How to Research and Invest in Good Stocks – Introduction
The global stocks market has helped create the world as we know it. While many people in the Main Street have the tendency of hating on Wall Street, the fact is that the world would be a very different place without the stocks market. This is because the stock market has helped fund all the main companies you know about today. For example, a company like Facebook received more than $100 million in its IPO. The same is true with other companies like Google, Amazon, and Twitter. Without Wall Street, these companies would not be what they are today. With more than 4000 being public in the United States alone, it presents a lot of opportunities for you as a trader. This article will explain a simple way which you can use to research stocks.
There are stocks in all sectors which means that it is very easy to find stocks in your field of interests. The US stocks market is usually divided broadly into a number of sectors, which include: consumer staples, consumer discretionary, technology, utility, finance, materials, industrial, healthcare, energy, telecom, and real estate. These sectors are divided into other subsectors. In the developed markets, the same sectors are found in their stocks markets. Therefore, it is important that you invest in sectors that are based on your interests. For example, if you are a technology enthusiast, you should focus on investing in companies in the technology sector like Microsoft, Google, and Intel.
Read Financial Reports
If you are interested in trading or investing in stocks, you should take time to learn the financial reports of the companies. As you grow in the investing world, you will start seeing how interesting the financial reports are. The financial reports are made up of three main parts. The income statement shows the company’s revenues and the associated costs. In short, it shows how a company is making money. The balance sheet shows the financial position of the company while the cash flow statement shows how the company is managing its funds. If you are a long-term investor, you should invest in a company that is growing earnings and revenues, one that has a good balance sheet, and one that rewards investors with good dividends and buybacks.
Read the News
After going through the financial statements, you should then read the news about the company. A good way to do this is to search the company’s news in the major publications like Wall Street Journal, Bloomberg, and Financial Times. Doing this will help you get all the necessary information about the company.
If you are a trader, the valuation of the company should not be of interest to you. This is because your goal is to make money in the short term. In the short term, the valuation does not matter a lot. If you are an investor, you should focus on the valuation because you want to invest in a company that is undervalued and then short the one that is overvalued. There are a number of ways of finding overvalued and undervalued companies but the most common one is comparing the earnings and sales multiples with that of the competitors. An overvalued company will often have a higher multiple than the peers. Still, this is not a good reason enough to sell or buy the company. You need to understand why the companies are overvalued and undervalued.
Another approach is to use the Discounted Cash Flow method. This one is a bit complicated because it involves using the present value formulas for cash flows.
After finding whether a company is overvalued or undervalued, you should now find an entry position. This can be either in a bullish or bearish manner.