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Our series on DIY investing continues with a look at some of the fundamentals of stock picking.
Before we talk about fundamentals, we want to remind our readers that the Nova Scotia Securities Commission does not give investment advice. We are not recommending that investors invest in stocks. This post is simply to provide investors with information that may help them make more informed investing decisions.
Stock picking starts with research. When researching stocks, you should be looking at how suitable the stock is when compared to your investment objectives, time horizon, and risk tolerance. Other basics to research include how legitimate the business offering is (this is especially important for new or small companies) and the potential for it to increase in value in the future.
Here is a closer look at some of the steps involved in researching a stock’s fundamentals:
Decide what you want to invest in: Do you want to invest in a specific industry or sector? Are there certain industries or companies that do not match your values that you would like to avoid? Once you’ve asked yourself these questions you can narrow down your research to individual companies.
Review the company’s public reports: Publicly traded companies are legally obligated to disclose certain information to the public. These include financial reports. These reports can provide you with information on how the company makes money (or potentially loses money) and other important financial information such as debt load, cash flow, revenue sources, and historical data.
Review the company’s finances: Now that you have the company’s reports available to you, it’s up to you to decide what’s important from that information and how it could possibly guide your investing. A few things you may want to look at are the company’s net income and losses year-over-year; their P/E ratio which measures a company’s current share price against its per share earnings; and its return on equity to determine if the company is using invested money efficiently and responsibly.
Explore the company’s industry: Have there been recent innovations, downturns, or changes in the industry that could have a positive or negative effect on the company’s future growth? How many competitors do they face and are they lagging behind or getting ahead of them? Is a competitor in the same industry a better investment?
Review the company’s leadership: As we’ve seen in recent years a company’s leadership can sometimes make or break a company. Review the company’s leadership to see if you believe the right people are leading it and making the right decisions. Does the company have potential for growth under the current leadership team?
Review expert opinions, articles, and news: There are several experts that share their opinions on a company’s investment potential online and in print. Some sources are more reputable than others, so be sure you investigate multiple sources and don’t rely on article and social media posts that promise so-“the best stocks to invest in,” without further research.
Researching stocks to invest in can often be a lot of work and is not for everyone. If you don’t have the knowledge, time, or resources to do this key research, then DIY investing may not be for you. Make sure you fully understand the commitment before making any investment.
Next week our DIY investing series will look at some of the common mistakes that DIY investors make