Investing in the stock market can be a great way to build long-term personal wealth. However, it is important to do your research before putting your money on the line.
Many people may be intimidated by the idea of investing in stocks, but with the right tools and knowledge, it can be a rewarding and profitable experience.
When it comes to investing in stocks, there are many factors to consider and failure to do so can result in poor investment decisions and unnecessary losses.
In this article, we will walk you through the steps you need to take to thoroughly research and review stocks before making an investment decision.
Difference Between Stocks and Shares
You may be wondering what the difference between “stocks” and “shares” is.
Well generally, these terms are interchangeably used to describe the same thing. However, technically speaking, there is a subtle difference between the two.
A “share” refers to a unit of ownership in a particular company. When you buy a share, you are essentially buying a piece of the company and becoming a part-owner.
On the other hand, “stocks” is a more general term that refers to specific ownership in any company.
To put this into context, if a person were to say to you, ‘I own stock in Microsoft’, it means they invested in the company and own a tiny portion of its equity.
By contrast, if they said, ‘I own 200 shares in Microsoft’, it reveals the precise number of units they own.
The important distinction to remember is that while shares provide exact evidence of the size of an investment, the term stock does not.
So, for instance, investor A might own one share in Microsoft, while investor B has one million. Both can be correctly described as owning stock in the company; however, the size of their investment differs markedly.
Identify Your Investment Goals
Before you start researching stocks, it’s important to identify your investment goals.
What do you hope to achieve by investing in the stock market? Are you looking for long-term growth, or are you chasing short-term gains? Are you prepared to assume a riskier investment for the prospect of much higher returns, or would you rather adopt a more balanced approach?
Once you’ve identified your investment goals, you can start to narrow down your list of potential stocks.
For example, if you’re looking for long-term growth, you may want to focus on stocks with a strong track record of growth over the past few years.
Alternatively, if you are hunting for short-term gains, you might prefer to concentrate on stocks that are currently undervalued and have the potential for a quick increase in value.
Ways to research and review stock before investing
In the same way, as you wouldn’t buy a house without researching the market and its location, you shouldn’t invest in stocks without properly researching and reviewing them first.
But what exactly does this entail?
Here is our suggestion for how to do your due diligence.
1. Analyse what the company does and how it makes money
The first step when researching what stock to invest in is to make yourself aware of what a particular company does and how it makes money. Doing this will enable you to determine whether they are a good fit for your investment goals.
To ascertain this information, it is a good idea to look at their website and do a Google search for media releases or news about them that is specifically aimed at investors.
If you have a trading platform that you plan to use it is worth reading up about the company on that as well.
2. Examine its financial results
It can be difficult to understand financial reports, but it is worth taking the time to research how well a company has been doing in terms of sales and earnings.
Similarly, it is worthwhile determining what their financial projections for the next 12 months are and what their current ratio is.
Essentially, a current ratio demonstrates a company’s capability of honouring obligations due within a year. Therefore, providing some indication of how stable and reliable an organisation could be should you want to invest in it.
3. Determine trends by utilising price charts
When assessing if a company is worth investing in, it is always worth utilising price charts.
They can identify trends in the historical share price of any given company over a long to the medium-term range. Therefore, confirming your inclination to invest in them. Or providing you with enough doubt to decide against doing so.
Although it can take some time to get to grips with how to read price charts, it is worth mastering this ability if you plan to invest in stock regularly.
4. Monitor the stock
Before you invest, it is worth keeping an eye on the performance of some of the companies you have shortlisted.
Keep a spreadsheet of their everyday share price for at least a month to see how they are performing. Also, try and keep abreast of general market trends every week, as well as commodity trends and the interest rate.
Doing this will enable you to test the water without committing any money. However, if you want to invest some of your cash, it is worth starting with a smaller amount of between $500 – $1000 until you are confident to invest large sums.
That way, you protect yourself from a potentially significant loss early on, whilst you are getting to grips with investing.
5. Analyse More Than The Numbers
While the financials of a company are important, it is also worth looking at the industry it is in and what position it holds in it.
Any company listed on ASX is obliged to inform their investors of any changes to their operational goals, as well as anything which could positively or negatively affect investors and their portfolio.
Information like this should be readily available to the public, so it is worth keeping up to date with all the company’s media releases.
Some of the things you should be aware of are whether the company holds a competitive advantage over their industry competitors.
You should also know how straightforward it would be for new competitors to launch into their market or industry and whether the company provides a service or product that is easily replicated.
Additionally, be mindful of if there are any economic conditions or events that could positively or negatively impact the company, both at present and in the future.
6. Hear what the experts have to say
Lastly, it is a good idea to take the advice of experts.
Whether that be Australian Stock Report wealth advisers, financial publications or noted industry figures via their social media accounts or TV appearances, there is plenty of knowledge to tap into which can help you make sound investment decisions.
Researching and reviewing stocks before investing in them should be a given. However, it is amazing the number of people who don’t do this.
At the end of the day, the whole point of investing in stocks is to make money. So, it pays to give yourself the best chance of maximising your returns. The best way to do this is to set your investment goals and then follow the steps outlined above. Doing so will set you up to build consistent long-term wealth in the years to come.