Investing is an important part of building a successful financial future. Like many endeavours, there are various paths you can walk to get to the destination. If investing in individual companies is an avenue you’d like to tread, i.e. buying shares in a business as opposed to ETF or LIC investing as I’ve previously written about, learning a research process is crucial.
There isn’t just one way to assess a potential investment, however the great news is that learning and improving how to research stocks is completely possible for anyone.
A word of warning: it takes time and effort. As a mentor of mine has told me before, learning to invest is like a practice where mastery has no clear end point. Continuous improvement can be made across a lifetime! So starting to build this skill set early on in your investment journey can help you eventually construct a portfolio very specific to you and your goals.
If you’re new to the research process, or you need a refresher, here are five practical ways you can get started.
Determine what kind of investor you are
Before you dive into the nitty-gritty details of stock research, take some time to understand what type of investor you are. What is your risk tolerance? What is your main goal? What type of investments work well for these goals?
Without knowing what you’re looking for, it’s going to be difficult to find stocks that align with your portfolio.
Get familiar with investment terms
The next step is to get comfortable with common investment terms. I know that for me, these terms felt completely foreign and overwhelming in the beginning of my investment journey.
This is basically how much money the company is bringing in. This is typically measured on an annual basis.
The sum of revenue minus all expenses, taxes, and depreciation will show whether or not the company is making a profit. This is defined as net income.
Earnings per share (EPS)
Earnings per share can be determined by dividing the earnings by the number of shares available for trading. This number will shed light on the profitability of a company on a per-share basis.
Price to earnings ratio (P/E)
The price to earnings ratio considers the current stock price based on its recent earnings.
Return on equity (ROE)
Return on equity measures how well a company is generating profit using the money shareholders have invested.
Look at the numbers
Now that you have some understanding of investment jargon, you can start to take a closer look at the company’s annual reports and financials.
Look at the company’s price chart and try to marry what is happening to the share price in relation to your research. Rather than trying to assess “should I buy this now?”, test your understanding of the company by assessing your research process. I know I wouldn’t buy a pair of jeans just because the price was going up, particularly if I didn’t understand why the price was increasing!An added hurdle - there are many charts and “technicals” that can bring unnecessary complexity to basic research. Stick to looking at the share price over time and comparing the movements to the very basics of the business. Essentially, as a beginner, it is easier to learn to crawl before trying to run.
Use any extra tools available to research stocks
When you sign up for a brokerage account, it’s likely that the platform will offer tools to help you conduct your stock research. These tools can really help streamline the process for you by comparing important financial details of a company, all in one place. Creating a stock watchlist can be another way for investors to visualise the performance of any given company.
Look beyond the numbers
While the numbers of any investment are a critical piece of the puzzle, it’s important to look beyond the financial details of a company before making an investment. Some factors you may wish to consider:
Who is in charge of running the company? Do you trust what you know about the management team? Without trust in the company, an investment could be a stressful experience.
Do you agree with the company values? These are the beliefs and principles from which the company operates. If you don't agree with them, then you should question whether or not you want to move forward with an investment.
The bottom line
An investment portfolio is an important part of your financial future. With that, taking the time to build a portfolio that aligns with your investment goals and values is a major piece of the puzzle.
Take the time to learn the basics of research and don’t rush into anything. Trust your instincts, question research that doesn’t make sense and continue to practise the skill over time.
And remember - the more research you do, the more empowered you’ll be to make informed investment decisions