How to research stocks for beginners?

If you are like most people, you would do some research before you invest in a product. You would not purchase a car, for instance, without first examining your preferred model, its value, its price, and its nearest rivals. The same is true of stocks. You ought not to invest in stocks without first knowing basic facts about other companies in the industry. If you develop an aptitude for researching stocks, you will go far in investing.

Owning stock is no more than owning a piece of a business. By law, stock issuing businesses publish reports, and that’s where you start researching stocks.

Reading an annual report

Reading an annual report is vital to a company’s value addition. Annual reports may be found on the websites of publicly-traded companies via the Investor Relations Section. Soon enough, you will be able to gather insight regarding accounting goodwill, diluted shares and depreciation.

The important areas to concentrate on while reading an annual report:

• Revenue

The money coming into a company;

• Net income

The remainder after expenses and taxes;

• Earnings and earnings per share (EPS)

Per-share basis company profit;

• Price to earnings ratio(P/E)

Company stock price divided by earnings per share;

• Return on Equity(ROE)

The profit generated per rupee of shareholder investment ;

• Return on Assets(ROA)

The profit generated from the company’s funds.

Important investing metrics: researching stocks

The following are the most important metrics an investor ought to have in their toolkit -

• Price to earnings (P/E ratio):

Companies report their profits to shareholders as earnings per share, or EPS for short. The price to earnings ratio or P/E ratio is a company’s share price divided by its yearly per-share earnings. For instance, if a stock trades for Rs 210 and the company’s earnings were Rs 14 per share over the preceding year, it traded for a P/E ratio of 15.

• Price to earnings growth ratio (PEG):

Companies all grow differently. The PEG ratio takes a stock’s P/E ratio, dividing it by the expected annualised earnings growth rate over the next few years. For instance, a stock with a 20 P/E ratio and 10% expected earnings growth over the coming five years would have a PEG ratio to the tune of 2.

• Price to Book (P/B) ratio:

A company’s book value is the net value of all assets. Book value is the amount of money a company would hypothetically have to shut down the business and sell all assets.

• Debt to EBITDA ratio:

A good indicator of a company’s health is its debt. The company’s income statement bears the EBITDA or’ earnings before interest, taxes, depreciation and amortisation.

Researching stocks: How do you research stocks before buying? Or How do you analyse stock? Or How do you analyse if a stock is worth buying?

You are looking to invest in a good business rather than a cheap stock. Stock analysis involves the following components:

• Durable competitive advantage

If you are a long term investor, you would be interested in knowing if a company will be able to keep its market share over time. Therefore it becomes vital to identify a reliable, competitive advantage. A respected brand name can give accompany pricing power, patents can shield it from rivals, and a large distribution network can cause it to have a cost advantage over others in the field ;

• Great management

Regardless of how good a company’s product is or the amount of growth occurring, the most vital thing is that the leadership has to have the best credentials. Not only would senior management be of high value in terms of experience and training, but their interests also have to be in alignment with shareholders’ financial interests ;

• Industry trends

Investors ought to concentrate on industries with positive growth prospects for the long term. For instance, over the last ten years, the percentage of the retail sales online has grown from less than 5% to in excess of 11% at present. E-commerce obviously is an instance of an industry with a positive growth trend. Cloud computing, healthcare, and payments technology are, in all likelihood, all set to grow exponentially in the coming decades.

How do you research stocks? Or How do I start learning the stock market? Or Fundamental & Technical analysis for researching stocks

Both analysis types can help find valuable information. The best way to go about it would be employing both types so that they complement each other.

Investors interested in fundamental analysis usually go for two fundamentals oriented strategies -

Growth investors concentrate on a given company’s future prospects; value investors concentrate on if the current stock price makes sense, considering a given company’s current health.

Analysts into technical analysis screen stocks with the following:

• Price & market capitalisation

You can decide not to include the classes of stocks that do not interest you ;

• Sectors & industries

Go for short selling, or sell long with relevant data about sectors and industries. Look for strong sectors and industry groups if going long is your intention. Buy a stock if you think its price will appreciate. On the other hand, you can go short, or simply borrow and sell a stock whose price is going to decline, buying it back later at a lower price. You will, of course, pocket the difference;

• Momentum

The investor interested in technical analysis is generally looking to identify strong, up-trending stocks for possible buys and weak down-trending stocks for shorts. The preferred way to find these is by using moving averages. These are trend-following indicators that smooth out day to day price movements to show a stock’s overall direction over time.

Conclusion

Researching stocks and selecting them does not have to be difficult. However, you do have to be flexible. Go for markets that are moving. However, be prepared not to trade when there’s no need to. Go short as well as long.

Learn from bad trades. Stay disciplined. With small losses, live to trade another day!

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