How to research a stock for your investment

Selecting stocks for investment can be overwhelming to a new investor. Learning how to research a stock can help you to get acquainted with the stock market.

If you are interested in investing in stock market then start your research on various stocks before purchasing them. Your research on stock will show you the positive and negative aspects in detail. It’s a very easy process only when you will know how to read a financial statement of a company.

How to research a stock for your investmentFinancial statements are part of the company’s annual report which the company publishes every year after closing its books of account.

It’s a document prepared by the management and audited by a chartered accountant for the shareholders by explaining the business of the last financial year in comparison to past performance.

Annual reports can be downloaded from the company’s website or can be obtained from BSE’s website.

Once you have selected a stock to buy, the first thing you should do is to collect its annual report and start your research on following points.

Revenue, earning and cash flow

Company’s earning in comparison to past performance can indicate whether it’s a growing company or not. If it’s a growing company then investing in to it will help you to get some money in future.

Earnings and cash flow can determine whether the company is able to retain anything after its expenses or not. Earning capacity and cash flow will let you know how the company can fund its business for expansion.

Also Read: How to analyze revenue for your stock research

EPS and PE ratio

Earnings per share or EPS determine the portion of a company’s profit that is allotted to each outstanding shareholder of a company.

Comparing price of two stocks or earning of two companies is point less as it will not be the right comparison. Determining EPS can make sense as it look at earning per share of a company.

Formula of EPS: Net earnings / Outstanding Shares

Price to earnings ratio or PE ratio is the ratio of company’s market share price to its earnings per share or EPS. By finding this ratio you can determine whether the company is fairly valued or undervalued or overvalued.

Formula of PE ratio: Current Market price of share / Earning per Share

You can compare these values with the industry average and try to know whether to invest your money into the stock of the company or not.

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Stock research report

Various research reports are published by equity analyst where they project the company’s profit and revenue based on their expectation. One can collect those reports and go through to have an understanding on the company’s future prospects.

If these reports are showing positive earning and growth over the next five years then it can be a sound investment compare to a company which has inconsistent growth projection. You should not take decisions based on these reports. This is just for your additional information which can be helpful to you in your research.

History and Market share

If the company has a big market in the industry where it operates then it will have impact on the value of a stock. In your research process, you should look at the size and market share of the company which will define the dominance factor of the company on others.

The easy way to invest in a stock market is to conduct your own research. The more you educate yourself on these areas the less you will have to rely on financial advisers.

Editorial Staff at Yourfinancebook is a team of finance professionals. The team has more than a decade experience in taxation and personal finance.