How do you begin researching stocks? When you think about it, most of us start out by asking ourselves some simple questions. What do I want to buy? How much do I want to pay? How much risk do I want to take? But what if you’re not sure? What if you have absolutely no idea what kind of stock you’d like to buy—and you need to decide that before you can begin investing?
In one of our earlier posts, we discuss the importance of coming out with a plan that is actionable when you start researching stocks. You need to do a lot of thinking and research before you really have a plan in place. This is why we strongly recommend that you do your research and come up with a plan, before you start investing in the stock market. Once you have your plan, you can start researching stocks and make your next move.
How do I start learning about stocks? Note the weighting of the word start. At this stage, the analyst (you) is not yet thinking about the detailed analysis. This is just a starting point. How do you do that?
How is the process of stock analysis generally understood? It covers reading financial statements, calculating ratios, estimating intrinsic value, etc. But before we get into the details, we need to prepare.
How do you do that? To do this, look at the company in question. In this article we will look at where to start when searching for business information. The overall goal should be to identify a potentially good company and then conduct a detailed analysis of its actions.
The basic idea is to have an eye for business. We can create standard questions that you can ask and answer to find out more about the company. It also helps investors who are not able to analyze stocks themselves to know more about the company. What you can do, however, is research the company thoroughly and give yourself an edge over other investors.
- In-depth observation and initiation of stock survey
In-depth observation and initiation of stock survey
It is important to understand the business behind a company before buying shares. This statement was repeated many times by the experts. How do we arrive at this understanding? To do this, you will need to answer four questions about the business/company (see infographic above).
These are the four parameters that allow us to evaluate the company’s fundamentals. The best part is that we don’t need reports or calculations to conclude. Just look at the company and find an outside investor.
If you’re looking for the best action, you need to sharpen your surveillance skills. How do you do that? We will discuss this in the next part of the article.
These four questions form the basis for further analysis. But what if you decide to skip this step (business observation) and immediately move on to a detailed analysis? This step can be skipped. But consider an analogy.
Let’s say you want to recruit a candidate (share) for your team (portfolio). So they will first ask for resumes (balance sheets) from potential candidates. But are you going to hire a candidate just because you look at their resume? Probably not. You will want to meet him in person (to observe him). You can also conduct interviews (surveys). Candidates are selected based on your observations and answers to questions.
Similarly, buying a stock based on financial reports alone seems like an incomplete task. The observation of the company makes the whole process of finding actions more complete.
#1. What is the purpose of the entity?
This is a basic requirement for any business. If we talk about RIL, TCS, HDFC, Biocon, those are popular companies. Maybe we can find out what their goals are. RIL is active in various sectors such as energy, petrochemicals, retail, telecommunications, etc. TCS is active in the field of IT services and consultancy. HDFC is engaged in real estate financing and Biocon is a pharmaceutical company.
But when it comes to lesser-known companies, we don’t necessarily know their goals. It is very important to be sure beforehand. Knowledge of the sector in which the company operates can be useful. This gives an idea of the kind of business the company is in.
For example, the ultimate goal of a pharmaceutical company is to sell drugs. The aim of the Oil Marketing Company (OMC) will be to sell petrol and diesel directly to consumers.
A direct way to find out is to consult the company’s annual report. Download it from the website and read the first 5-10 pages. Then go to the president’s message. As you read through these pages, look for any mention of the industry or products. This exercise can provide an accurate picture of the company’s objective.
2. How does the money come in?
What do we want to know? How the company converts its products and services into sales (cash flow). This is a crucial step on the road to learning about actions. Why?
This helps to clarify the issue at hand. This is how we learn about a company’s products and services. In addition, we will also understand how and where they are sold to convert inventory to sales (or cash). It can also provide insight into other aspects of the business.
For example, a company like Tata Motors has two types of products: commercial vehicles and passenger vehicles. They are sold to end users through distributors. With the acquisition of JLR from Ford in 2008, Tata Motors expanded its product development capabilities. It also gave the company the ability to influence prices.
The price advantage is evident in the price ranges in which vehicles like the Harrier and Safari are currently sold. Previously, the vehicles were only produced in economy class. But now, after the JLR deal, their car prices could be much higher.
