Conducting in-depth research into stocks and companies is essential to a profitable trading strategy. By doing your due diligence, you can develop an informed opinion about the outlooks of the companies you are trading or identify information potentially missed by the broader market. Importantly, stock research can also help you find the best stocks that align with your trading strategy and offer a prime opportunity for profit.

Setting Your Investment Goals

Before starting to research stocks, it’s important to think what stocks you are trying to find in the context of a broader trading strategy. Are you looking for long-term investments in blue-chip stocks, or swing trades centered around small-cap stocks? Knowing what types of stocks and what types of companies you are interested in trading can help you narrow down your search to only stocks that are worth researching.

How to Discover New Stocks

One of the most important parts of finding profitable stocks is discovering new stocks to watch. These may be hot companies in a sector you’re interested in or companies that fit a specific set of criteria for your trading strategy.

There are several common methods for discovering new stocks:

Personal Experience

Conversations with friends, families, and colleagues about the stock market can all generate new ideas for industries or individual companies to conduct deeper research into. This type of discovery can also come from buying products from a new company or seeing an advertisement for a company. While personal experience can lead to some highly profitable stocks, good stock picks from friends and family may be rare – so most traders will need to have a more rigorous discovery process.

Industry Research & Research Tools

There is a huge variety of platforms available for stock discovery and stock research. This includes stock news organizations, primetime programming on stock-related media channels, stock newsletters, and aggregator platforms that highlight new stocks. We’ve reviewed many of these services, including Zacks, Motley Fool, Seeking Alpha, and Stansberry Research.

Stock analysts, many of whom can be followed publicly via Twitter or a blog or privately through a paid platform, can also be an extremely useful source of information for finding new stocks. Many industries also offer their own newsletters or magazines, which can be useful for learning the basics about up-and-coming companies.

Zacks Stock Research Tool

Depending on how wide a net you are casting for stocks, it may be a good idea to keep an eye on multiple different stock discovery resources.

Stock Scanners

For technical traders, stock scanners are one of the most powerful ways to discover new potential trades. Stock scanners allow you to display only stocks that fit a customized set of technical and fundamental criteria, so you can easily identify stocks that may be setting up to be profitable for your strategy.

You can use tools like EquityFeed and Trade Ideas to create custom scans that help you identify the exact stocks you are looking for.

Stock scanners can also be useful for fundamental traders, since they allow you to sort companies based on financial data. If this is how you plan to use a stock scanner, make sure your scanner has access to a wide variety of recent and historical financials for all companies traded on major exchanges.

Custom Stock Screen

How to Analyze Companies

Once your discovery process has yielded one or more potential stocks, it’s time to conduct more in-depth research. In this phase of stock research, you’ll be looking into the company underlying the stock as well as the technical strength of the stock itself.

Financial Data

For fundamental traders, financial data is the ultimate measure of a company’s worth. While fundamental analysis is a broad topic with many nuances, one of the best places to start is to look at a company’s accounting ratios. These metrics – including gross margin, operating margin, debt-to-equity ratio, quick ratio, and payout ratio – provide a quick view of a company’s profitability and financial efficiency.

Stock Market Statistics

Typically, these ratios provide information over the short-term, on the order of the past quarter or year. Accounting ratios can also be compared to those of other companies in the same sector to benchmark a company’s performance.

Corporate Leadership

The leadership of a company isn’t as easy to analyze as financial data, which takes the form of immutable numbers. However, leadership can play an important role in the future direction and profitability of a company. Be sure to closely scrutinize the executives in charge of a company of interest, including their past leadership history and results and any plans they have outlined for the future of the company.

Qualitative Factors

There are many additional hard-to-quantify factors that go into determining what a company will be worth in the future. For example, whether the company has diversified revenue streams and how stable those revenue streams are can determine whether it is stable over the long term. In addition, whether the company has competitors and the nature of its competitive advantages can play a large role in the future growth and staying power of the company. Look closely at growth, and whether past or current growth rates are sustainable. Finally, consider the brand identity of the company and whether that brand resonates with the company’s target audiences.

Technical Stock Research

Technical analysis can be important for identifying potential entry and exit points into a stock. But technical analysis can also be used to take a broader view of a stock’s profit potential, such as by identifying trends. Trends can be a strong indication of whether a stock will continue moving in one direction, and you should have strong evidence from other research to bet against a trend.

trendspider

Comparative Metrics

Whenever analyzing a company or stock, it’s essential to compare it to other similar companies and stocks. That may mean companies in the same industry, such as direct competitors, or stocks with similar technical and fundamental characteristics. Metrics such as P/E ratio, debt-to-equity ratio, and PEG ratio can also be compared directly between stocks.

Valuation

The valuation that institutional investors and venture capital firms assign to a company is a good indicator of its outlook. Not only will valuation likely be directly reflected in stock prices, but you can use valuation trajectories to look for trends in a company’s growth. Market capitalization can also be an indicator of stability – highly valued companies are generally thought to be more stable than small-cap companies. However, stability does not necessarily mean profit in the short or medium term.

How to Choose Which Stocks to Buy

Once you’ve done your research and settled on one or more stocks, there are some additional considerations that go into choosing which stocks to buy and when.

Strategy Alignment

Any stock you buy should align with your overall trading strategy. That means you need to think about your investment goals – are you buying for a day trade or a long-term investment? Importantly, the timeframe over which you expect the stock to increase in price should match the timeframe of your investment.

Some questions you may ask include:

  • How long do I plan to hold this stock for?
  • What is my risk tolerance?
  • Why did I choose this investment over alternatives?
  • Do I understand the factors that impact this investment?

Technical Analysis

Technical analysis can be a valuable tool for identifying a price level at which you are willing to enter into a position. If the stock is above your set price level, you may have to wait before buying it.

In addition, technical analysis can be used to assess the strength of a stock. Ideally, you can purchase a stock when it is poised for an upward movement, or when it is trending strongly upward.

The Process of Planning a Trade

Finally, the last part of researching a stock is planning out your trade into the stock. When trading, there are several different parts of the trade to consider:

  • Entry price
  • Position size
  • Stop loss level
  • Profit target
  • Trade execution and commissions

For each of these components of your trade, your research and trading strategy should suggest appropriate values. Always have a profit target in mind when entering into a trade – this is usually based on technical analysis, but can also be determined based on fundamental valuation. In addition, you should always keep a trailing stop loss to protect your position from loss and to lock in profits.

Conclusion

Thoroughly researching stocks before trading is essential to establishing profitable positions. From the discovery process to executing a trade, you should be looking into all of the available information about a stock and integrating that information into a larger picture of how the stock price will change over the timeframe of your position. Keep in mind that comparison to other stocks in the same sector or size class, or with a similar technical setup, is also important to choosing the right stock for your strategy.