Stock Research Guide: How to Research Stocks

Have you decided to invest in stocks, but aren’t sure where to start with selection and research? You’ve come to the right place! As a beginner, it can be overwhelming to navigate financial statements, ratios, and other aspects of stock research and investing. Fortunately, we’ve provided details on how to research stocks with this guide. We’ll cover what stock research is and how to develop a strategy that suits your financial situation. Keep reading to learn more!

how to research stocks

What is stock research?

Stock research is a methodology employed by investors to analyze the value of a stock investment before making a purchase. The process should be holistic, considering both quantitative and qualitative aspects. For instance, an investor should evaluate the financial statements and the executive team of a company before making a final decision. 

Related Reading: Types of Stock Orders

How do I start researching stocks to buy?

As with anything, you need to spend time developing your craft. This is true when it comes to researching stocks and making investment decisions. Every investor has their own risk tolerance level, financial goals, and budget. These are the basic aspects to consider when determining the foundation of your research. For instance, if your goal is to invest for retirement, you may choose to invest in stocks that have demonstrated steady, long term growth, like Canadian Tire. Or, if you have a limited budget, you may choose to invest in a reasonably priced stock, not expensive stock like Amazon or Tesla

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Another important factor to consider is your values and interests. You may think stocks are merely about dollars and numbers, but that’s not true! Investing in industries that you value or are interested in matters too. Many people have actually earned small fortunes by investing in startups that they believed in during their infancy simply because they liked the product or service. As an example, many people bought Apple stock in the 1980s way before the brand was as renowned as it is today merely because they liked computers and tech (hello, Forrest Gump!)

Here’s a few other quick tips on how to start researching stocks to buy:

  • Define your goals. Do you want to become a day trader? Or do you want to save and invest for retirement? Maybe you simply want to learn the fundamentals of investing? Whatever your goal is, clearly define it and keep it in mind when researching stocks. Your goals may change in the future, and that’s okay! You just need to figure out what your goal is now, not years down the road. 
  • Consider your budget. How much money are you willing to invest? Typically, $500 to $1,000 is a good starting point, but you might start with more or less than this range based on your circumstances. Knowing your budget during the research phase is helpful because it can rule out options outside of your budget quickly. Remember that you should eliminate large debts and build a healthy emergency fund before putting money into investments. This allows you to manage your investments with comfort, rather than finding yourself in a situation where you need to panic sell to make ends meet. 
  • Assess your risk tolerance. Everyone has a different tolerance for risk. Some prefer to put their money into safe stock investments so they aren’t gambling their savings. Others may prefer to take on high risk stock investments for a bigger pay off, but risk losing their savings. No one can define your risk tolerance, it’s up to you to decide what level of risk you’re comfortable with!
  • Utilize Ratios. There are many metrics to consider when researching a stock. You should assess several ratios before making a decision, instead of just considering one. Here’s two popular ratios used to research stocks:
    • Price to Earning Ratio. This ratio measures the stock price against the earnings of the company. Generally speaking, a P/E ratio of 20 is considered “good” and anything over 30 is considered “bad”. For beginners, this is an easy ratio to calculate and factor into your decision making.
    • Price to Book Value Ratio. Another optimal metric to consider for beginners is the price to book value ratio. This ratio measures the stock price against the book value of the company. Generally, the lower this number, the more undervalued a stock may be. 

Related Reading: What Is The Stock Market And How Does It Work? A Beginner’s Guide

Best Stock Research Websites

The other thing to consider when determining how to research stocks is websites that provide real time and relevant information. Below are popular free sites used for stock research:

Related Reading: 10 Best Stocks for Beginners in Canada

Best Apps to Research Stocks

Do you prefer to do research from your phone? Check out these two popular options:

Related Reading: Questrade vs Wealthsimple: Which One Is Right For Your Money?

How to research a stock before you buy

Buying stocks is not much different than buying a house or car. You wouldn’t buy a car without a complete inspection or researching common issues the particular model has had in the past, right? The same is true with a stock – you wouldn’t invest without reviewing the financial statements and doing a background check on the company and key executives.

Below is a general outline of steps on how to research a stock before you make a purchase: 

Step One: Set Goals, Consider Your Budget and Determine Risk Tolerance

Before starting the research process, you should take a moment to set financial goals, consider your budget and determine your risk tolerance level. These are foundational basics in the research phase. If you skip this step, you might find the perfect stock, but find out it’s outside of your budget, as an example. So, take the time to assess these components before beginning your research. 

Related Reading: Building a Balanced Portfolio: Everything You Need to Know

Step Two: Make a Preliminary Selection of Stock Options

At this stage, you can connect with yourself and get creative! What industries interest you? Is there a particular company that excites you? Where do you want your hard earned money to help out in society? Typically, people invest in industries they are interested in and understand on a personal level. If you’re really passionate about cars, you might buy stock in a car company like Ford or General Motors. Consider an industry you want to support, then make a selection of stocks you like within that industry. 

While investing in your passions is important, remember to diversify. You might like cars, but that doesn’t mean you should exclusively invest in the auto industry. Perhaps you choose the car industry for this purchase, but next time you choose Artificial Intelligence (AI) or energy.

Finally, rule out options that don’t align with aspects from step one. If a stock is too high risk for your tolerance level, rule it out immediately. Or if the stock price is outside of your budget, move onto other options. The whole purpose of this exercise is to fine tune your selection early on in the research phase. 

Related Reading: How To Invest In Stocks

Step Three: Assess Quantitative and Qualitative Aspects of Each Stock

Once you have an initial selection of stocks, it’s time to deep dive into the research phase. Your research should consist of both qualitative and quantitative components. Many investors prefer to start with quantitative research, like evaluating the financial statements and calculating ratios. Once the quantitative aspect checks out, they move onto qualitative research, like analyzing the executive team’s reputation and reading content about the company in the media. This approach is preferred so that investors waste less time researching companies that aren’t financially sound to begin with. Ultimately, if a company isn’t profitable, qualitative aspects don’t matter much. However, it depends on your preferences and approach as an investor!

Related Reading: How to Make Money in Canada as a Student

Step Four: Make a Final Decision Based on Your Research

After performing your quantitative and qualitative analysis, it’s time to make a final decision. You can perform some sort of comparative analysis of the various options you chose in step two. How do they compare and contrast? Which one fares better than the other? Sometimes a comparison can be a helpful exercise to rule out one option over the other. At this stage, you should also take a step backwards and look at the holistic view of each stock option now that you’ve completed a deep dive.

Related Reading: How to Start Investing in Canada with a Little Money

Step Five: Purchase the Stock and Evaluate Performance

Once you decide on the stock you want to purchase, it’s time to complete the stock order. Make sure you have the funds available in your account and the stock exchange is open for business. 

After some time has passed, compare the actual performance of the stock against your expectations. Did you make a good decision? Were you able to achieve your goals? By asking yourself these kinds of questions, you can fine tune your research strategy for your next stock purchase. You can also make sale decisions based on the performance of the stock and your objectives.

Related Reading: How to Buy Stocks

How do I know what stocks to buy?

There are a variety of strategies investors use in the stock research process to determine what stocks to buy. However, every investor has their own preferences when it comes to determining true value based on their interests, goals, and risk tolerance. Ultimately, what might be a good buy for one investor might not be a good buy for another. Researching stocks is more so an art than an exact science, so take the time to fine tune your approach and learn from your mistakes! And if you ever get stuck on how to research stocks? A financial advisor can help! Complete this quick questionnaire to be matched with one today. 

Read More: How to Short a Stock in Canada

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