Here’s how to research stocks: A 3-step process investors can use

Nick Sundich Nick Sundich, February 7, 2024

Here is our guide for investors looking how to research stocks. As equity analysts with extensive experience over several years in several sector, we’ve done a fair bit of stock research in our time! We have a 3 step process with which we use to analyse stocks and determine whether or not they are worthy of looking at further.


How to research stocks: A 3-step process

1. Analyse the Company

The first step is to delve into company-specific analysis, where you evaluate the financial health and performance of a particular company. You need to look at Four things.

First, the Financial Statements. Investors need to Carefully examine the company’s financial statements, including the balance sheet, income statement, and cash flow statement. Trends in revenue growth, profitability, and cash position cannot be neglected.

Second, assess the company’s competitive position in its industry. Is it a dominant player, is it a smaller player with potential to take market share from larger players, or is it in a cut-throat competitive environment. Look not just at the company, its market share, the nature of its products or services, and its relative strengths and weaknesses compared to competitors, but its competitors too. You may want to consider stocks listed on other exchanges (not just on the ASX) as well as non-listed companies.

Third, Management Quality. Look for track records of successful leadership and strategic vision both with the current company and in past lives. Investigate the company’s corporate governance practices to ensure management is accountable and acting in shareholders’ best interests.

Finally, look at the company’s financial ratios including (but by no means limited to) P/E, EV/EBITDA, PEG, Debt-to-Equity, Return on Assets and Return on Equity.


2. Analyse the Industry

Investors need to analyze the broader market trends and the specific industry in which the company operates. This step involves understanding the market environment, growth prospects, and regulatory landscape. One useful way to do this is to conduct a SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis to assess the company’s position relative to its market and industry.

Think about how macroeconomic factors like interest rates, inflation, and global economic conditions can impact the company and industry. Identify any technology or societal shifts that could disrupt the industry and the company’s approach to addressing these trends.

3. Analyse the Price of the Stock

We touched on this briefly before, brining up multiples like the P/E ratio. This is called relative valuation – Compare the stock’s multiples to similar companies in the industry to gauge its relative pricing.

There are other ways to analyse companies including discounted cash flow (DCF) models, M&A models and Dividend Discount models. Also consider market trends and patterns by using technical analysis tools (such as the RSI and MACD) to predict future movements based on historical price and volume data.


So then what?

Then make the decision as to whether to buy or sell. If you choose to buy, there are two steps required. First don’t invest any more than you are willing to lose. And second, remember that stock research is an ongoing process. Stay informed by regularly reading news, reports, and market updates related to your investments.

Continually evaluate your investment thesis and be prepared to adapt your strategy as new information becomes available. Embrace a learning mindset, and consider how you can improve your stock research process over time.

By following these guidelines and continuously educating yourself on stock investing, you can become a more confident and successful investor. Remember that investing in stocks can generate returns, but also result in losses. So always exercise caution.


What are the Best ASX Stocks to invest in?

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