Investing in stocks is a smart move for your financial future. But this is only true if you build an investment portfolio that matches 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 confusing. 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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The Motley Fool offers detailed analysis of companies you can invest in, monthly stock picks, and model portfolios you can consider. Collaboration with Motley Fool’s Stock advisorAnd build long-term wealth.
Discover your investment goals
If you invest in stocks, it’s a good idea to get specific about your financial goals, which can help you build a portfolio that meets your needs.
Some reasons you might want to invest in stocks may include:
- Become financially independent
- Retire at a reasonable age
- Build up the funds needed for a large purchase at least a decade in the future
Whatever your goals are for your portfolio, consider writing them down to help you stay on track. The stock market is an inherently volatile place. With all the ups and downs, a written goal can help you stay the course on this rollercoaster ride.
Additionally, you may have separate goals for different parts of your portfolio. For example, you could allocate 90% of your portfolio to long-term goals, such as retirement. You may reserve 10% of your portfolio for trading and investing.
“If you’re not willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.”
Warren Buffett
Billionaire investor and philanthropist
Choose your approach
When you’re considering 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 fundamental value of a business to determine the stock price.
This type of analysis is well suited for value investors. A value investor acts like a bargain hunter looking for the best deals and searching for bargains in the stock market. This is usually a long-term strategy.
When performing fundamental analysis, you will look at business metrics to determine if the stock price accurately reflects the value of the business. If the analysis finds that the company’s stock price is lower than you think, this stock may be a good addition to your portfolio.
Many of the picks from The Motley Fool rely on fundamental analysis of a company and its competitors to determine whether or not to buy.
Technical analysis
On the other hand, some investors prefer technical analysis.
With this type of analysis, you would assume that the stock price is an accurate assessment of the underlying business. So instead of looking for trades based on the value of the business, you’ll be looking for opportunities to buy a stock based on that stock’s price history.
Technical analysis aims to root out patterns in a stock’s price. In general, this is a short-term investment strategy.
The right approach varies based on your goals. If you are looking for long-term stock picks, fundamental analysis is the preferred approach. Technical analysis can work well for short-term investment goals.
Learn about investment metrics
When performing fundamental or technical analysis, you will need to know some of the basic metrics used to evaluate a stock. You can find this information through documents filed with the SEC or use a service like The Motley Fool that aggregates a lot of metrics about a company into one dashboard.
Here are some metrics to understand.
Price to book ratio
The price-to-book (P/B) ratio compares the value of a company’s assets against its stock price. You can determine a company’s book value by finding the sum of the company’s total tangible assets minus its total liabilities. If the book value is higher than the stock price, you will likely make money, even if the company goes bankrupt.
Price-earnings ratio and growth
The Price to Earnings Growth (PEG) ratio takes a look at how fast a company is growing in relation to its price. To find this value, you’ll need to divide the P/E ratio by the expected annual earnings growth rate for the next several years.
These numbers are the tip of the iceberg for stock research. But understanding these numbers is a great place to start for beginners.
Look at the company’s records
A company’s stock price isn’t the only factor investors should consider. As you create an investment portfolio, look for companies that have a solid plan for generating reliable profits.
You should look for companies that have:
You can find this information on the company’s website and in the news. Keep an eye out for companies that hit all three points above.
When do you go from searching to buying?
Although researching stocks is important, you’ll need to transition from research to buying at some point. But when? Ultimately, when you feel comfortable with your ability to choose the stock that aligns with your financial goals.
The stock market can be volatile. So, should you invest when the market sees a big swing up or down?
The answer is that you should continue to build your investment portfolio in line with your goals. You can find opportunities to invest in a booming market and a falling market. Don’t let high volatility sway you away from your investment plans.
Remember, adopt a long-term strategy when it comes to investing. This means that you will buy and hold your investment for years, not just days or months. So don’t let small price fluctuations scare you.
Tools that can help you research stocks
At some point, you may become frustrated with the free stock research options, which may prompt you to look for a more in-depth resource that you pay for. There are a lot of options. Here are a couple favorites:
Motley Fool
The Motley Fool offers a full suite of research tools to help you find stocks to invest in. They also share their own recommendations on stocks to buy based on their own research. The great thing about these selections is that they lay out the thesis and research for you to decide for yourself. Even if you don’t like that single company, learning the insights they’re looking for is key.
While you’re building your portfolio, The Motley Fool also has model portfolios and advanced tools that can help you in the long run. They have a lot of educational content, and even live stream during the day.
Read our full Motley Fool review here.
Moby
Moby is a newer research platform that lets you understand stocks without all the crazy jargon you might find elsewhere. You can get market alerts, sector rankings, and political trade tracking.
Moby also has its own stock picks that are shared with subscribers. When you subscribe you can unlock all their past selections.
Read our full Moby review here.
Morningstar
Morningstar is another popular option for researching stocks, and apart from the stock screeners and finance tools, it helps you track your portfolio with an incredibly useful dashboard. Frankly, I think more people rely on Morningstar for ongoing tracking than primary research.
Read the full Morningstar review here.
Bottom line
Researching stocks is an important skill for investors to learn. But as you build your portfolio, consider using stock research tools to simplify your decision-making process.
One great option is The Motley Fool. An affordable stock research platform can be the perfect place for investors to learn the ins and outs of stock research. You can choose to root all this information from free sources. But be prepared to devote more time to this process.
Editor: Claire Tuck
Reviewed by: Robert Farrington
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