What You Need To Know About Researching Stocks


How to research stocks is a question that every prospective investor, big or small, should ask themselves before they part with their, or their clients', hard-earned cash. Those that have been "in the game" for many years, will know the value of good research and how it can help inform their investment decisions: whether to buy, to hold, or to just plain stay the heck away from that stock!!!

Think of the hordes of researchers employed in professional investment firms who spend their days not only eking out fundamental research information from the many and varied sources available to them that they can feed to their traders, clients and other interested parties, but also look for the nuggets of information that will help their firm steal a march on their competitors and lead them to a deep well profits!!! At the end of the day why do you think these researchers are hired? Because research is important, and no professional, self-respecting investor would ever invest that hard-earned cash in the stock market without doing their research.

So what about the private investor, the "small" guy, the guy who doesn't have an army of researchers churning out reams of data to help them make their investment decisions? Don't these guys need some research information too? Shouldn't they carry out research in the same manner as the professional firms? But the small guy doesn't necessarily have the same human research resources as the professional investor, they just don't have the capability, but nonetheless do it they should and must.

So, what to do... where to go... what to look for?

This article attempts to provide some pointers to the basic information that the private investor should consider before making their investment decisions. Following these pointers may not necessarily make you a multi-millionaire, but it should at least help you sleep better at night, knowing that you've made your investment decisions based on "technicals", as they are often referred to and other underlying information, as opposed to making decisions based on a tip one of the guys down at the gym gave you the previous evening!!! This is your money, you owe it to yourself to do what you can to increase the possibility of making a return on that money.

After all, say you were looking to buy a new car, and particularly if it was second-hand, you'd probably want to "kick the tyres", check it out at a few different car showrooms, see what's on offer, see if you can get the best "deal", get the best bang for your buck, before you lay down the cash. You wouldn't buy the car based on a tip that one of the guys in the gym gave you, would you? You'd want to see it for yourself, touch it, sit in it, test-drive it. Well the stock market is pretty much the same, although you can't "touch it" in the same way, but carrying out even some basic research will go a long way toward getting your investments decisions right.

The other point to make of course is that just because you do the research you are not necessarily guaranteed to make money on your investment. For example, unforeseen market events can scare many investors in such a way that it leads them to sell their stock and thus drive prices down. And what about the newly appointed CEO who takes over from their successful predecessor who spent 10 years building the firm's brand and footprint, who just doesn't "get it" the way his predecessor did and leads the firm in a direction that ultimately proves to have been the wrong way to go, leading to lack of market confidence in the firm and to a depressed stock pric

So now you're thinking: do I really want to be in the stock market at all? Well the truth is that it can be a lot of fun, but there are a two fundamental things to consider before you spend any time on that all-important research. The first thing is to decide "what it is I am trying to achieve?". For most investors it's pretty basic - grow the investment value and reap the dividends. Imagine if you were able to build up a small portfolio of carefully chosen stocks that over time grew in value, and paid an annual dividend, now that wouldn't be bad at all. You'd have to feel pretty satisfied about that.

So, apart from doing your research to help you grow your investment, you are also doing it to help you minimize the risk of loss. And this is the second consideration, you must be prepared to expect some losses (prepared being the operative word here) and you must decide what level of loss is right for you. So really you need to sit down and say "how much am I prepared to lose if it goes wrong?". There is no right or wrong answer to this question. The answer is a purely personal "feel" thing. What's right for you may not necessarily be right for the next guy, and so on and so on.

But, if you've figured out the answers to these two questions you're on the right track and ready to do some research. So where do you start. Well there are probably four important technicals that the investor should consider at a minimum, namely, price-earnings ("P/E") ratio, BETA, 52-week price range and trading volume. So what makes these measures important and where do you find them? In terms of finding them log on, or download any of the financial news media sites such as Bloomberg, Thomson-Reuters, Yahoo Finance, Google Finance etc., and key in the unique stock "identification code" for the particular stock you are looking to research (which again will be found on any of these sites and is an industry-wide standard code).

