Are you overwhelmed by the stock market? Does it seem ominous and confusing to you? You’re not alone. Only about half of Americans participate in owning stocks, which means that a majority of people are missing out on some seriously lucrative gains.
That said, investing in stocks is one of the best ways to grow your wealth- without needing to make serious sacrifices. Best of all? Beginners can invest with just a few dollars, and you don’t need any experience to start.
But how do you know where to invest? And when? Let’s get into what you need to know about how to research a stock.
Understanding the Stock Market
You’ve probably heard about the stock as being up or down. When people use these terms, they are likely referring to the market indexes known as the S&P 500, the Nasdaq, or the Dow Jones Industrial Average.
Investors use indexes to track their portfolios. These indexes can also help facilitate stock trading decisions.
Beginning investors interested in long-term growth benefit from building diversified portfolios. They understand the market ebbs and flows, and they don’t sell at the first sign of a downturn.
Most beginning investors don’t try to time the market. They may examine economic calendars or historic trends. But, they don’t try to strike it rich based on certain days of the year.
Diversified portfolios may comprise of carefully chosen individual stocks. They may also consist of mutual funds, EFTs, or index funds. These are essentially baskets of many different investments, which provide automatic diversification.
More active stock traders engage in more thorough research. They may spend hours a day researching and tracking the market. They utilize various tools and analytic ratings to track and chart different stocks.
Understanding Types of Stocks
At first, learning the ins and outs of a stock market may feel like learning a foreign language. That said, the basics tend to be straightforward.
Stocks are investments in public companies. When companies sell stock shares, they issue them as either common or preferred stocks.
1. Common Vs. Preferred Stocks
Common stocks offer you a small share in the company’s profits. Depending on the type of stock, you may earn dividends. Dividends are the payouts provided on a routine basis.
Preferred stocks, on the other hand, pay fixed dividends. A preferred shareholder received dividends before common shareholders, which can be beneficial in cases of liquidation or bankruptcy.
Common stocks tend to be more volatile. There are pros and cons to this volatility. On the one hand, you risk losing more money. However, you can also gain more in interest over the long-term.
2. Small, Mid, and Large-Cap Stocks
Company size can play a role in stocks. Large-cap refers to companies with market values worth more than $10 billion. They tend to have the most stable prices. However, they don’t necessarily have the highest growth potential.
Medium-cap refers to companies with values between $2 billion and $10 billion, and small-cap refers to companies with values between $300 million and $2 billion. Well-rounded investors tend to invest in stocks from each size. This increases diversity within one’s portfolio.
3. Sector-Based Stocks
Companies tend to be divided into different sectors. Think about it. We have food industries, healthcare industries, and hospitality industries to name a few.
Balanced investors also tend to invest in stocks from a variety of sectors. This strategy can provide some safeguarding in the event of a recession.
For example, we all know about the Great Recession of 2008. Many insurances, financial, and tech sectors tanked during that year. However, some retailers, like Walmart and Dollar Tree, absolutely thrived.
That’s why diversity is so important. You want to protect your assets in case the market dips.
4. Value Stocks
Value stocks are typically viewed as undervalued in the market. The companies issuing these stocks have assets worth more than the price.
Smart investors, however, can spot their potential. They look at the lower prices as deals and assume they will become more valuable as time progresses- or as the company grows.
5. Speculative Stocks
Speculative stocks usually come from startup companies with limited financial records. Startup companies can be inherently risky, as research shows that half of all new small businesses fail within five years.
With that in mind, some investors enjoy the risk. There is a potential for a considerable return. And if you get in at the beginning, you can rake in the profits.
6. Penny Stocks
Penny stocks are very cheap stocks with very high risks. They often trade as low as 2 cents per chare, and they rade no more than $5 per share. These are also usually issued by startup companies.
If the company succeeds, the stock value rises. Unfortunately, research shows that most penny stocks don’t make it very far.
Now that you know the different stock options, it’s time to start evaluating the stocks you plan to pick! Let’s review a few crucial items.
1. Understanding the Forms
There are a few useful forms to consider when researching stock options. All companies are required to issue these forms to potential and current shareholders.
A Form 10-K refers to the annual report of essential financial statements. This provides a particular company’s source of income, balance sheets, and overall revenue and expenses. Form 10-Q provides quarterly updates on the company’s operations and finances.
As a potential investor, you’ll want to compare the revenue and net income. The revenue refers to the money a company makes during a designated period. The net income refers to the profit that a company makes after subtracting all operating expenses.
2. Understanding Stock Terms
As you glance over different stock options, you’ll likely run into a few, unfamiliar terms. Let’s review them.
Earnings and Earnings Per Share (EPS)
EPS refers to the division of earnings by the number of shares available for trade. This figure represents the company’s profits, and you can compare the number to other similar companies.
Price-Earnings Ratio (P/E)
When you divide the company’s current stock price by its earnings per share, you’ll receive the P/E. This number can show you how much investors pay to receive $1 worth of the company’s current earnings.
Return on Equity
The return on equity shows how much profit a company nets per dollar invested. A company’s return on equity helps you interpret how effectively a company invests money and returns investments to its shareholders.
Other Qualitative Considerations
Numbers tell you one thing. Likewise, most skilled investors will agree that it’s best to leave your emotions out of the equation.
That said, it’s your money. You need to feel comfortable where it’s going. You also need to feel confident in your decisions to invest it.
Let’s dive into some of the important qualitative measures you should consider. Examining those will help you make the best decisions for your future.
1. Consider Your Values
What kind of values do you hold? Are you someone who cares deeply about the environment? If so, you may not be so keen on investing in companies that jeopardize the livelihood of our rainforests.
All companies have inherent sets of values and ethics. None are inherently good or bad. However, they may feel good or bad for you.
This is your money. How do you want to spend it? Do you want to invest in ethical companies that you believe in?
2. Competitive Advantages
What do Apple, Google, and Disney all have in common? They dominate their sectors. No matter the stakes, they strive to beat their competition.
All industries have leading companies. However, leading companies change all the time. The next big gamechanger could be just around the corner.
Does the company you’re looking into bring something new to the table? Do they have a mission that piques your interest? Do you have a gut feeling that they are going to succeed?
3. Management Teams
Companies are only as good as their employees. And employees are only as good as their management teams.
You can look into a company’s management by scoping out annual reports or reading transcripts. You can also research a team’s board of directors.
Of course, it can be hard to discern quality management if you don’t work for a company. That said, if you hear negative press about one of the leaders, this could be a red flag.
Final Thoughts on How to Research a Stock
Learning how to research stock is just one part of the process. Actually forking over your money (and committing) to your investments is another. However, once you get started, you’ll enjoy the benefits of watching your cash grow.
Are you ready to get started? Here’s your inspiration- the best time to invest is now!