Great investors like Warren Buffett and Peter Lynch are quick to admit that a critical component of their investment strategies revolves around significant research. They claim they have never purchased even a single share of stock without first understanding the intricacies of the company and its life on the stock market. Both of these men have made their fortunes making wise investments and, using their simple advice, it’s possible for a beginning investor to do so as well.
Before a single dollar is invested, here are a few tips for researching stocks:
Stock Activity and History: The market is volatile. Therefore, it’s essential to focus on the history of the stock and not its day-to-day fluctuation. The overall history of success is often more important than the daily activity. There are several sites that provide detailed accounts on a stock’s activity including The Motley Fool, Google Finance and NASDAQ.
Read the Paper: More likely you’ll be reading news sources on the Internet these days, but hyperlinks within the article you’re reading will just help supplement your knowledge. News organizations like CNN and the New York Times will often detail companies in crisis, those expecting job cuts or experiencing bankruptcy rumors or those that are finding great success with products or service lines. Industry specific publications are also a great resource, including, of course, The Wall Street Journal, Forbes, and SmartMoney.
Company: Learn more about the company than you ever imagined. Understand the business philosophy of the CEO, read annual reports, investigate the products or services it offers, know its website inside and out. Gain an understanding not only of where the company plans to go, but its history as well. Utilize tools like Bloomberg BusinessWeek’s Customer Insight Center which breaks down company information into several categories including news, financials, earnings, people and ownership.
Know the Future: Financial analysts will estimate the company’s future quarterly or annual earnings. These fair market values help investors gauge the success of a company’s performance. Often the earning estimate is used as a benchmark to measure the company’s overall performance.
A great source for finding a company’s earnings estimates is MSN Money. The site gives a great visual graph of how the company is expected to perform over the next several quarters. It also reports the high and low estimates given by analysts, as well as a prediction of growth over the next five years for the company and the industry.
Research What You Know: Look around. Great products and services worthy of investment are hidden in plain sight. After all, behind nearly every successful product is a publicly-traded company. But, be wary, because not all great products come from sound businesses.
Network: Talk to everyone who knows anything about the company. Whether it’s a friend of a friend or the boss’s wife, her understanding of a company can make or break the deal. It just may be that the neighbor’s cousin works for the company in consideration. Her insight into the scuttlebutt around the office or in the news may very well deter or hasten the purchase. Be cautious, however, that the information you gain is public information. Buying or trading stocks based on proprietary information is called insider trading, and it’s illegal.
It’s up to the individual investor to decide his strategy. Having an arsenal of information does nothing more than make the purchases educated and hopefully worth their weight in gold.