How to research a stock

Learning how to research stocks is a good idea, because

It can help you make better long-term investments.
Knowing what you’re invested in can help you stick to your plan.
You may be less likely to impulse buy or sell during market fluctuations.

On the Australian Stock Exchange alone, there are more than 2,000 stocks.

The Nasdaq Composite Index, which is more commonly called The Nasdaq, has more than 2,500.

So with so much choice, how are you meant to decide what's worth investing in?

Even though it’s tempting to jump on the latest meme stock or crypto play, or do what everyone else is doing, the smart play is to do your own research. It’s what the professionals do.

Professional investors spend most of their time researching

Your job as an investor is to form an unbiased, unemotional view of what you’re researching.

It means you’ll pull from a wide variety of sources, then test them against such questions as, “What does this research tell me?” “What are the different views of this stock, trend, and industry?” “Does this make sense to me?”

There are thousands of stocks at the stock market

You can think of the stock market as an actual market.

Every day, people buy and sell their shares of companies because everybody’s got different timelines, risk appetites, portfolios, and personal circumstances when it comes to investing.

How can you tell if a stock’s worth buying?

1. Get the facts

You can find out the basic information about a company from its website.

Publicly listed companies usually have sections of their websites that are dedicated to existing and potential investors. To find them, just google the company name, and ‘for investors’.

You should be able to find information such as earnings reports, product announcements, leadership changes, and capital raises.

You’ll need to understand the financial health of the company, and decide whether you believe in its management, and that you know enough about the company’s industry and sector – and if you don’t, you’ll need to research those too.

Some documents to check out include:

Earnings reports:

These reports, generally released every three months, outline a company’s performance for the previous quarter, vs the year before. Generally, investors look to see improvement across key metrics, and whether there are any significant updates or announcements that might change their thesis or valuation of the stock.

Earnings reports tend to include:

Balance sheet - A balance sheet shows a company’s assets, liabilities, and net worth.

Income statement - Also known as profit & loss statements (P&L), this statement shows the revenues, expenses, gains, and losses of a company during the reporting period.

Cash flow statement - A cash flow statement reports the cash generated and spent during a specific period of time.

Some companies only release their reports half yearly.

10-Ks:

This is an annual report required by the US Securities and Exchange Commission (SEC) for all US publicly traded companies about their financial performance.

10-Ks include information on how a company makes its money, organises its business, how much it pays executives, plus earnings per share and other key metrics.

Press releases and market announcements:

Companies are generally required to disclose to the market when anything happens that could impact the value of its shares, good or bad.

2. Get the insights and views

Now that you’ve got the facts, you may want to cross check your understanding with what other people think.

Your goal here is to broaden your understanding so that you can spot weaknesses in your argument and make the best decision you can.

Remember how every investor will have a different motivation for buying or selling a stock? This means that there’ll be many different viewpoints for each particular stock, and finding out about them may help strengthen your case for buying – or passing on – a stock you’re interested in.

Places to get insights include:

Financial press:

Online newsletters, websites, financial journalists, and news can offer alternative views and insights.

Broker reports:

Sometimes brokers will initiate research reports on particular companies or sectors. These can be interesting sources of information.

One research method is to build a ‘bull’ case and a ‘bear’ case for each stock. That is, find all the reasons why a company might succeed, as well as all the reasons it might fail.

3. Figure out if the company works for you

Whether you decide to buy a company, put it on your watchlist, or forget about it completely will come down to your research – and how it fits into your risk tolerance, and wider portfolio strategy.

Ultimately you want to build a portfolio that you feel comfortable and confident about, because you’ll want to give yourself the best shot at long-term success.

This could mean a diversified portfolio with broad exposure to different companies, sectors, or industries, so that if one falls, it won’t take your total net worth with it.

It’s also important to take your risk tolerance into account, and to keep your investment timeframe in mind.

At Spaceship we’re long-term investors, which means we’re typically looking for companies that will grow in value over the long-term, benefiting from long-term trends.

If you’re looking for a short-term return, it may be best to ask yourself if investing in individual stocks is the best way to deliver that. Remember there are no guarantees when it comes to investing.