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Sebastian Perez
Sebastian Perez

How To Research A Stock Before You Buy



Wall Street stock analysts look deeply at a company's financial reports and announcements to conduct fundamental analysis. This is done to come up with a presumed fair value or price target and then to issue a recommendation to investors accordingly (e.g., buy or hold recommendations)."}},"@type": "Question","name": "What Are Some Bottom-Up Tools for Stock Analysis?","acceptedAnswer": "@type": "Answer","text": "Bottom-up analysis begins with a company's financial statements such as the balance sheet and income statement. From there, various ratios can be computed that reveal a firm's current and expected financial position. These ratios include, among several others, the debt-to-equity (D/E) ratio, the quick ratio, inventory turnover, and various price multiples.","@type": "Question","name": "What Should I Do If a Stock Rises Above Its Target Price?","acceptedAnswer": "@type": "Answer","text": "If you are confident in your original analysis, a security should be sold for a profit once it reaches or exceeds its price target. You may want to first see if anything fundamental has changed that might raise the current price target, but otherwise use the proceeds from your sale to fund a new investment opportunity."]}]}] Investing Stocks Bonds Fixed Income Mutual Funds ETFs Options 401(k) Roth IRA Fundamental Analysis Technical Analysis Markets View All Simulator Login / Portfolio Trade Research My Games Leaderboard Economy Government Policy Monetary Policy Fiscal Policy View All Personal Finance Financial Literacy Retirement Budgeting Saving Taxes Home Ownership View All News Markets Companies Earnings Economy Crypto Personal Finance Government View All Reviews Best Online Brokers Best Life Insurance Companies Best CD Rates Best Savings Accounts Best Personal Loans Best Credit Repair Companies Best Mortgage Rates Best Auto Loan Rates Best Credit Cards View All Academy Investing for Beginners Trading for Beginners Become a Day Trader Technical Analysis All Investing Courses All Trading Courses View All TradeSearchSearchPlease fill out this field.SearchSearchPlease fill out this field.InvestingInvesting Stocks Bonds Fixed Income Mutual Funds ETFs Options 401(k) Roth IRA Fundamental Analysis Technical Analysis Markets View All SimulatorSimulator Login / Portfolio Trade Research My Games Leaderboard EconomyEconomy Government Policy Monetary Policy Fiscal Policy View All Personal FinancePersonal Finance Financial Literacy Retirement Budgeting Saving Taxes Home Ownership View All NewsNews Markets Companies Earnings Economy Crypto Personal Finance Government View All ReviewsReviews Best Online Brokers Best Life Insurance Companies Best CD Rates Best Savings Accounts Best Personal Loans Best Credit Repair Companies Best Mortgage Rates Best Auto Loan Rates Best Credit Cards View All AcademyAcademy Investing for Beginners Trading for Beginners Become a Day Trader Technical Analysis All Investing Courses All Trading Courses View All Financial Terms Newsletter About Us Follow Us Facebook Instagram LinkedIn TikTok Twitter YouTube Table of ContentsExpandTable of ContentsStock Analysis Is a ProcessBest to Start Where You AreWhat to AnalyzeStock Alalysis FAQsThe Bottom LineInvestingFundamental AnalysisHow to Become Your Own Stock AnalystByManoj SinghFull BioManoj Singh has 29+ years of experience working for the Central Bank of India. He is the author of Bulls, Bears, and the Tortoise.Learn about our editorial policiesUpdated March 16, 2022Reviewed byEric EstevezFact checked by




how to research a stock before you buy


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Wall Street stock analysts look deeply at a company's financial reports and announcements to conduct fundamental analysis. This is done to come up with a presumed fair value or price target and then to issue a recommendation to investors accordingly (e.g., buy or hold recommendations).


For individual investors, choosing the right stocks can feel like a daunting task. But if you want to manage your own portfolio, you can apply the same kind of techniques that the pros on Wall Street use in their research and analysis.


Each approach has its merits. However, in most cases, fundamental analysis should be your primary tool to assess the value of a given stock, according to Robert Johnson, chairman and CEO at index provider Economic Index Associates.


For instance, blue-chip stocks such as those included in the Dow Jones Industrial Average may provide a consistent return but not have quite the potential for gains as a startup company. However, there is naturally a greater chance of a startup performing poorly, or even going out of business. Therefore, you must determine the balance between how much risk you are willing to take and what kind of return you expect.


Which metrics are most important depends in large part on the style of investing you prefer. For instance, two common forms of investing are value and growth investing. Value investing involves buying stock in companies that are undervalued, therefore selling at a discounted rate. Growth investing, on the other hand, means buying stocks of companies that are expected to grow at a rate faster than the market.


"Value-oriented managers tend to focus on price-to-book, price-to-cash flow, and other measures that indicate a depressed price compared to the normalized earnings or intrinsic value of a business which creates a margin of safety," says Ludwigson. In other words, for value investors, the key metrics are those that indicate the price is lower than competitors' stocks, such as on a price-to-earnings or price-to-book basis. The lower these ratios are, the better.


"Historically, asset prices and historical returns gradually move toward the long-term mean. So, if a particular stock is selling at a low P/E or price-to-sales multiple, all else equal, the P/E or price-to-sales ratio will likely revert to the mean at some point," he says.


"Growth managers tend to focus on revenue and earnings growth with less focus on metrics like price-to-earnings as they expect the earnings to expand over time to justify the price," he says. Oftentimes, growth stocks are companies that have not fully matured, so revenue and earnings growth is more important than price.


When first starting your research, you can check each company on an online brokerage's research platform as well as in stock screeners. These are a good way to check some of those metrics, like profit margin and price-to-earnings. Then, you can take a deeper dive into reports on the companies that look good.


Matthews notes that the 10-K (the annual report) is his favorite document to help with company research as it outlines performance as well as potential risks and other strategic and financial details.


Once you answer these questions, you can start to formulate your investing strategy. Certain metrics, such as price-to-earnings, lend themselves more to value investing, while metrics like profit margin are more important for growth investing. You can then hone in on a company's fundamentals using an online broker and company reports to identify the right stocks for you.


Researching stocks can seem overwhelming, but it doesn't have to be. First, determine your preferred investment style, budget, and risk tolerance. Then, you can use an online broker as well as internal and external company filings to find out more about each stock you are considering.


Disclosure: We scrutinize our research, ratings and reviews using strict editorial integrity. In full transparency, this site may receive compensation from partners listed through affiliate partnerships, though this does not affect our ratings. Learn more about how we make money by visiting our advertiser disclosure.


This guide will walk readers through the steps necessary to research a stock, including understanding how fundamental analysis and technical analysis work, analyzing financial metrics, gathering information on qualitative research and news developments, and how to place everything into context.


As you can see, before recommending a stock to users, Rule Breakers considers a number of factors. In short, the service mainly looks for well-run companies in emerging industries with a sustainable advantage over competitors, among other factors.


According to their website, the Motley Fool Stock Advisor stock subscription service has returned of 374% since their inception in February 2002 when you calculate the average return of all their stock recommendations over the last 17 years.


This is important because qualitative research usually looks beyond short term stock price changes that are driven by events like quarterly earnings announcements which may not provide much insight into long term outlooks.


When saving up for a big purchase, research tells us it's important to know the difference between a traditional savings account versus a high-yield savings account. (Hint: the latter grows your money faster.)


And when it comes to investing our money in the market, doing our research is just as crucial. You don't have to be an expert to start buying stocks, but the more you know going in, the better off your investing journey will be. 041b061a72


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