How to Research Stocks?
Investing in the stock markets can fetch you very good returns in a short period. This is because you can invest your money in the shares of various companies and wait for the prices of those shares to increase before selling them off to make profits.
As per the financial experts, if an investor wants to gain inflation-beating returns, investing in equities is their best bet.
And in case you happen to invest in a multibagger stock, your investment can get multiplied several times within a few months. However, this is easier said than done. To make profits in the stock markets, it’s very crucial to select the right stocks. Additionally, you need to time the market diligently. If you fail to do any of these two things, you can even lose all your money.
Stock prices rise and fall daily. As an investor, you need to duly analyse and research a stock before deciding to invest in it. Now, the question that arises is, “How to research a stock?” Let’s discuss.
The Two Types of Stock Analysis
When it comes to researching stocks, you can take any of the two routes mentioned below:
- Technical stock analysis
- Fundamental stock analysis
The technical stock analysis involves the use of various technical data to predict short-term movements in stock prices. You must have seen stock market investors trying to predict price trends by reading patterns and charts. That is called the technical analysis of stocks. Various tools and indicators can help you in the technical analysis of stocks. These include volume indicators, moving averages, Relative Strength Index (RSI), and Bollinger Bands, among others.
On the other hand, fundamental stock analysis refers to the study of a company’s fundamentals to determine whether you should invest in its stocks or not. While technical analysis helps in predicting short-term price movements of stocks, fundamental analysis helps in selecting the right stocks for investment. Fundamental analysis of a stock is done by looking at various factors, such as a company’s debt to asset ratio, nature of business, past performance, etc.
How to Study a Stock?
Now that you know the two methods of stock analysis, let’s move to the step-by-step guide on how to study a stock:
- Know your risk tolerance and budget
The first thing that you need to do is determine your risk tolerance and budget. There is no limit on how much you can invest in the stock market. You can start with as low as ₹100 to buy a few penny shares, or you can invest crores to buy large-cap shares. So, you need to define your budget so that you can select your stocks accordingly.
Also, you need to know your risk tolerance before selecting your stocks. Different stocks carry different levels of risk. For example, blue-chip stocks usually carry low risks as compared to start-up stocks. However, the potential for gains is quite high in the latter.
- Select your stocks
The next step is selecting the stocks in which you want to invest your money. You need to select at least 15 to 20 stocks based on your risk tolerance and budget. If you have a high-risk tolerance, you can select aggressive stocks that can provide very good returns in the future. Otherwise, you should only bet on the stocks of fundamentally strong companies.
It’s recommended to select a few stocks of all types so that you can create a well-rounded investment portfolio for yourself.
- Look at the fundamentals of the company
This is the most crucial step. After you’ve narrowed down a list of stocks in which you want to invest your money, you need to research their fundamentals one by one. This will help you in determining whether a particular stock is good for investment as per your investor profile or not.
You need to look at various factors, such as a company’s revenues in the past three years, its net income in the same period, earnings per share (EPS), price to earnings ratio (PE), quick ratio, and current ratio, among others. If a company is making regular profits and has a high PE ratio, it indicates that the company should be fundamentally strong.
- Turn to qualitative research
After knowing the fundamentals, you need to conduct qualitative research on stocks chosen by you. You should try to find answers to the following questions:
- What is the nature of the business of the company?
- How is the company making money?
- Does it have any competitive advantage?
- How good is its management team?
- What are the risks that can impact the business?
- Move to the technical analysis part
Now that you have the stocks in which you would be investing your money, you need to determine the entry and exit points. If you’re willing to invest for the long term, your stock analysis ends here. However, if you wish to invest for a short-term or conduct intraday trades, technical stock analysis is very crucial.
You need to apply various technical indicators in the stock charts to predict short-term price movements. Then, you can take buy or sell positions as per your technical analysis results.
Researching stocks is a multi-step process. You need to be diligent and careful at every step. Also, you need to consider your requirements and preferences all the time. Even after careful research, you should not be 100% about your predictions. Instead of putting all your eggs in a single basket, you should always create a balanced investment portfolio.
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Frequently Asked Questions
There are four types of technical indicators you can use for technical stock analysis. These include trend-following indicators, oscillators, volatility indicators, and support/resistance. In addition, some common technical indicators include volume indicator, RSI, MACD, Bollinger bands, MFI, and moving averages.
Full-service stockbrokers provide research data and stock recommendations at nominal prices. You can open your Demat and trading account with a full-service stockbroker to get access to this information.
The fundamental stock analysis involves the use of intrinsic values of stocks, whereas technical stock analysis involves using charts and patterns. Fundamental analysis helps in selecting the right stocks, whereas technical analysis helps in predicting short-term market movements.