.

The following are the long-term benefits of diligent stock research:

• Higher returns from successful trades
• Improved financial literacy occurs as you grasp concepts like valuation metrics, analytical methods, technical graphs, etc.
• Long-term wealth creation through investing in high-quality stocks
• Improved confidence in your trades
• Minimized risk
• Enhanced financial well-being

You’ll have more money to invest and continue earning from the market. Research does not only cover learning how to know what stocks to buy. It also covers dividend stocks, a crucial approach to long-term income.

Your capital is at risk

Different Approaches to Stock Research

There are different approaches to learning about the stock market, with distinct advantages. Some people prefer numbers through charts and technical indicators. Others prefer qualitative information like news reports, company announcements, SEC filings, government regulations, etc.

Fundamental Analysis vs. Technical Analysis

The table below shows the difference between fundamental and technical analysis:

You can see how fundamental analysis complements technical analysis from the table above. Learning the two approaches will take time. However, you’ll be glad to know them, as they are the fundamentals of learning how to research stocks.

Combining Both Approaches for Holistic Insights

Being a long-term investor does not mean throwing away technical analysis. You won’t focus on short-term price movements. Instead, you will focus on the overall picture months and years of trading data revealed.

Long-term investors still use technical indicators like moving averages to smooth steep price swings. Similarly, short-term investors can benefit from assessing an asset’s quality and comparing it with market trends. Alternative data like news and economic indicators (e.g., the inflation rate) can add context to historical price data and trading volume.

A stock split might allow new investors to buy shares at a lower price, but that shouldn’t be your sole influence. We recommend combining fundamental analysis and technical analysis for holistic insights. You’ll take more time to identify trading opportunities, but the effort is worth it.

Most trading apps, especially stock market research and investment software, have tools for both analyses. Some offer virtual trading accounts to get you started toward becoming a seasoned stock market analyst.

You cannot escape these analyses unless you trade for leisure. We’ll show you how to value a stock with fundamental and technical research.

Quantitative vs. Qualitative Research in Stock Analysis

The fundamental difference between quantitative and qualitative research lies in numbers and words. Quantitative research deals with numbers and statistics. That is where you’ll find terms like standard deviation, percentiles, price-to-earnings ratios, beta in stocks, etc.

Quantitative research relies on data-driven techniques to identify market trends and trading signals. Most technical tools are built on quantitative research algorithms.

Qualitative research brings in a subjective analysis of non-quantifiable assets or data. For example, you can review employers’ appraisals to gauge a company’s work culture.

Reading the news, events, product launches, mergers, acquisitions, new regulations, etc., make up part of qualitative research. The idea is to draw an inference from the data.

Let’s see a practical example. Company A has a disruptive product on the market. However, the CEO is a former gambler with several debt cases.

The CEO’s background immediately raises red flags about the company. You’ll likely refrain from investing because the CEO’s track record is not stellar. Compare that to a CEO who has headed successful companies, and you’ll see your perception change.

Qualitative research requires a few mathematical tools. You can stay on your sofa and read about any aspect of a company as needed. A few hours will leave you with enough information to appraise the company as credible or suspicious.

Some alternative data services attempt to collate qualitative data in one spot. They can help narrow your research instead of sifting through terabytes of data on the internet.

Your capital is at risk

Management and Corporate Governance Analysis

This section is qualitative, as you don’t need complex mathematical skills to evaluate it. You can gain information through the company’s governing and corporate structure. That goes beyond the management structure most companies display on their websites.

Dig deeper into the official books. For transparency, most companies allow the public to see their governance structure.

The things you can do at this stage include the following:

Leadership and Management Effectiveness

The best approach to assessing leadership and management effectiveness comes from individual strengths. Review the leaders’ backgrounds, from the CEOs to other management staff. You’ll discover that some CEOs have significant success stories while others are in for the first time.

Progress from individual strengths to corporate decisions. Review major decisions the company has made in the past. These include partnership deals, advertorials, mergers, product investments, etc. The more success stories you have, the more effective the company’s leaders are.

Evaluate milestones and compare them with the company’s vision. Fulfilling milestones points to the leadership’s commitment to achieving its goals. That can boost investor confidence to buy the company’s stocks.

Evaluating Board Structure and Independence

An independent board can make better objective decisions because they do not materially connect with the company. Former directors and company executives should not be part of the board. The more independent a board is, the more likely it is to make decisions in the company’s best interest.

Review each board member and their ties to the company. That is the approach to evaluating the board’s independence.

Examining Executive Compensation Practices

Executive compensation should be transparent. Cunning or missing information in this regard is a red flag.

Executives should receive good compensation. However, their compensation shouldn’t come at the expense of the company.

Building a Research Checklist

Key Information to Gather Before Investing

Here are a few details you should gather before investing:

• Your investment goals
• Your risk tolerance
• The company’s financial statements
• Market capitalization
• Price-to-earnings ratios
• Financial ratios
• Industry
• Leadership and management structure
• Major news and events

Customizing Checklists Based on Investment Objectives

The list in the previous section is unfixed. We recommend customizing it based on your investment objectives. For example, dividend yields will come if you want to be a long-term investor.

Determine if you are investing for the short- or long-term. Then, determine how much you want to invest.

Regularly Updating and Revising Research Checklists

Revisit your checklists and add new details as the market changes. For example, you might add the analysis from reputable platforms to your checklists. The key is recognizing a crucial detail and updating your checklists.

Recap of Key Research Strategies

Remember to use the following research strategies:

• Begin with fundamental analysis
• Analyze qualitative data, including financial statements, ratios, and leadership/management structure
• Identify the stocks and view their price charts
• Add indicators and oscillators to identify trends
• Review news and other events affecting the company

Conclusion

Learning how to research stocks properly will spare you the pitfalls of impulse trading. You’ll make better-informed decisions after reviewing multiple company and trading data sets. Also, combine fundamental and technical analysis for holistic insights.

Practice with the eToro virtual trading account.

Your capital is at risk

FAQs