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Ditch Your Car - If you live in a community where everything is within a reasonable distance, you need to ask yourself why you are driving a car, which when...

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How Do I Research a Stock

How Do I Research a Stock?
Date Added: June 8th, 2005

By Chris Stallman 

I don't have a whole lot of time to follow the stock market.  So what are some easy ways to research stocks without devoting too much time to it?
-Jeffrey H., Western Illinois University

Thanks for the great question.  This is actually one that I get a lot because it seems that most people don't want to spend their days following the market, which is understandable.  But I don't advocate investing blindly.  After all, you wouldn't spend thousands of dollars on a car without doing your research, so why would you spend thousands of dollars on a stock without doing your homework?  Here are a few tips:

Get Ideas from Everyday Life

Peter Lynch and Warren Buffett are strong advocates of investing in what you know, and so am I.  So the best ways to get investment ideas are to look at the companies around you.  Is there something that really stands out to you as a great product idea?  Is there a particular company that's doing very well?  Or is there a market that you think is being underserved and has room for a lot of growth?  Thinking about these kinds of things will give you a couple ideas to follow up on.

Form an Investment Opinion

Simply locating companies that are doing well isn't enough because it's important to remember that not every successful company is a great company.  Just because Starbucks is popping up on every street corner doesn't necessarily mean it's a good buy.  Why?  Because you have to be careful not to pay too much.

So how do you know how much to pay?  Well, I strongly recommend learning more about the company and the risks it faces.  You can do this by using websites like Yahoo! Finance and Morningstar.com.  It's also good to go through and read a few news articles to hear what journalists are saying about the company.  Perhaps your company is actually facing some growing pains.  Maybe it's facing litigation for one of its products.  It's not only important to recognize all of the good things about the stock but also all the bad things.

If you get ambitious, I recommend using the SEC's website to find the company's latest 10-K.  The 10-K is an annual report that each public company must file with the SEC.  This report has all the great information about the company and it'll give you a lot of insight into the business, possible risks, and good explanations of how the company is doing.

Once you have a good sense of the quality of the business and the future going forward, compare it to some of its peers.  I'm not a huge advocate of relying on the P/E ratio, but if the P/E ratio is significantly above or below its competitors, maybe you should take notice.

In reality, I can't really tell you how to value a stock.  That's something you'll have to come up with on your own.  Everyone has his or her own investing strategy.

Once You Find a Stock, Keep up to Date

Once you find a stock to invest in and you've made your purchase, it's always helpful to keep up to date on what's happening with it.  Now, I'm not advocating becoming a news junkie and worrying yourself about every news article that comes out.  But it's good to know what's going on in case a buying or selling opportunity presents itself.  You may one day decide that the company simply wasn't as rosy as you thought it was and might be stinking up your portfolio.

And, of course, an alternative to worry about picking your own stocks is to have someone do it for you.  You can always invest in a mutual fund, although I think exchange traded funds are better options.  It's all about your comfort level and risk tolerance.

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