The importance of stock analysing before investing

Investors depend on stock analysis to find potentially profitable stocks. Common ways to analyze stocks include technical and fundamental analysis.

Several components fall under fundamental analysis, including examination of a company’s price-to-earnings ratio, earnings per share, book value and return on equities. Many investors also use the recommendations of financial analysts to analyze a stock. The type of stock analysis you implement is based on personal preference.

Understand the various methods to analyze a stock to fine the technique that best suit your financial objectives is essential.

All you need to know are the right steps to analyze a stock before you invest your money and you will be on your way. Here’s our guide to investing in stocks for beginners!

1. Use A Stock Screener

A stock screener refers to a tool which filters and shortlists a set of stocks tailored to your personal stock selection criteria. Say you are looking to invest in stocks in the New York Stock Exchange (NYSE) or searching for a company which gives out consistent dividends or a company that has to be profitable. All you need to do is enter all these criteria into a stock screener and a list will be generated for you almost immediately. If you are a seasoned investor, you can almost always find a screener or stock analysis software with more technical filters, like Debt t Equity Ratio and Intrinsic Value. This makes the process of finding the best companies to invest much easier.

2. Zoom into the Company of Your Choice

If you are a new investor, this is usually the part where your heart would start to sink. But did you know that a company’s financial numbers should only make up for around 33% of your investing decisions? The other 67% should comprise of other qualitative factors which is unfortunately, often overlooked by most investors, even the seasoned ones. If you would like to know how to pick the right stocks, consider using the 3R model the next time you want to invest in a company (and in the following order):

a) Right Business Model

A company with good business model is one that either has a unique product, able to withstand competition or is able to generate consistently increasing earnings for the company.

b) Right Management

A company can have outstanding financial numbers and sound business model. However, if they do not have the right management team to handle the money properly, it is a major red flag and you should reconsider investing in them at all. The right management team is one who has integrity, reports the company’s situation as it is and continues improving the business.

c) Right Valuation versus Price

The final criteria is the company’s intrinsic value / true value as compared to its current share price in the market. A company whose share price is higher than its intrinsic value, is considered overvalued whereas a company whose share price is lower than its intrinsic value, is considered undervalued. As an investor, our aim is to find companies that are undervalued, or in simpler terms, companies we can buy at a “discount”.

3. Shortlist and Compare

After looking into the companies generated from your screener, you would realize that you prefer some companies over others. Perhaps they are companies that has a better management team, perhaps they are companies that you know of personally, because you are using their products. In fact, one of the best and easiest ways to select a company to invest in, is to choose companies that we are already familiar with. This concept is also known as Circle of competence. Using this concept, you can further downsize your list further to one or two companies. And voila! You’ve found yourself the company to invest in!

4. Invest

And we finally arrive at the grand moment – to actually invest. In order to start investing, it is important to ensure that you have a brokerage account, and your local trading account with the exchange - The Central Depository.

Once you have all of these in place, all you need to do is to give your broker a call or log into your online brokerage account to click on that invest button. When it comes to deciding which companies to invest, it is important to ensure that they fairly priced against its intrinsic value at the time you decide to invest! As Warren Buffett would put it,

“It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

While the steps may seem simple, there are still investors who do not analyze stocks before investing. there is also a big chunk of “investors” who rely solely on tips and hype (things like Best Companies to Invest in 2019) without really understanding the company’s fundamentals and end up losing their fortune. Little did they realize however, that with the right knowledge and the right tools, their risks would have been massively reduced.

If you’d like to find out how to hunt for undervalued stocks, visit 8ly.cc/tash to register for a COMPLIMENTARY Technology-Assisted Stock Hacking Masterclass and receive a book worth $25 for FREE.

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