What is the Best Way to Research a Stock?

Let's say you have an investment idea. You thinkopportunities.
that, for example, green energy is the next big thing,These days, online brokers are virtually the only way
and you recently heard a television analyst talkingpeople buy stocks. The tools they offer still focus on
about a specific company that manufactures solartrading, and are now much fancier and more complex
panels. He thinks that this company is in a goodthan ever. They try to convince you that trading is
position to capitalize on an increasing public demandthe only game in town, and that you will gain an
for green energy sources. Since you think that thisadvantage only by using their proprietary trading
stock might have investment potential, you want totools. Consequently, those of us who invest for the
do more research. But where do you start?long-term have been left in the dust.
This is a question that many investors struggle with.Independent-minded investors are now, more than
There are literally thousands of websites that provideever, forced to rely on our own research methods
information about stocks. You can find stockand come up with our own rules for what makes a
screeners, financial documents, analyst reports,good investment.
charts, industry information, blogs, forums, and muchNow that we have some perspective on how
more.brokers make money and have established the
Many investors are overwhelmed by all of thisimportance of doing your own research, let's return
information. Some might not do enough researchto the original question, namely: What exactly is the
before buying a stock. Others might spend too muchbest way to research a stock?
time focusing their research on the wrong things. YetAlthough I can't definitively answer that question for
others might simply hear a stock recommendationyou, hopefully I can give you a few ideas based on
from a colorful television analyst and decide to investwhat works for me. The first thing that I
in that stock without doing any of their own researchrecommend is to really think hard about what is
at all.important to you in an investment. Think about the
On the other hand, most experienced investors willinformation that is available to you and how you can
agree that if you want to be successful, you'll needuse it to get to the core of what you are looking for
to do a good deal of research. There are very fewin a company. Do you think management is the most
serious investors who will invest in a stock withoutimportant factor in determining what makes a
putting in hours, if not days, of research prior tocompany successful? Or are you a numbers person
buying a stock. They would also likely agree that notwho likes to pore through the details of financial
only should you spend a lot of time doing research,statements?
but that your research should be focused.Determining what is important to you in an
But what exactly is focused research? Before weinvestment isn't easy. If, after spending some time
address this question, let's gain some perspective bythinking about this, you still don't feel like you know
learning a little bit about how the financial industryenough about investing to understand what is
makes money from you and how this relates to yourimportant, I suggest that you read a book or two on
success as an individual investor.the topic before proceeding. Now, let me share with
In the old days, before the internet, there wereyou a little bit of information about how I typically
stock brokers. Your stock broker was in charge ofresearch a stock. To give you some basic ideas, I
buying and selling stocks for you. It was in the besthave outlined some steps below that I typically use.o
interest of your broker to have you: 1. Trust him,Review the company's profile and some basic
and 2. Buy a lot of stocks from him, since he earnedmeasures. This is a screening step that helps me to
a commission each time you bought or sold a stock.get an idea of whether I'm interested in the stock in
The whole system was based on trust.the first place. There are a number of sites that post
Let's assume that your stock broker made abasic company profiles.o Analyze financial documents,
recommendation about a particular stock, or gaveincluding the balance sheet, cash flow statement, and
you a "hot tip". He urged you to buy a stock quicklyincome statement. This step helps me determine the
before you missed out on the opportunity. Howfinancial health and overall profitability of a company.o
would you know that the stock that your brokerCheck for revenue and income growth over time. If I
presented in his "hot tip" was actually a goodsee that these measures are increasing over time, it
investment? Well, to keep it simple, most peopleis typically a good sign that the stock price could
didn't. They had to trust that their broker wouldfollow.o Research the Industry and compare the
recommend the right stocks.company to Its competitors. I like to do some basic
At the time, researching a stock was much moreresearch about the competition and industry to
difficult. You didn't have access to all of the freegauge whether a company is in a favorable
information that is now available online. Since yourcompetitive position.o Browse SEC filings, including the
broker was incentivized to make money for himselfannual report and recent quarterly reports. There is a
by convincing you to buy stocks, you couldn't begood deal of incredibly useful information in these
sure that he had your best interest at heart when hedocuments that companies are required to disclose at
recommended a stock. The only thing that wasregular intervals.o Listen to the most recent investor
certain was that he was trying to earn as muchconference call. The investor conference call is
commission as possible. The result of this systemtypically held each quarter, following the company's
was that, if you were lucky enough to have aquarterly earnings release. The investor conference
trustworthy broker who made good stockcall is a great source of both subjective and
recommendations, you were able to make someobjective information about a company.o Read
money. But if you didn't have a good broker, and yourecent news stories and research recent
didn't know how to find one, it was much moredevelopments. Understanding what is going on right
difficult to invest successfully.now with a company is also important to me.
Later, in the 1990's, along came the internet, and withTherefore, reading news stories and researching
it came a plethora of services and information relatedrecent developments helps me to gauge if a
to stocks and investing. Traditional stock brokeragescompany is on the right track.o Review trading
slowly gave way to online brokerages. Peoplevolumes and insider buying activity. I like to look for
gravitated to these new online brokers because itrecent institutional and insider buying.o Review key
was much cheaper, easier, and faster to buy stocksfinancial ratios and percentages. A few of the key
there compared to traditional brokers. A trade thatitems that I review include the PE Ratio, PEG Ratio,
used to cost $100 using a traditional broker mightROI, ROA, ROIC, and a few balance sheet ratios.o
only cost $10 using an online broker, and you couldResearch dividend history. The dividend is important
execute a trade with the click of a mouse at theto me because I think it tells you a good deal about
exact moment you desired.a company's financial health. I like companies that
On the surface all of this seemed great. Onlinehave been increasing their dividend payout ratio over
brokers not only made it easier and cheaper to buytime.o Research the effectiveness of the
stocks, but also encouraged people who hadn'tmanagement team. Does the management team
previously been investors to begin investing. Thehave a solid track record of being able to improve
problem was that when people began making theprofits? If the management team is new, I like to
switch to online brokers, they no longer hadresearch their past performance at other companies
someone to consult with before making a trade.or in prior roles.o Analyze the stock price. I like to
They needed to rely more on their own knowledgelook at not just the stock price itself, but also the
and do their own research to figure out which stockscompany's historical stock price compared to its PE
to buy. As a result, although it was now cheaper andratio. This gives me a better idea of whether I should
easier to buy stocks, it also became much easier tobuy a stock now or wait until it becomes a better
make bad investing decisions. Talk to any investorvalue.
who rashly invested in a company that went belly-upWhile these steps work for me, you may decide that
in the late 90's and they can attest to this.you don't want to use all of them. Or maybe you will
On top of all of this, most online brokers, likedecide to use a few steps that I don't use.
traditional brokers, wanted you to buy and sell stocksRegardless of which steps you decide to follow, I
as often as possible. This is because they also madeencourage you to spend some time and think
a commission each time you bought or sold a stock.through what is really important to you in an
Since they wanted you to trade often, they beganinvestment, come up with a series of research steps
to develop "research" tools that encouraged tradingthat you can consistently follow, and then use them
and not investing. But why was this a problem? Theeach time you research a stock. You will give
short answer is that not everyone thinks that tradingyourself a better chance of picking quality stocks
is a good way to make money. Many people preferover time, and therefore you will be likely to make
to invest for the long-term, and don't have time tomore money in the long-run.
constantly monitor the market for trading