Welcome To Step 5!
Here we will go through what to look for and where to look when researching into stocks before buying. Take a look around see what we have to offer!
Welcome to your fifth step on your investing journey! On this page we talk about how to research a stock, why it is important and where to look!
We go into quite a bit of detail here, so don't be discouraged if it seems to much just keep at it and keep learning!
Read what we have carefully and don't get discouraged. If you have any questions get in contact with our team!
When researching a stock to buy, it’s essential to take a well-rounded approach. While insider tips and tricks can be helpful. That being said, there are plenty of legal strategies and key resources that even experienced investors may overlook. Here are some advanced ways to analyze stocks effectively:
The Core of Stock Analysis:
Start by focusing on the company's financial health and performance. Look at:
- Earnings Reports: Pay attention to quarterly and annual earnings reports. Focus on key metrics like Revenue Growth, Net Income, Earnings Per Share (EPS), and Margins (gross margin, operating margin). A growing company often shows increasing revenues with stable or improving margins.
- Free Cash Flow (FCF): This is a critical indicator of a company's ability to generate cash after investing in operations and capital expenditures. Strong FCF can be used for expansion, paying dividends, or repurchasing shares.
- Debt Levels: Companies with too much debt are risky, especially during economic downturns. Look at the Debt-to-Equity Ratio and Interest Coverage Ratio. High debt levels can limit a company's ability to weather financial storms.
- Analyzing Insider and Institutional Activity (Legal Tips)
Insiders (executives, directors) and institutional investors have a lot of insight into their companies, but you can still track their movements legally.
Insider Trading Data: It’s not about insider trading (which is illegal), but tracking insider buying and selling can give you insights into what those close to the company are doing. Insiders often know more about the company’s potential and risks than anyone else.
Use SEC Filings like Form 4 to see if executives are buying shares, which often suggests confidence in the company's future. Similarly, if there is consistent selling by executives, it may signal concerns.
Institutional Activity: Check if big institutional investors (like hedge funds or mutual funds) are increasing their positions. This info is available on 13F Filings. Large investors often have access to excellent research, so their buying/selling decisions can provide valuable clues.
Alternative Data Sources: Go Beyond the Obvious
Here are some sources that not everyone thinks about when researching stocks.
- Google Trends: Search interest can sometimes predict a product's future sales or a company's stock performance. For example, if there is a surge in searches related to a company’s product or service, it could indicate rising interest and potential sales growth.
- Reddit and Social Media Sentiment: Platforms like Reddit’s r/WallStreetBets, Twitter, or StockTwits can be revealing. If there’s a lot of chatter about a company, it could indicate either a growing interest or speculative hype. Be cautious—what’s trending might not always be based on facts, but if it’s backed by solid fundamentals, it could be worth looking into.
- Patent Filings and Innovations: Look at Patent Filings and R&D efforts. If a company is filing patents related to a groundbreaking technology, it may indicate that something innovative is coming down the pipeline.
- Supply Chain Check: You can often find insight into a company’s future by researching its suppliers and customers. If a company is starting to win major contracts or if its suppliers are expanding, it could mean good things ahead. Tools like ImportGenius or Panjiva allow you to track supply chain activity.
Industry Trends and Market Sentiment
Stocks don’t exist in a vacuum. It’s important to consider the industry’s overall health and future outlook.
- Market Cycles: Certain industries perform better in specific economic conditions. For instance, defensive stocks (like utilities or consumer staples) tend to do well during recessions, while growth stocks (like tech or biotech) often perform better during bull markets.
- Macro-Economic Indicators: Keep an eye on interest rates, inflation, and GDP growth. These can significantly impact the stock market and certain sectors. For example, rising interest rates can hurt growth stocks but benefit financials (like banks).
- Regulation and Government Policy: Especially for sectors like healthcare, energy, or tech, government regulations can significantly impact a company’s prospects. Stay updated on legislative changes that could affect your target company or industry.
Technical Analysis: Finding Entry and Exit Points
While fundamental analysis tells you what to buy, technical analysis helps you time your investment.
- Volume and Price Trends: Check if a stock is trending in a specific direction with increasing volume. If a stock price is rising and volumes are increasing, it can indicate strong momentum.
- Key Price Levels: Look at support and resistance levels—prices at which a stock has historically had trouble moving above (resistance) or below (support). Breaking these levels can signal a strong move in either direction.
- Relative Strength Index (RSI): This is a technical indicator that helps measure the stock's price momentum. An RSI over 70 suggests the stock is overbought, and below 30 suggests it’s oversold.
Stock Screening Tools
Use stock screeners to filter stocks that meet specific criteria. Some advanced screeners allow you to:
- Set specific valuation ratios (like P/E, P/B, etc.)
- Look for companies with solid revenue growth and low debt
- Screen by technical factors like price momentum, RSI, and moving averages.
Platforms like Yahoo Finance, Finviz, or TradingView offer free or affordable stock screeners.
Look for Upcoming Catalysts
A stock’s price often moves when a new event or catalyst occurs. Some examples are:
- New Product Launches: Look for companies planning to release a new product or service, especially in tech or consumer goods.
- Acquisitions: If a company is acquiring or being acquired, it can signal growth or market consolidation.
- Legal Wins or Regulatory Approvals: For biotech or pharma companies, getting FDA approval for a drug can send the stock price soaring.
When researching stocks, you need a mix of financial fundamentals, market sentiment, insider and institutional activity, and a keen eye on catalysts and trends. The trick is combining these with careful technical analysis to ensure you’re entering at the right price and timing.
Well done! Step 5 is complete! You now know very important pieces of information on what and where to look for researching stocks before you buy them! Click Here To continue on to page 6: Diversifying Your Portfolio!