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Mar 31, 2022

Here’s How to Research Stocks

By Stash Team

Consider P/E ratio, profit and loss, and news when buying stocks.

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Buying the stock of companies that interest you can be a great way to start investing. But it can be tough to figure out  which are the better bets. All investment involves risk, and it’s generally wise to learn how to research investments before adding them to your portfolio

Fortunately, there are some key numbers that may help you decide if an investment is right for you. Read on to learn how to research stocks, and then flex your analytical muscles.

The theory: How to research stocks

When you buy shares of a company’s stock, you’re probably hoping their value will increase. Unfortunately, there are no crystal balls, but understanding the company better can help you make a more informed prediction about how its shares might perform. Here are some important terms you may want to look into when you research a stock:

  • Revenue or sales: Revenue is the income a business creates, usually from the sale of goods and services. It’s the lifeblood of a company; without revenue, an enterprise can’t function for long. If revenue is increasing over time, that may show that the company is growing.
  • Net income: This is how much profit a company made, or what’s left over after subtracting expenses, debt payments, and taxes from revenue. Net income is similar to the cash you have left after paying all your bills.
  • Price-earnings (P/E) ratio: The P/E ratio is a mathematical formula that compares a company’s stock price to its earnings per share. Investors use it to make educated guesses about whether a stock’s price is high or low. This article can give you more details on how to research stocks based on their P/E ratios.
  • 52-week range: This is the highest and lowest price of the stock in the previous year. It can help you suss out whether you’re purchasing a stock near the top or bottom of its price range.
  • Earnings reports: Public companies must file a 10-Q every quarter with the Securities and Exchange Commission (SEC); this document provides a view of the company’s financial position. You can look up a company’s reports online using the SEC’s EDGAR database. Earnings reports can be complicated, but they’re a rich source of information.

These key indicators that can help you research stocks are generally available in stock charts, earnings reports, or both. In addition, it’s a good idea to consider non-numerical information, like news reports, company press releases, and publicly available reports from management, like annual or quarterly letters. And you can get weekly market updates and other financial news right here on Stash.

If that seems like a lot of information to digest, remember that you’ll likely get more comfortable understanding the numbers as you go. There’s no magic how-to: research investments that interest you. You may be surprised at how much you can learn by simply sitting down and digging in.

Jargon Hack.

What is 52-Week Range?

52-Week Range

The highest and lowest price at which a stock has traded over the course of the previous year.

Find out

The practice: How to analyze a stock before investing

Now that you know the kind of information you might want to look at, let’s dig into a hypothetical example of how to analyze a stock. Before investing in XYZ Capitol (an imaginary company)*, let’s say your research gives you the following information:

  • In the last quarter, XYZ Capitol had $10 million in revenue.
  • In the same period, its net income was -$9 million, a loss.
  • Its P/E ratio is 5, and the industry average is 20.
  • The stock price is $8 per share, and the 52-week range is between $8 and $50.
  • A quarterly letter from the company’s CEO mentions ongoing litigation related to a faulty product and a management shakeup that includes the departure of the company’s CFO.

As a general rule, it’s best not to judge a company based on a single quarter, but there are exceptions. In this case, XYZ Capitol has:

  • A large loss (net income)
  • A low share price (52-week range)
  • Major litigation and C-level turnover (CEO letter)

Something is clearly going on with XYZ Capitol. It might be a good bet to avoid purchasing the company’s stock for now. 

(Example is hypothetical, and is not a prediction or projection of performance of an investment or investment strategy)

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Knowing how to research stocks is an important part of being a savvy investor. And understanding how to analyze a stock before investing may help you make more informed decisions, even without a crystal ball. Stash offers opportunities for every investor.

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Stash Team

*This is a hypothetical example and is not representative of any investment.
**For Securities priced over $1,000, purchase of fractional shares starts at $0.05.
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