How Do I Research
a Stock?
Date Added: June 8th,
2005
By Chris Stallman
| E-mail
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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