What’s the point? It is important to know how a company makes money and if it is doing enough to increase its pricing power. Investors should ask questions and seek answers before investing in stocks.
3. How does the company currently operate?
Analysts prefer to assess performance based on a company’s long-term financial results. Why? Because a good deal may not yield immediate profits. But in the long run, the benefits will come. Read: Why the stock price may fluctuate.
But here we are just beginning to learn the actions. At this stage we do not need to process the financial statements. All we have to do is look.
These include companies active in sectors such as consumer products, hotels, restaurants, airlines, entertainment, fashion, automobiles, etc. The products of these companies are the most visible. If we look closely, we can judge their work.
What should we look for?
- Dude: Try to find out how old the company is. Find the date of their registration. The older the company, the better.
- Evaluation: Are you thinking about their products? If you were a customer, would you buy their products? The answer is yes – the company gets a point for that.
- Customer coverage : Think about the distribution and sales of the company. How accessible are their products or services to the end user? You want to target companies whose products are readily available.
- POS: Also try to assess their point of sale (POS – as in a retail store, a merchant). The impressive presentation of the products at the point of sale speaks volumes about the quality of the company.
- Eligibility: Also check if their products and services are acceptable to the general public. Mass acceptance of a product or service can greatly increase its effectiveness.
- Size: As investors, we want to buy shares of the biggest companies. In this contest, try to estimate the size of a company based on its sales or market capitalization.
Second, it’s the types of businesses that aren’t as visible. How do you rate their work? It is not easy to judge based on observations alone. So give yourself time. Go to Google Alerts and set up the company’s news feed. I usually take the news feed (from an unknown company) once a day for at least 30 days.
You can also look at company news on portals such as moneycontrol.
You can also use the Google Alerts trick for the first type of business. It is very effective in making a first impression.
4. Assessment of competitiveness
This is probably the litmus test for any business. A company that can maintain itself as a leader in its industry will financially dominate the market. Investors should therefore start studying stocks by looking at competitors.
The first thing to consider is the extent of competition. Make a list of all companies operating in this area. Look at their sales figures. You can do this by going to the promotion page on BSE India. In the sidebar you will see the Peer Group option. Click on it and you will get a comparison of four companies with detailed information.
Find out if their sales, profits and margins are close. If that’s the case, then the competition is fierce. If there are too many names on the list, it means that the company is not capital intensive. Such a venture has its challenges. Other new companies are likely to emerge in the future, leading to even more competition.
We can also think in terms of product development. The technological difficulty of inventing or duplicating a company’s product. Can reproduction be prevented under the rules of copyright? What is the competitor’s name recognition to support the investment. How price sensitive are product sales? How easy is it for a company to raise the price and not hinder sales?
Observing a company’s competitors is a very effective way to get a feel for that company. This work will determine who is the market leader. You will also know where your company stands in relation to them.
Observing a company using the four questions above can be time consuming. But after learning some of these actions, the process becomes easier.
Informed investors will never analyze a stock in detail until they have answered the four questions above. The answers to these questions will determine whether or not it’s worth spending time on a complete fundamental analysis.
For a quicker way to start searching for stocks, use our stock screener to identify potentially interesting stocks. Once these inventories are identified, a detailed analysis can be performed using our inventory form.
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Frequently Asked Questions
What should I look for when researching a stock?
A company’s financial history and market performance is the most important thing to look for when researching a stock.
How do you analyze stocks for beginners?
Some of the things you may want to consider when analyzing stocks for beginners are: What is the company’s revenue? What is the company’s earnings per share? What is the company’s price-to-earnings ratio? What is the company’s dividend yield? The company’s revenue is the amount of money the company makes from each sale. The company’s earnings per share is the amount of money the company makes from each share of stock. The company’s price-to-earnings ratio is the price of the company’s shares divided by the company’s earnings per share. The company’s dividend yield is the percentage of each share that the company pays in dividends.
How do I start picking stocks?
You can start by investing in a low-cost index fund. This will give you broad exposure to the stock market without the need to research individual companies.
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