When you’re new to this process, researching stocks you’re considering investing in can seem overwhelming. In the beginning, it might seem difficult to learn about stocks, but understanding financial statements are key.
What is the Best Way to Research Stocks?
Many people wouldn’t commit to a major purchase before first doing some research. You wouldn’t purchase a car without researching the model, the price, the value, and the closest competitors of your favorite model first. Stocks are no different. A stock investor should research about other companies and stock market reviews in the industry before investing, for example, you can find the Motley Fool Everlasting stocks review here.
Owning stock is nothing more than owning part of an organization. Companies that issue stock are required by law to produce public reports, so you can use them as a starting point when choosing stocks.
How can I Choose Which Documents to Research?
SEC (Securities and Exchange Commission) requires that publicly traded companies file a range of financial documents. There is also the 10-K, which shows the balance sheet, the revenue sources, and the expenses for an organization. Narrative sections of 10-Ks can provide insight into a company’s concerns about the marketplace, competition, and other information relevant to its business.
What Are Annual Reports?
To be able to value a company, you need to read its annual report. You can find annual reports on the Investor Relations section of the websites of publicly traded companies. Practicing will help you learn how to look at the numbers and figure out what’s happening in the company. Inexperienced traders could gather insight about accounting goodwill, depreciation, and diluted shares from annual reports as they have been in the game for a while.
As you read a report, you should pay attention to the following points:
- Money coming into a company is revenue
- Net income is the amount left over after expenses and taxes
- Company profit per share is called earnings per share (EPS)
- A company’s current stock price divided by its earnings per share is the price to earnings ratio (P/E).
- Return on equity (ROE) vs. Return on assets (ROA): ROE is the profit generated per dollar invested by shareholders. ROA is the profit generated from the company’s funds.
How Does Value Investing Work?
Value investing is a stock-picking and investment strategy that has been proven to be effective in the past. This approach involves looking at a stock’s health instead of relying solely on market price and other figures to determine its value.
Benjamin Graham was the pioneer of the value investing approach, whether in its pure or modified form. In his approach, Warren Buffett and other investors have amassed fortunes in the hundreds of millions to tens of billions of dollars by finding undervalued stocks (or those with low earnings potential).3 The formula he described consists of seven factors.
After you’ve completed your research, and that should include a deep dive into a company’s public documents and reports, you are ready to buy stocks. To find out what types of trades you can place with your broker, you can consult a financial advisor.