Behind every investment position, there is some degree of research that supports it. Whether you are using technical indicators, like MACD and Stochastics, to plot resistance and support levels or fundamental indicators, like interest rate decisions and political turmoil, to identify companies that are a bargain, research is key to positioning yourself profitably. But what should you be researching about when you want to invest in the stock market? Of course, it is impractical to try and sift through every possible white paper, quarterly earnings report, or forums discussion you can get your hands on, not to mention it can be tedious and stressful to do so. Start researching these five things:
A company’s balance sheet reveals a lot about their financial health. It tells you how much cash they have, both in cash and liquid assets, how much debt it has accrued, and its net worth or book value. A negative balance sheet could mean that a company is sinking and is headed towards insolvency. Other things you can learn from a company’s balance sheet include how fast their customers pay their outstanding bills, whether or not products are being recalled at a higher-than-normal rate, how many days it takes to empty their inventory, and whether or not the budget they allot for research and development is producing any promising results.
It makes sense to research the company’s management team before investing in its stock. After all, they are the ones who makes the big decisions and control the outcomes. Research what the CEO is up to by following his/her social media accounts. Look up their professional credentials, educational attainment, and industry milestones. Are they a good leader or is their career riddled with scandals and lawsuits? What about the other higher ranking officers, like the CTO and lead engineer? Are they competent in their line of work? Have they undergone rigorous sales negotiation training or technology certifications?
Analysts perform extensive research on different companies and then give their recommendations on whether to buy, sell, or be neutral for the time being. If the company’s future outlook is healthy, they will of course issue a “buy” signal and the opposite for when companies are posting subpar reports. You’ll find several financial websites that will post analyst recommendation scores. Some will grade companies from a scale of 1 to 10 while others will simply put Pass or Fail. Analyst recommendations are a great way to summarize every key point that you need to learn regarding a company.
The broker you choose to execute your buy or sell orders can affect your portfolio’s bottomline. If there are any delays when closing a position, you could be losing money. And although this small slippage in one trade is a minute dollar amount, it could sum up to be in the thousands of dollars over an X period of time and X period of positions. Your broker should be able to execute any orders you instruct it to instantaneously. Their platform should also be running at full capacity at all times, especially during volatile hours.
Price and Valuation
It makes sense to start with price and valuation. After all, its current price is what you’ll be paying for the stock of the company. Keep in mind, however, that a high price doesn’t mean the stock has a high intrinsic value, and vice versa. Nonetheless, price is a good place to start. Experienced investors often look for stocks that are undervalued and cheap. However, this doesn’t mean you should dump your capital on companies that have a share price of less than a dollar. Instead, look for companies whose stock price is undervalued relative to its potential value.
Investing in the stock market is a lucrative endeavor, yet it also entails some level of risk. Fortunately, this risk can be reduced by researching extensively and identifying the factors that create profitable opportunities.