The P/E Ratio is a measure of a company's current share price relative to its per-share earnings, and is calculated by dividing the market value per share by the earnings per share ("EPS"). So, for example, if a company's stock is trading at $20 a share and earnings over the last 12 months were $1.25 per share, the P/E ratio for the stock would be 16.00 (often referred to as the "price/earnings multiple"). The EPS is usually taken from the last four quarters, but sometimes it can be taken from the estimates of earnings expected in the next four quarters. A third variation uses the sum of the last two actual quarters and the estimates of the next two quarters, but let's not get too technical, use the last four quarters and that's usually good enough.

In general, the higher the P/E the more confidence investors have in the expectation of higher earnings growth in the future compared to companies with a lower P/E. However, the P/E ratio doesn't tell us the whole story by itself. It's usually more useful to compare the P/E ratios of one company to other companies in the same sector and to the market in general and to the company's own historical P/E. It would not be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry may have much different growth patterns/prospects.

The P/E is sometimes referred to as the "multiple", because it gives a measure of how much investors are willing to pay per dollar/euro of earnings. If a company were currently trading at a multiple (P/E) of 16, the interpretation is that an investor is willing to pay 16 for every 1 of current earnings. So, a stock with a higher P/E ratio can be argued to be a better "punt" than the one with a lower P/E.

A word of caution: investors should avoid basing their investment decision on this measure alone. The earnings figure is based on an accounting measure of earnings that can be susceptible to certain, legitimate forms of manipulation, making the quality of the P/E only as good as the quality of the underlying earnings number.

The BETA is a measure of the volatility, or systematic risk, of a security in comparison to the market as a whole, also known as the "BETA coefficient". Think of BETA as the tendency of a security's returns to respond to swings in the market. A BETA of 1 indicates that the security's price will move with the market; of less than 1 that the security will be less "volatile" than the market; a BETA of greater than 1 indicates that the security's price will be more volatile than the market. For example, if a stock's BETA is 1.1, it's theoretically 10% more volatile than the market. Utility stocks tend to have a BETA of less than 1 while many high-tech Nasdaq-based stocks have a BETA greater than 1, offering the possibility of a higher rate of return, but also posing more risk.

The 52-week price range is exactly what it says, a measure of the fluctuation of the price of a stock over a year. In particular the lowest and highest prices at which a stock has traded in the previous 52 weeks are of most interest. Obviously one can determine the price range by looking at online graphs and summaries and seeing whether it is steady, maybe within a certain range, or if there is a rising/falling trend, etc.. It's probably fair to say that a stock who's price has shown an overall downward trend may not be the one you'll want to buy, over the one that has shown the rising trend. But all-in-all this measure gives a good sense of how the stock price has performed in the previous 52-week period.

The trading volume, or average daily trading volume, is the average amount of stock traded in a day or over a specified amount of time. Trading activity has a direct bearing on a stock's "liquidity", which means that when average daily trading volume is high, the stock can be easily traded and has high liquidity. As a result, trading volume can have an effect on the price of the stock. If trading volume isn't very high, the security will tend to be less expensive because people are not as willing to buy it. When trading volume increases or decreases significantly, this can be a signal that there has been some news released that has affected people's views on the stock. Stocks are less volatile when they have higher trading volumes because much larger trades would have to be made to have an effect on the price.

In addition to the above factors the investor should also take account of the company's dividend trend - if the trend is upwards, that will generally indicate the firm is performing well and it's management is rewarding the stockholders. In addition try to inform yourself about the company, the company's management, the market sector in which it operates, how the company is performing in its sector and the company's general growth and product/services trends/plans - that's the "touchy-feely" stuff...

So, that's a whirlwind tour of the key considerations in how to research stocks. Remember, just about everything is important and it's definitely better to be "over-informed" than "under-informed"!!! So, do the research and have fun...

Rate My Tips (www.ratemytips.com [http://www.ratemytips.com]), part of the Financial News Media Global group, is a pioneering and unique online community that provides private investors access to a centralized database of stock, forex and commodity investment tips posted by Tipping Service providers. Private investors can also rate the tips provided by the Tipping Service providers and share news, views, comment and opinion via the Scrolling Tips, Share The Rumor and Forum platforms, thus creating a unique facility that helps to better inform the private investor community.

Article Source: https://EzineArticles.com/expert/Mike_J_Quinn/1445588

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