Investors have likely heard that investing in stocks is a smart move for your financial future. But that’s only true if you build an investment portfolio that aligns with your financial goals.
Unfortunately, the process of investing in stocks seems shrouded in mystery for many beginners. The good news is that researching stocks doesn’t have to be overwhelming. Like all skills, you’ll need to learn the basics to get started.
We’re partnering with our friends at The Motley Fool to explore how to research stocks for beginners.
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Figure Out Your Investment Goals
If you are investing in stocks, it’s a good idea to get specific with your financial goals, which can help you build a portfolio that meets your needs.
A few reasons why you might want to invest in stocks may include:
- Becoming financially independent
- Retiring at a reasonable age
- Building up the funds for a major purchase that’s at least a decade in the future
Whatever your goals are for your investment portfolio, consider writing them down to help you stay on track. The stock market is an inherent volatile place. With all of the ups and downs, a written down goal can help you stay the course on this rollercoaster ride.
Plus, you might have separate goals for different parts of your portfolio. For example, you might allocate 90% of your portfolio to long term goals, like retirement. And you might keep 10% of your portfolio to trade and invest.
“If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”
Warren Buffett
Investor & Billionaire Philanthropist
Choose Your Approach
As you consider a stock for your portfolio, you’ll need to analyze it. There are two different options. Here’s a look at each.
Fundamental Analysis
Fundamental analysis examines the underlying value of a business to determine what the stock price should be.
This type of analysis is the perfect fit for value investors. A value investor acts like a bargain hunter searching for the best deal and looks for bargains in the stock market. Typically, this is a long-term strategy.
When conducting fundamental analysis, you’ll look at the metrics of a business to determine if the stock price accurately reflects the value of the business. If the analysis finds that a business’s stock price is lower than you believe it should be, that stock could make a good addition to your portfolio.
Many of the picks from The Motley Fool are based on a fundamental analysis of the company and its competitors to determine if it’s a buy.
Technical Analysis
On the flip side, some investors prefer technical analysis.
With this type of analysis, you’ll assume that the stock price is an accurate assessment of the underlying business. So instead of looking for deals based on the value of the business, you’ll look for opportunities to buy a stock based on the history of that stock’s price.
Technical analysis has the goal of rooting out patterns in a stock price. Generally, this is a short-term investment strategy.
The right approach varies based on your goals. If you are looking for long-term stock picks, then fundamental analysis is the preferred approach. A technical analysis can work well for short-term investment goals.
Learn About Investing Metrics
When conducting either a fundamental analysis or a technical analysis, you’ll need to know some of the basic metrics used to evaluate a stock. You can find this information through documents filed with the U.S. Securities and Exchange Commission or use a service like The Motley Fool which aggregates a lot of metrics about a company into a single dashboard.
Here are a few metrics to understand.
Price-to-Book Ratio
The price-to-book (P/B) ratio compares the value of the company’s assets against its stock price. You can determine a company’s book value by looking for the sum of a company’s total tangible assets minus its total liabilities. If the book value is higher than the stock price, then you could potentially make money, even if the company went bankrupt.
Price-to-Earnings-Growth Ratio
The price-to-earnings-growth (PEG) ratio takes a look at how fast the company is growing in relation to its price. To find this value, you’ll need to divide the P/E ratio by its annualized expected earnings growth rate for the next several years.
These numbers are the tip of the iceberg for researching stocks. But understanding these numbers is a great place to get started for beginners.
Look Into A Company’s Records
A company’s stock price isn’t the only factor investors should consider. As you build out an investment portfolio, look for businesses that have a solid plan for reliable earnings.
You should look for businesses with:
You can find this information on a company’s website and in the news. Keep an eye out for companies that hit all three of the points above.
When To Go From Research To Purchase
Although researching stocks is important, you’ll need to go from research to purchase at some point. But when? Ultimately, it’s when you feel comfortable with your ability to select a stock that aligns with your financial goals.
The stock market can be volatile. So, should you invest when the market has a huge swing up or down?
The answer is that you should keep building your investment portfolio in alignment with your goals. You can find opportunities to invest in a booming market and a falling market. Don’t let the major swings sway you away from your investment plans.
Remember, adopt a long-term strategy when it comes to investing. This means you will buy and hold your investment for years, not just days or months. So don’t let small price swings scare you.
Using A Tool To Help You
At some point, you may get frustrated with free options to research stocks, which may prompt you to look for a more, in-depth resource that you pay for. That’s where a service like The Motley Fool comes into play.
The Motley Fool offers a full suite of research tools to help you find stocks to invest in. They also share their own recommendations of stocks to buy based on their own proprietary research. The cool thing about these picks is that they lay out their thesis and research for you to decide for yourself. Even if you don’t like that single company, learning the insights they are looking at are key.
As you build your portfolio, The Motley Fool also has model portfolios and advanced tools that can help you for the long term. And they have a ton of education content, even live streams during the day.
If you want to save time in researching stocks, check out The Motley Fool.
The Bottom Line
Researching stocks is an important skill for investors to learn. But as you build your portfolio, consider using stock research tools to streamline your decision-making process.
One great option is The Motley Fool. The affordable stock research platform could be the perfect place for investors to learn the ins and outs of researching stocks. You can choose to root out all of this information from free sources. But be prepared to commit more time to the process.
