How to research stocks? Explained by Digimagg

Conducting stock research is essential for investors, providing the groundwork for achieving financial objectives. By comprehensively analyzing a company's financial status, industry standing, and market prospects, investors can make informed decisions. In this guide, Digimagg explores 5 essential steps to develop a robust stock research strategy.

How to research stocks?

Comprehensive stock research entails reviewing financial statements, grasping valuation principles, and evaluating a company's future potential. Valuing a stock entails calculating its intrinsic worth to gauge whether it's priced below or above its market value, aiding in the decision-making process for portfolio inclusion.

Types of stock analysis

In their pursuit of stock investments, investors commonly utilize three primary forms of analysis: technical, fundamental, and sentiment.

Sentiment analysis

Sentiment analysis assesses the prevailing mood or sentiment of the market towards a specific stock or the overall market.

This method may entail examining opinion surveys, market metrics such as volatility and breadth, and social media platforms to gauge public sentiment.

Although sentiment analysis can be somewhat subjective, it provides crucial contextual information.

Fundamental analysis 

Fundamental analysis is central to this discussion as it forms the cornerstone of stock market research. It involves scrutinizing a company's financial statements, market standing, and broader economic conditions to ascertain the intrinsic value of its stock.

5 step guide to fundamental analysis

1. Identify prospective investments

Select favorable options based on market capitalization, earnings, and growth potential.

2. Develop financial projections

Predict future income statements, balance sheets, and cash flow statements.

3. Evaluate qualitative aspects

Examine leadership, brand reputation, and competitive advantages.

4. Determine buying/selling actions

Make decisions considering the potential for gains or losses compared to intrinsic value and desired returns.

5. Gather publicly available data

Acquire financial statements, reports, filings, and industry information.

Technical analysis

Alternatively, you may opt to concentrate on price shifts and trading volumes to predict forthcoming changes in stock prices. This approach involves scrutinizing past market data, such as price charts and diverse market indicators, to recognize patterns and trends.

1. Trend lines

Identify historical support and resistance levels from past trends.

2. Moving averages

Enhance data clarity by smoothing market trends.

3. Momentum oscillators

Identify overbought or oversold market conditions.

4. Volume indicators

Evaluate trading strength through volume data analysis.

5. Chart patterns

Anticipate potential future price movements based on traditional formations.

Master stock analysis: 5 Steps to conduct professional stock research on your own

Step 1. Validate your investment approach

Verifying whether you lean towards growth or value investing is a crucial initial step.

Growth investors typically seek companies with strong potential for future expansion and earnings growth, while value investors aim to identify undervalued stocks trading below their intrinsic worth.

A growth investor might prioritize forward earnings estimates and industry growth trends, whereas a value investor might focus on financial ratios and company fundamentals.

Equally significant is determining your investment horizon. Are you a short-term investor seeking quick gains, or do you prefer a long-term approach for gradual appreciation? Your time frame will dictate the types of stocks you consider and the depth of research required.

Understanding your investment style helps narrow down investment options and concentrate on those that align with your financial goals and risk tolerance.

Step 2. Choose between top-down and bottom-up approaches

Next, you must decide on your approach to stock research: beginning with a macro perspective or delving straight into individual companies. This choice shapes your research methodology and the stocks you explore.

In a top-down approach, you commence by scrutinizing macroeconomic indicators and sectoral trends to pinpoint promising industries. This strategy provides insight into the broader economic landscape and its impact on various market sectors.

By concentrating on macro and sectoral trends, you can identify stocks poised to capitalize on these overarching dynamics.

On the other hand, the bottom-up approach entails a comprehensive analysis of individual companies, regardless of their sector or prevailing economic conditions.

This methodology demands an in-depth assessment of a company's fundamentals, including its financial status, competitive standing, and growth prospects.

When employing this approach, the objective is to identify undervalued companies with strong potential for success, based on their inherent attributes.

Step 3. Collect your sources

Here's a breakdown of essential resources to aid your analysis:

Financial statements and earnings calls:

These sources offer valuable insights into a company's financial well-being and strategic direction. Earnings statements provide critical data such as revenue, expenses, profits, and earnings per share. Additionally, listening to earnings calls can provide deeper context as company executives discuss results, answer analyst questions, and sometimes offer guidance for future performance.

Financial platforms

Websites like Google Finance and Yahoo Finance are indispensable tools for investors, offering a plethora of data including stock price calculations, historical performance, financial statements, and news updates. These platforms facilitate tracking stock valuation, market trends, and industry news, enhancing your stock research process.

Broker research

Many brokers furnish clients with research reports, market analyses, and investment recommendations. While these resources can offer valuable insights, it's essential to recognize potential biases and cross-reference them with other data sources.

Newsletters

Subscribing to investment newsletters provides regular updates and expert opinions on market trends, specific stocks, or sectors. Trusted sources can enhance your understanding and keep you abreast of the latest developments.

Stock screeners

Stock research and analytics tools enable you to filter stocks based on specific criteria such as market capitalization, sector, or financial ratios. Stock screeners are invaluable for identifying potential investment opportunities that align with your criteria. One of the most popular screeners is Finviz.

Industry updates

Frequent perusal of business news websites or subscribing to publications tailored to your industry can furnish you with timely updates that may influence your investment choices.

Step 4. Pose essential queries

Pose the following questions to gain a deeper understanding of the business you're contemplating investing in:

• What are the company's sources of revenue?
• What factors are fueling the demand for the company's products or services?
• What is the company's historical performance?
• Does the company possess a leadership team with demonstrated expertise and experience?
• What are the company's growth and profitability prospects?
• What is the level of the company's debt?

Moreover, it's crucial to evaluate the company's sectoral positioning and its susceptibility to diverse risks:

• What is the present condition of the industry in which the company operates?
• What significant challenges does the company face?
• Is the company vulnerable to any economic, political, or cultural risks?

Step 5. Perform quantitative analysis

Quantitative research serves as the cornerstone of effective stock analysis, offering a data-driven framework for assessing investment opportunities. Integral to this process is the examination of financial statements.

Financial statement evaluation

At the heart of quantitative analysis lie three pivotal financial statements: the income statement, balance sheet, and cash flow statement.

• The income statement unveils the company's revenue, expenses, and net income, unveiling trends in profitability.
• The balance sheet provides a snapshot of the company's financial stability by showcasing its assets, liabilities, and shareholders' equity.
• Meanwhile, the cash flow statement elucidates the company's liquidity by delineating the flow of cash in and out, crucial for gauging operational efficiency and financial well-being.

In summary, comprehensive stock research integrates both quantitative and qualitative assessments, encompassing a thorough examination of financial indicators, company performance, and competitive standing.

Effective stock research entails leveraging diverse resources such as earnings reports, financial news platforms, and stock screening tools. Various analytical methods, including technical, fundamental, and sentiment analyses, are essential for gaining a holistic understanding of stock valuation. Furthermore, determining one's investment style and choosing between top-down and bottom-up approaches can further refine research methodologies.

To fully harness the benefits of stock research, investors should identify strategies and tools aligned with their investment philosophy and apply them consistently to achieve favorable outcomes.