How to Research Stocks

One of the most rewarding aspects of dealing shares without the aid of a traditional stockbroker can be doing your own stock research. In fact, even if you do use an advisor to recommend investments to you, it is good practice to research the recommended company on your own before making a decision. It is true that doing your own stock research can be quite difficult and time consuming at first, perhaps even a bit intimidating for some. In the end, however, performing research on the investments in your portfolio will give you not only a better understanding of each of the stocks, funds, bonds, or other securities that you own, but will also give you a great feeling of satisfaction and accomplishment. Most people will be much more comfortable with the shares that they own as a result of having done their own due diligence on each of the companies in which they invest. By understanding what to look for and what is really important when researching stocks, you can save yourself time and aggravation by focusing on the most important financial figures and ratios

Getting Started

Perhaps the best way to begin your stock research is to find a company or an industry that you are interested in. It could be that you think the people at your bank are great or maybe you love your new mobile phone. Even something that you do not own or use could be a good investment if you think it has a solid reputation or a lot of room for growth. Once you have decided on a company you are interested in, you need to find out if it is a publicly traded company or private. You cannot easily invest in private companies so if the business you like is private, now is the time to check out some of their closest competitors. You can then begin researching the company.

Using Yahoo! Finance

There are a number of very valuable, yet fortunately free, resources available on the internet. Most of them will provide similar information. However, one of our favourites is Yahoo! Finance, which lists current market information and news along with a great deal of additional information. You can enter any company’s stock symbol or name into the “get quotes” box to find the stock you are searching for. Once you find the company you are seeking and click the “get quotes” button you are brought to a new page filled with information on your subject. There is a summary section listing some of the most common quotes and statistics. There is also a stock chart, which is interactive upon clicking on it, a section entitled, “More On (your chosen stock),” and for most companies, there are news headlines underneath the other information. Nearly all of the information you would need to properly research a stock can be found from this page, and the majority of it can be seen on the first screen, without even having to dig any deeper.

Let us now look at some of the information available in the summary, using Yahoo! Finance as a guide, although again, other financial websites will offer similar information.

  • Last Trade – This is the price that shares of the stock last traded at. If it is after the market close or on the weekend then it is from the last trade when the market was open.
  • Trade Time – Last time shares of the stock traded on the market.
  • Change – The first number with an up or down arrow is the actual value in pounds (or dollars if checking US equities) that the shares rose or fell during trading. In parentheses will be the percentage increase or decrease. The numbers are compared to the previous day’s close. So for instance if the change says that shares are up 10.00 (10%), then the last trade made when the market closed previously was for £100.
  • Prev Close and Open – The Previous Close is the price that shares sold for when the markets last closed. Open is of course what they started at when the market opened for trading. These prices may be different, as prices fluctuate even after trading hours with news and information that comes to light after the market close. As a result of newly available information and company news, the markets will adjust the price at each open accordingly.
  • Bid and Ask – These are the prices that dealers and market makers pay and sell the shares for. The “bid” (sometimes called the offer price) is what a dealer will pay when a shareholder sells their shares, while the “ask” is the price they wish to sell their shares for on the open market. The difference between the two is the spread. The larger the spread, the more “expensive” a stock is in terms of being able to sell your shares for a price close to what you paid.
  • 1y Target Est – This is the average estimated worth of the shares in 12 months.
  • Day’s Range – Shows the lowest price and the highest price for which shares traded on a particular trading day.
  • 52wk Range – Shows the lowest price and the highest price for which shares traded in a one year rolling time period (not a calendar year).
  • Volume – The number of shares traded on the last (or current) trading day.
  • Avg Vol (3m) – The average number of shares traded per day over the last 3 months.
  • Market Cap – Also called market capitalization, this is the company’s worth in terms of the number of shares outstanding and the price per share.
  • P/E (ttm) – This is the price to earnings ratio for the trailing twelve months (ttm).
  • EPS (ttm) – The earnings per share for the trailing twelve months.
  • Div & Yield – This is the dividend amount and its yield on an annual basis.

Since we are trying to keep it simple, we will examine how we can use this information along with some additional basic information to make an intelligent, informed decision on a given stock.

52 Week Range

Some people like to compare the current price (last trade) against the 52 week range. If the shares are very near their 52 week highs, then it might not be a great time to buy, as there might not be much value left in the stock. On the other hand, if they are nearer their 52 week low, they might contain a lot of value, depending on the reasons and the financial situation of the company. Comparing prices versus the 52 week range is a good practice but decisions should definitely not be made on this basis alone.

P/E Ratio and Earnings per Share

The next items investors like to check are the P/E ratio and the earnings per share. These can be very valuable bits of information and can quickly help in determining the financial health of a company and the value of its shares. First we will look at earnings per share (EPS). The way EPS is determined is by taking the total income available to common shareholders divided by the number of common shares outstanding. The higher this number, the better, since it means that each share is has more money earnings. Once we know the EPS, we can figure the price to earnings ratio, or P/E. This is figured by taking the market price per share of stock divided by the EPS. Generally speaking, the lower the P/E ratio is the better.

When comparing stocks by looking at financial figures like EPS or P/E, the shares should be compared with competitors or other companies within the same sector. For example, it would be fair to compare the EPS and P/E of two bank stocks against each other, but a bank stock compared against a tech stock, for instance, would not be an appropriate comparison. Different industries will have different standards on what is an appropriate figure for EPS or P/E ratio.

Annual Dividend Yield

The annual dividend amount and yield are also very important, although more pertinent to some investors than to others. Shares with a high dividend and yield can be a great investment for those seeking income. The fact that a company issues a dividend is not always an indicator of a great stock. Although quite often, very solid, well-established companies offer great dividends, they do not always translate to large annual returns outside of the dividend payments. However for investors simply looking for regular fixed income payments, comparing dividends and yields becomes very important. When doing so, higher numbers are obviously better, and comparisons across a wide range of industries are perfectly acceptable.

Everyone has Different Goals

An important aspect when researching stocks is to realize what your investment goals are and to have a plan to achieve them. If you are a young investor seeking high rewards and willing to deal with the risk involved, then you may need to look outside some of the “blue chip” stocks and research growth stocks, stocks that are potentially well under-valued and emerging markets. On the other hand, if you are nearing retirement, stability and income should be the focus and you should have very little interest at all in any high-risk, high-reward plays. No one can tell you exactly how to research stocks that will be perfect for your portfolio because everyone does it differently. Even the experts often disagree on what are the most important aspects of stock research, since most everyone has a different idea of what is important to them. However, with the tools above you will be well on your way to making wise, sound investments, without the need for a finance degree or spending hours upon hours researching every stock you would like to purchase.