How to research stocks on your own: A guide
Ever got a “hot stock tip” from a friend? Many of us have. But usually, things don’t work out as planned. Often, this equity is near its peak. So, we buy high and sell low – the opposite of what we want.
To become a successful stock picker, invest time & effort into research. There are no shortcuts to success – investing is no exception. Stop treating the stock market like a casino – there is a way to win in the long run.
Invest In What You Know
You should never throw darts blindfolded – figuratively or literally. With regards to finance, this means not picking stocks based on friend’s advice or preconceived notions. It’s this that has led you to where you are.
Instead, invest in industries you know or have a deep interest in. Doing so will allow you to leverage an information advantage that others might not have.
Let’s say you work in the pharmaceutical industry. By default, you have a better understanding of industry trends than the average Joe. For this reason, you’ll have greater success picking growth stocks over the long-term.
Similarly, let’s assume you read alternative energy blogs in your free time. So much so, you’re on top of every development in the wind, solar, and battery sectors. Given this knowledge advantage, why wouldn’t you play in alternative energy space?
However, industry knowledge alone isn’t a guarantee that things will work out. To further increase your win odds, you’ll need to flag stocks that have growth potential.
Identify Stocks With Growth Potential
Not all stocks are destined for stardom. After a much-hyped IPO (and let’s face it, virtually EVERY IPO is), most settle into a tight trading band. Boring.
To find growth stocks, keep your eyes open for specific characteristics. First, their industry should be returning an average of 10% growth over three years. And, candidate stocks should have an average return of 15% over that period.
Once you have flagged equities that meet these conditions, go deeper.
Examine Their Books
When it comes to the health of a company, stock prices aren’t a foolproof gauge. Misleading reports, investor speculation, and plain old hype can all inflate an equity’s price.
To get a better idea of a firm’s financial health, look at their books. Start by examining their balance sheet. Calculate their current ratio by dividing their liquid assets by short-term liabilities. The higher the number, the healthier their cash position. If it’s less than 1, the company is in danger. Firms in the latter position must liquefy other assets or borrow money to cover their obligations.
Next, determine their cash flow. Ideally, a company should be cash flow positive – that is, their liquid reserves are increasing QoQ. To determine this, find their income statement. On it, you’ll find company profits/losses, revenue sources, expenditures, and other relevant information.
Check the Background of Their Management Team
A ship is only as stable as its crew. Learn who occupies executive positions in a target company and look into their past. Bios won’t cut it, as companies write these to make themselves seem competent.
Instead, you’ll want to see what other information is out there. Begin by googling the names of key executives. If they have Google-resistant names, include the name of their company. This way, if an executive has involved themselves in public controversies or legal trouble, you’ll find it.
Encounters with the law doesn’t necessarily mean they’ll get into trouble later. However, specific charges/allegations, like insider trading or fraud, should give you pause.
Seek Out Expert Analysis
Experts got to where they were through years of intensive study, practising, and failures. Eventually, they connected the dots and found success. If you want to improve your stock-picking ability, listen to the takes of experienced traders.
Jim Cramer, Warren Buffett, Peter Lynch – all these folks have made a fortune trading equities. They don’t always get things right – no investor does. But, because they’ve made more good calls than bad, they’ve risen to the top.
However, some call them out for giving self-serving advice. Considering the “guru” status of these figures, that’s understandable. So, you should also seek out opinions from lesser-known but successful investors. According to Alex Carlson of Insider Financial, new, bleeding-edge industries like cannabis, bitcoin, and alternative energy will soon explode.
Many older, institutional investors won’t touch these stocks. Not because they think these sectors won’t succeed, but because they don’t understand them. So, seek out every viewpoint you can find – this way, you’ll make better-informed trades.
Beating the Stock Market Takes Time
We all want to get rich ASAP. It’s part of the environment we grew up in. But, that doesn’t change the fundamental laws of success. If you want lasting prosperity, you’ve got to work for it – and that means putting countless hours of study and practice.
Over time, you will fail. That’s a virtual guarantee. But, if you learn from your mistakes, you’ll get better. Eventually, you’ll combine these lessons with found knowledge, and you’ll find your groove.
Stop taking shots in the dark and start learning – your future self will thank you.