The RIGHT Way To Research Stocks
Dear Penny Stock Millionaire,
You don’t make important purchases without doing research to make sure the product is what you need and is the highest quality brand available for the price, right? That’s just foolish.
You wouldn’t buy a car or a house without checking them out first. Hell, many of us don’t even buy something as simple as a kitchen toaster without researching it first!
The stocks you trade are far more important — because your trading can potentially buy you the car and house (and kick-ass toaster) of your dreams. So when it comes to stocks, research is crucial.
There’s no way around it: If you want any remote chance of succeeding as a trader or investor, you’ve gotta learn to love research. No, there aren’t any loopholes. Unless you’re willing to embrace stock market research and use it to help you get ahead in life, just stop reading this.
Still here? You don’t mind doing research?
Good. Stock market research has proven very useful to me and many of my students, and you’re making a smart choice by learning about it right now.
Here’s what you need to know …
What is Stock Market Research?
Long story short, effective stock market research is digging deep for everything you can learn.
A share of stock is a piece of ownership in a business, and part of your research needs to be done with that outlook. Here are some stock market research questions.
- How well is the company performing?
- What does it sell?
- How well are its products performing in the marketplace?
- What is its growth potential?
- What companies is it competing against?
You also need to look at the stock as a financial instrument…
- Is its current market price historically high or low?
- Is it trending up or down?
- What are the price/earnings ratio and other financial indicators?
Those are just some of the questions you need to answer to perform fundamental analysis of a stock. That requires looking at the stock as a share of ownership in a company. It’s critical for investing in stocks for the long-term, like Warren Buffett.
If you’re looking at a long term investment, you’ll want to find out:
- Do you want to own this company?
- Do you want to own it at its current price?
- And most of all — is it a good value for the money?
I assume the penny stocks I trade are never going to grow into the next Apple or Amazon. In fact, I assume the opposite. My outlook is almost always that all of them will eventually go out of business. But that doesn’t mean you shouldn’t still trade them. You can potentially make a lot of money from trading their ups and downs (I certainly have, as have my students). It’s the most exciting form of day trading as far as I’m concerned.
Importance of Stock Market Research
We all know that reading product reviews aren’t necessarily enough to make something a sure buy. Some of those reviewers are paid. Some are by complete idiots. Others don’t share your standard of an ideal product.
If you want something done right, do it yourself.
You need to perform your own stock market research because you can’t take what anybody else says at face value — and because your competitors are doing their research.
Knowledge is power … and in the stock market, it can be the difference between making money and losing it.
How to Properly Do Stock Market Research
Stock market research demands you get as many facts as possible from authoritative financial sources. A good place to start is Yahoo Finance.
You must learn to separate facts from opinions and figure out what the facts actually mean in terms of predicting the stock’s future. That may be the hardest part.
I’ve assembled a list of 7 ways to improve your stock research. Read them. Learn them. Embrace them. Aim for the awesome toaster, not the shitty one.
#1 Research on the Company Interest
Found a company? What industry is it in? Look up its North American Industry Classification System (NAICS) number.
OK, once you’ve done that, you know the industry. Now research this:
- How big is the industry?
- Is it growing or declining?
- How many companies are in it?
- What companies are the largest?
- How does your company compare to them in size and market share?
Where can you learn this? Check out the Standard & Poors industry survey.
You also want to find out how the industry trending. Is it growing or shrinking? Are new technologies transforming it? Learn everything about it that you can.
How to research companies for stock trading and investing isn’t cut and dried, however.
It’s now easy to see that horse-drawn buggies were a bad investment in 1900.
However, though the railroad industry has been in decline for many decades, Warren Buffet has found a winning railroad. One secret of his success is studying company financial forms, especially the company 10-K.
What is a Company 10-K?
The 10-K is the annual report the Securities and Exchange Commission (SEC) requires all publicly listed companies to file.
In the Management Discussion and Analysis (MD&A) section, the company reveals a lot of important information you don’t see on the income statement or balance sheet. The discussion of risk factors can tell you about potential threats the company faces.
The properties section can alert you to resources not disclosed on the balance sheet.
The legal proceedings section keeps you up to date on pending lawsuits. The company doesn’t intend to lose them … but what if it’s like AT&T just before the courts smashed that company into pieces? See what I mean here?
The cash flow statement is invaluable to investors because many companies know how to increase “paper” income, but they require cash to pay their bills.
All of this is part of your fundamental analysis. But the other side of the fundamental coin is…
#2 Technical Analysis
Technical analysis is studying the opportunity to buy a stock strictly by using statistics and other numerical indicators to determine whether now is a good time to buy.
The primary tool is the stock’s chart. You can see the recent history of its market price along with other information such as its trading volume.
A stock’s chart clearly shows whether the price is in an uptrend, a downtrend or has just been drifting.
Technical analysts also use the chart patterns to analyze the stock’s price action, using trendlines to determine when a stock’s price is on the brink is going sharply up or down.
Because other traders are looking at the same chart, you can use it to gauge what your competition is thinking, and where they’ve possibly placed their stop orders.
Understanding Candlestick Charts
Japanese rice traders created candlestick charts around 1850. The basic idea is the same as standard stock charts, but they figured out ways to include more useful information without making the chart too messy and complicated.
Instead of displaying a stock’s closing market price for a day as a simple black dot, candlestick charts show it as a cylinder (the candlestick). It stretches from the open price to the close.
If the stock’s price closed higher for the day, the candlestick is white (or in modern times, green). If it went down in price, the cylinder is filled, appearing black (or red).
This helps traders easily see what’s happening just by noticing how many white and black cylinders there are. And the longer the cylinders, the greater the gap between the open and close prices. That means the buying and selling were more intense.
The Bottom Line
There is a lot that goes into researching a stock the right way, and if you aren’t doing your research the right way, you’re not investing, you’re gambling. If that’s what you are looking to do or if you are too lazy to do the research the right way, a casino might suit you more than the laptop lifestyle.
If you are willing to put in the time and learn the right way to do your analysis, I congratulate you again. You’re one of the few.
I’ll cover the other 5 ways you can improve the way that you research stocks tomorrow, so stay tuned. You won’t wanna miss this.
Editor, Penny Stock Millionaires