Independent Stock Analysis for InvestorsJanuary 31, 2020
Being able to independently analyze your stock investment is something that you should at least try to achieve.
This is more convincing when you think about the way some stock analysts are treated as questionable. It is always better to learn the ropes yourself that depend on other so-called experts.
The Process of Stock Analysis
Regardless of whether you’re looking for growth or value, the first step you will take is develop a probing and inquisitive mind.
You need to find out what you want to buy and sell at what price or level. Analysts usually select a specific sector or industry. And within that industry, they select specific companies.
Their goal is to probe the company by analyzing financial statements and every other valuable information. They verify facts by examining the company’s suppliers, customers, and competitors.
What to Analyze
In order for you to draw up your own conclusions, you must understand the different steps involved in stock analysis.
Some analysts choose the top-down approach, wherein they start with a broad industry and work their way to a specific company. Meanwhile, others follow a bottom-up approach, where they start with a particular company and learn about the outlook of the whole industry.
There are publicly available sources of information for nearly all industries. Usually, the annual report of a company itself provide a good enough overview of the industry, coming along with the future growth outlook. The annual reports also give you some ideas about the minor and major competitors in a particular industry.
Business Model Analysis
Try to focus on a company’s strengths and weaknesses. You may find a strong company in a weak industry and a weak company in a strong industry.
The strengths of a firm usually reflect in its, for examples, unique brand, customers, suppliers, and products.
You may also learn about a company’s business model through annual reports, trade magazines, and websites.
Understanding the financial health of a company is one of the most crucial steps in analyzing a stock. Without understanding the financials, you will not actually think like an analyst.
Try to understand the company’s balance sheet, cash flow statements, and income statements. Usually, the numbers you find financial statements tell more about the company than the lengthy words of an annual report.
Quality of Management
Management quality also plays a critical factor in terms of stock analysis. There are no good or bad companies, but only good or bad managers.
The key executives are responsible for the future of the company. Assess the company management and the quality of its board by doing some extensive research.
Stock prices follow earnings. To know whether a stock price would be moving up or down in the future, try to see where future earnings are heading.
Unfortunately, you cannot find any quick formula that can tell you the future of earnings. Analysts make their estimates by crunching past figures of sales growth and profit margins, coming along with profitability trends going on in that particular industry.