Five ways to research a stock before you buy

Choosing investments is a complicated process. And once you’ve chosen an investment, that doesn’t mean it’s time to put your feet up. You’ll need to keep an eye on your portfolio and make decisions about how to react to any changes in its performance. This is why research is such an important tool for investors. If you’re new to the research process, or you need a refresher, here are five practical ways you can get started.

1.     Find out what the company does and how it makes money

A good place to start researching a company is to find out how it makes money. Sometimes it’s easier to start with companies you’re already familiar with, or to focus on business models that are simple to understand. This is because if you don’t understand how a company makes money, it might be harder for you to keep track of how your investment is performing.

With CommSec, you can access information about a company’s business activity on the website:

If you want to dig deeper, most companies publish information for investors on their website. You can often find financial results, announcements, annual reports, and notes from past Annual General Meetings.

As well as researching a company, look at the landscape surrounding it. The type of questions you can think about here are:

• Does the company have a competitive advantage within its industry?
• Does it operate in an industry where it’s relatively easy for competitors to enter the same market?
• Are there any particular events or economic conditions that could have an impact on the company?
• Does it provide a product or service that could be easily substituted for another?
• Do the company’s customers or suppliers have a lot of power over its prices?

Need inspiration on what companies to research? Find out where to get stock ideas.

2.     Read the research from the experts

If you were a professional money manager, you’d probably use independent equity research to challenge your thought processes and investment decisions. You’d look at research pieces from in-house analysts, large investment banks, and independent research firms. These research pieces are written by analysts who regularly speak with industry experts, competitors, and company management. They analyse everything about a stock and the sector it belongs to.

If you’re not a professional money manager, it’s not practical to do the same in-depth analysis. However, you can read the same research to educate yourself around your current and future investments.

At CommSec, we offer our customers access to research from Goldman Sachs and Morningstar, covering hundreds of stocks.

To view research:

Once you have bought a stock, keep an eye on the financial press. This will help you stay on top of your investments and learn about other views from industry experts.
 

What to look out for in analyst reports:

• Price Target or Fair Value – this is the value that the analyst has projected the stock should be worth. If an analyst’s price target is higher than the current share price, it means the analyst believes the stock is currently undervalued, and the price should rise toward the price target over time.
• Methodology – this is the approach used to arrive at both the price target and the recommendation. It’s important to look at this to understand how the analyst reached their forecast. For example, Morningstar provides a description of their research methodology on their website so investors can get a better understanding of their ratings system.
• Any change for a re-rating/price target - what has caused the analyst to change their forecast? Has there been a regulatory change, a shift in sentiment towards a specific sector, a change in economic forecast, or an announcement by the company? Find out the context so that you can build an understanding of what influences share prices.
• It’s important to read the whole report and not just skim across the recommendations of buy, hold or sell. That way you can start to understand how the analyst reached their conclusions.
   

3.     Charting

Look at the company’s price chart and try to gauge whether the stock might be trending up or down. If the price has fallen over time, take a closer look at the company to find out why. Charts can also tell you how much demand there is for a stock (known as the trading volume). If there’s a sudden increase or decrease in trading volume, try to find out what prompted it. With a CommSec account, you can access various charts on our website.

To access charting:

Find out more about how to use charts and other tools to help you decide when to invest.

4.     Look at the company’s financials

If you’re keen to do your own analysis, CommSec provides a range of company fundamental data points on our website, including balance sheet numbers, projections, and ratios like in the table below. These can help you analyse investments and compare different companies.

To access a company’s financials:

The bottom line

When you’re researching a stock, every bit of information is just one piece of the puzzle. Investors should look at a range of sources including (but not limited to) company reports, expert analysis, market news and announcements.

And remember to trust your instincts. Question any research that doesn’t make sense, and read widely to stay on top of your investment portfolio. The more research you do, the more empowered you’ll be to make informed investment decisions.