Stock Market Research: Definitive Guide on How to Research Stocks

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!

Download the key points of this post as PDF.

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. 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.

You 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. Almost all of them eventually go out of business. But you can potentially make a lot of money from trading their ups and downs. 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 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 opinion and figure out what the facts actually mean in terms of predicting the stock’s future. That may be the hardest part.

Here’s a handy list of 8 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, so 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 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.

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.

#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. If it went down in price, the cylinder is filled, appearing black.

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.

#3 Top Stock Research Tools for Stock Research

Here I just can’t pretend to hide behind false modesty. There are many good stock market research trading tools, but when it comes to the one tool that I want for my stock trading, StocksToTrade is my favorite.

I can say that because I helped create it so I’d have the perfect software to support my own trading.

Only you can decide the tools that you use for researching companies. I, my students, and many other traders prove StocksToTrade’s value every day. That’s because it helps us to compete with the best in the market — and sometimes we win.

Do we win every time? Of course not. And any traders out there who boast that all they do is win are totally full of shit. Don’t listen to them! Losses happen, and if we’re smart, we learn from them.

As many of those who follow me know, I’m not a fan of risk. I actually prefer to take smaller wins so I can get out with something rather than nothing.

They don’t all need to be home runs. Smaller hits can add up to much bigger gains over time.

#4 Look for Great Stock Market Indicators

What you want in a stock you’re thinking about trading is movement. You can potentially profit from buying a stock that goes higher. And you can potentially profit from selling short a stock that goes lower.

But you can’t profit from a stock that stays in the same range. So look for indicators that bring you good or bad news.

Positive signs for stocks include getting new contracts, closing new rounds of financing, and entering into new partnerships.

Bad news can be almost anything. Let your imagination run wild. There’s some crazy shit going on with businesses out there — always remain vigilant in your research!

Get to Know Stock Chart Patterns

Anybody can look at a stock chart and see whether the current price is high or low compared to the past. It’s also not normally hard to see whether the price is in an up or down trend, or whether it’s range-bound.

That’s why it takes more than that to make money from your trading.

You must know and recognize the important stock patterns. I can’t emphasize this enough.

Stock prices move in a variety of ways, and those movements are often predictable, according to the pattern they form.

They move in predictable ways because they reflect the hopes and fears of the people in the market.

People react in typical ways to certain events. When you recognize those events, based on the chart patterns you see, you can sometimes predict whether other traders are going to buy or sell.

#5 Importance of Stock Valuation

I love bargains. You love bargains. When you go to your favorite restaurant and see they’re running a sale, you love getting $5 off your favorite meal, right?

But what would you do if they raised the price to $500? No matter how delicious the food is, you’d go to another restaurant.

We love bargains, and we don’t want to pay too much for things we buy.

Except in the stock market, where people pay too much all the time.

That’s why stock valuation is so important!

Apple, Amazon, and Google may be three of the best companies in the world, but if you pay too much money for them, you’re going to lose money.

By the same token, if you find a stock that’s just half-decent, but it’s “on sale” for a very low price, you can potentially get more value for the same money.

#6 Company Balance Sheet

A company’s balance sheet is one of the most important basic financial statements.

On the left side of the balance sheet is all its assets. Assets include cash in the bank, shares of stocks and bonds, accounts receivable (bills owed to the company), factories, land,  manufacturing equipment, computers, patents, and everything else that enables that company to sell its products and services or which can be converted into cash.

At the top of the right side of the balance sheet is the company’s debts. This includes accounts payable (bills the company owes), pension liabilities, and bonds.

In general, the less debt a company owes, the better. Just like people, a company that owes nothing but its current electric bill is in far better financial shape than a company in way over its head struggling to pay for the raw materials it needs to manufacture its products.

The bottom of the right side of the balance sheet is the company’s equity. That is the difference between the total assets and total debts. It’s how much the company owns free and clear of any debt.

The two sides of the balance sheet must be the same. That is, they must balance.

Total Assets = Total Debts + Total Equity

Got it? Good. Let’s move on to another super-important financial statement: the almighty earnings report.

#7 Earnings Report

The balance sheet is an important snapshot of the company’s overall financial condition. However, remember that the purpose of a company is to make money.

Therefore, the earnings report (or income statement) is the most important financial report.

It can also be boiled down into a simple equation:

Gross Earnings – Total Expenses = Net Earnings

Gross earnings are all the money the company has made from selling products and services. Some companies also make money from investments and the interest on cash they have in the bank.

Total expenses include everything the company must pay, except for buying assets.

An example of some expenses includes electric bills, salaries, rent, interest, taxes, advertising, sheets of iron required to manufacture the product, and much more.

However, it does not include a new forklift. That’s considered buying an asset. Who knew?! You should. I should. If we want to get ahead as traders, this is shit we need to know!

Expenses also include depreciation, which doesn’t require cash. It’s a bookkeeping way of accounting for how forklifts and other machinery go down in value over time. Therefore, some companies manipulate depreciation.

What’s left over is net earnings.

The higher the company’s net earnings, the better.

Analyze Recent Earnings

Look at the most recent earnings report you can. Company earnings do go up and down, so you want to see what’s happening now, not last year. Check out the net income for the most recent quarter.

#8 Keep Improving Your Knowledge

OK, so you’ve learned about stock market research. Learn more. Learn as much as you can. But don’t beat yourself up if a trade goes south, because it WILL happen.

Even armed with a shitload of stock market research, you’re going to make mistakes. That’s normal. If making money from trading was easy, everybody would do it, and it wouldn’t even pay the minimum wage!

Research takes time and consistent effort, but it can potentially pay off. Just ask my student, John Papa.

If you need help with your stock market research, consider getting a trading education. A lot of people don’t want to spend money to become day traders. They want to earn money, right? So it may seem backward to invest in day trading classes. However, it’s important to look at the big picture here, as the cost of a lack of education is often infinitely greater than that of a proper education.

Consider this: Many of my students started out believing they didn’t need day trading classes, either. But then they got into the market and started losing money. For many, this was the realization that made them see the value in getting a trading education.

What about you? Are you willing to invest in your knowledge now, and prevent potential losses in the future?

Join My Trading Challenge

If you’re serious about doing this, then day trading classes can offer you many benefits, often including a much quicker learning curve. My Trading Challenge offers ease and flexibility with online lessons that can be tailored to your schedule.

I didn’t have a mentor or a program like mine. But in retrospect, I wish I had. I probably would have made money far quicker and not made so many ignorant mistakes if I had.

But lamenting the past won’t change anything. Instead of complaining, I want to help you so that you don’t have to make the same ignorant mistakes I did … that’s why I created the Challenge.

The Bottom Line

You should never, EVER, treat stocks as an impulse buy.

Too many people lose money because they invest in a company they heard about on social media or because it came recommended by a guru. Don’t become one of those people!

It’s your money at risk. Perform your due diligence. Yes, it takes time, but you can get the job done quicker with knowledge and the right trading software, so you’re in better shape starting out than I was.

Have you started trading yet? What’s YOUR biggest challenge right now? You tell me. Comment below.