Retail investors depend on the recommendations of stock analysts, word of mouth and media coverage to make investment decisions. The more you invest, the more important it becomes to conduct your own fundamental analysis on stocks before investing in them. To invest confidently and prudently requires a thorough stock analysis and broad understanding of the industry you are choosing to put money in.
Here’s how you can go about researching stocks like a stock market expert.
1. Reviewing Financial Statements: Share market analysis is first and foremost a numbers game. If you know which company you want to invest in – the financial statements of the company is the place to start. These statements are publicly available. A quick read through the company’s balance sheet, income statement and cash flow statement summarises the company’s performance in objective terms. Financial statements give you information on sales, profit margins and scope for profitability in the future based on which you can evaluate the future earning potential of the company.
2. Industry Analysis: A comparative analysis of the company’s performance against its competitors or other companies in the same industry provides further insight on how well the company is performing relative to industry standards. Annual reports issued by the company, reports by stock analysts on the industry, trade magazines, surveys and research papers are resources that help put together a clear picture of industry trends.
3. Researching Stocks: To understand if a stock is worth the value it’s trading at, one must look at the valuation of the company. Stock prices should be influenced by the earnings of the company but other factors such as a global health crisis, foreign investment, change in regulations can inflate or bring down the value of a stock disproportionately. The price to earnings (P/E) ratio of a stock is also a good indicator of whether the price of the stock is high relative to the earnings per stock. Analysts review historical data as well – looking at earnings per share over a period of time A high P/E ratio may indicate that the stock is overvalued whereas a low figure is indicative of the stock being undervalued. It is one of many metrics used to determine if a stock is worth buying or not.
4. Price Targets: The entire objective behind researching and stock analysis is to arrive at a price target. Stock analysts project the future price of a stock based on all the above parameters. The price target determines your entry or exit from the investment. The price target is not a fixed figure and is subject to the influence of market forces, new information and global developments. However, it is the surest indicator of whether you stand to earn money in the future by picking up a stock, at its market value, in the present time.
These are few of the parameters you must consider while carrying a pre-investment due diligence exercise. With proper research with the help of a online stock broker comes preparednessto hedge against losses and plan for better gains.