How Do I Research a Stock Before Investing?

How thoroughly should you research a stock? That’s up to you. But the more you know about a stock and the business it represents, the more informed your decisions will be about the investment.

Researching investments is a process so crucial that it has its own name: due diligence. This means looking into the business prospects of the company whose stock you want to buy as well as how the stock has performed, the stock prices of its competitors and more.

There are many ways to go about due diligence, but here are the basics.

Review the Company’s Public Documents

This part of the research can begin on the company’s website. Read through it to get a sense of what the company does or makes as well as its overarching mission. And it’s a chance to ask yourself questions about the business the company is in. Does the company’s business philosophy make sense to you? Is it a business you believe has the potential for growth?

The next step includes wading into the company’s earnings reports. Every publicly traded company is required to issue earnings reports each quarter, along with more comprehensive annual reports. The jargon and layout of these reports can take a little getting used to, so be patient. At first, you’ll have to stop and look things up. Take the time and soon you’ll be able to find the information you need easily.

These quarterly (10-Q) and annual (10-K) reports can be found on the company’s website. They will tell you how the business is doing. Is it making more money? Is it spending more money? What parts of the business are growing, and which are shrinking? These documents will also help you understand management’s perspective of those short-term financial results in light of its long-term strategy.

Review the Company’s Core Business

The biggest investments of the next decade may not even be in business yet today. The biggest investments of today may be out of business in a decade. The future is unpredictable, so how can investors make the right choice?

One way to try to predict the future is to look at what the company makes. Is it a product with a future, or is it something that people have stopped using? Think of a company that makes film for cameras. The explosion of cheap digital cameras and then the rise of camera phones have nearly destroyed that business in less than a decade. If the company provides a service, will that service likely be in demand in the future?

Another way is to look at the company’s competitors. Is it a major player with the size and scale to offer cheaper products or to buy up its competitors? How do consumers feel about the quality and value of its products compared to those of its competitors?

Find Out What Other Investors Are Saying

Most publicly traded stocks are analyzed by investment banks, who sometimes publish their analysis or who share their thoughts with journalists. Either way, there will likely be an array of opinions about the stock you’re considering. Those voices won’t always agree, so see who makes the most sense to you.

In addition to established news outlets, there are also blogs and message boards. But many writers for those sources may have an agenda, so be sure to double-check any information you receive there. Some investors even go so far as to visit sites like Glassdoor to see how employees feel about working at a given company.

Watch the Stock Itself

In addition to looking at the stock’s underlying business, products, competitors and what people are saying about it, look at the stock’s performance. Over time, is it going up or staying flat? Or is it highly volatile with big price swings? It’s easy to look up a stock’s long-term and short-term performance online.

A stock’s historical performance can help you see how the stock has treated its investors as well as whether it might be underpriced or overvalued by the market. And those observations can help you decide if it’s a wise long-term or short-term investment.

Know Your Portfolio Strategy

Ask yourself how the stock fits into your overall plan for your money. Be clear what you’re investing for—a home, retirement, a child’s education or just to make as much money as possible.

Keeping that goal in mind can help you decide how long you plan to hold an investment for. It can also help you understand how much risk you’re willing to take. It’s also wise to check your overall investment holdings to see if you’re too heavily invested in one particular sector or industry, which can create unexpected risks.

Consider an Advisor

There are about 6,000 publicly traded companies in the United States. So, you may need help in selecting and researching stocks. That may mean buying a mutual fund, with a staff of professional analysts who can dig into every company the fund owns. Or an investment advisor may be the help you need to answer important plans, not just about the markets but also your financial plans and how to pursue them.

Colin Dodds has written for preeminent media and financial companies. He is the author of several acclaimed books, including Ms. Never and Watershed. He lives in New York City with his wife and children.

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