How to Research Individual Stocks
When you’re learning any new skill, you want to start with the fundamentals and work your way up to more complicated tasks.
Investing is no different.
Most personal finance experts advise new traders to buy and hold low-cost index funds for a long time. Index funds reflect entire sections of the marketplace at a time, which allows for easy investing into a diversified portfolio of funds, reducing risk in the process.
This is also why investing in individual stocks carries more risk and should probably represent a smaller piece of your portfolio, at least until you become an expert trader. A good rule of thumb is to start your investing with about 80 percent of your stocks in index funds and just 20 percent in individual stocks.
If you have already created a portfolio similar to that, or you feel ready to learn more about stocks for individual companies, here are a few things to keep in mind.
Different Kinds of Stocks
The stocks that most of us are already familiar with are called blue-chip stocks. These are the kinds of stocks from the biggest and most successful companies, like Disney, Amazon, Apple, Google, and Bank of America.
But many investors find they can make greater ROI (return on investment) by investing in smaller, newer companies that show potential for fast growth. This is another way of diversifying your portfolio.
While it’s smart to buy some stocks in reputable and relatively stable companies like Tesla or Netflix, you will want a balanced portfolio that includes stocks from emerging businesses as well.
You just need to make sure and do your research for those smaller companies, which inherently come with more risk.
Different Kinds of Analysis
There are two kinds of analysis, and any savvy investor must master both skills for longtime success in trading individual stocks.
Technical Analysis means using all relevant information about a company’s prices and market performance to try and find patterns that reveal how the stock’s value is likely to behave.
This kind of analysis is typically used to predict short-term growth and price changes. It’s helpful for understanding potential profit gains, but is less useful for seeing long-term trends.
According to Matt Choi of Certus Trading, technical analysis allows investors to ascertain high-probability target opportunities in many markets, including stocks, forex, bonds, commodities, futures and exchange-traded funds.
As a Chartered Market Technician (CMT), 99% of how Choi trades relies on technical analysis, according to an article in The Frugalpreneur.
“As such, mastering technical analysis serves as the foundation of consistent and profitable trading,” Choi said in the article.
That’s where Fundamental Analysis comes in. It uses valuation and several other growth metrics to figure out if a stock has a good price, and can suggest hidden information about the company’s likely future value.
Fundamental analysis can also lead to understanding market expectations and finding new stocks worth investing in. Most investors love buying undervalued stocks because it means that the stock price will likely increase fast, leading to higher profits.
Writing for The Tokenist, Tim Fries said fundamental analysis looks at both macroeconomic and microeconomic numbers to see if a company is overvalued or undervalued.
“Fundamental analysis can also lead to understanding market expectations and finding new stocks worth investing in,” Fries wrote. “Most investors love buying undervalued stocks because it means that the stock price will likely increase fast, leading to higher profits.”
To learn more about the difference between technical analysis and fundamental analysis, check out this great explainer from Money Crashers.