Pursuing financial independence as people of color and first-generation wealth builders is some groundbreaking sh*t, y’all. When we build wealth, it’s never just for us. Often times, we got entire communities depending on us. And what’s the best way to build this wealth? Investing. Read on to learn how to research individual stocks.
If you let your money sit in a savings account for years, you will lose money to inflation. Savings accounts with traditional brick and mortar banks will typically have low interest rates, so while you may be “earning” money for keeping your savings with this bank, chances are these earnings don’t outpace the rate of inflation. Investing avoids this.
New to investing? Check out our beginner’s guide to investing episode with Delano Saporu of New Street Advisors Group. One of the easiest paths to investing is around index funds and ETFs, but today we’re talking all things individual stocks.
Why Should I Research Individual Stocks?
Jeremy from Personal Finance Club talks about the “fee effect.” When we hire financial advisors, we need to consider their fees, as they can eat up to 2.0% in investment account/fund management fees. While the number sounds small, compound interest makes this fee even greater the longer you hold your investments.
You can manage your own portfolio! It takes a little time, and a little confidence to start doing this. When picking individual stocks, here’s what you need to do to get started on your independent analysis.
1. Pick your analytical model
When you research individual stocks, make sure to remember that investing in individual stocks is investing in a particular business. At the core of picking individual stocks is the following question: which company or industry do I believe is going to be making moves in the near future? You have two options of approaching the start of your research: starting with an industry, or starting off the bat with individual companies you are aware of. The second option will come easier once you are familiar with how to do a quick analysis of a company.
Brush up on your critical thinking skills for this one. Which industry or sector do you believe is headed towards an upwards direction? At this step, you don’t have to zoom in deep into financials and technical bits. Instead, start here: based on the news, a bit of qualitative research, and your own opinion, which sector is going to widen or pick up pace?
For example: with the rise in demand for more advanced technology, some investors may be keeping an eye on different sub sectors within the larger industry of technology. While humans have manipulated technology in totally new ways, perhaps the next phase of tech innovation is rooted in artificial intelligence. Some investors are keeping an eye on this industry for that reason.
2. Read analyst reports
These are the reports you’ll see on different investing platforms as you research individual stocks. To find them, just type your company name’s ticker symbol, along with “analyst reports.” These reports give you an overview of multiple aspects of a company, including strengths and weaknesses, and stance within their respective industry. The most valuable analyst reports don’t focus on just the valuations or just the financials, but rather a blend of both.
You can see analyst reports published by individuals, big investment banks, or research platforms like Morningstar. When researching and reading analyst reports, you should never make your decision based on a singular report. Best practice is to read a handful of reports for one company. This ensures you get to read various opinions and develop an understanding of a broader landscape. Analyst reports will also give you a good introduction into specific aspects of a company, which you could then zoom into with your own analysis. An important consideration: analysts are notorious for thinking in the short-term. If you are a long-term investor, try to identify if the analyst is viewing the company in the short-term or the long-term!
A different kind of report to also consider are annual reports put together by the CEO of a company!
3. Pull Financial forms
After you’ve had some practice with reading analyst reports, you can start to move into looking at financial reports. You have 2 options: you can go deep and get the actual forms (Form 10-K and Form 10-Q), or you can rely on sites like Yahoo Finance, who display some of these key financial numbers. Step 1 to approaching these forms: don’t read every single word. It’s a lot. Zoom in on the following:
- Revenue: this is the dollar amount of all that was brought in during a certain period. This is generally known as the “top line” on an income statement.
- Net income, or operating income: this is the “bottom line” on an income statement because it’s the dollar amount of what a company has made after their operating expenses have been subtracted from their total revenue.
- Operating profit margin: find this number by calculating as operating income divided by revenue. It will give us a metric that shows how much revenue is left to cover non-operating costs, after operating expenses have been paid. We’re looking for a higher number on the scale of 0 to 1.0 usually. The higher the number, the more per dollar that is “left over.”
- Current ratio: find by dividing current assets by all current liabilities. A ratio more than 1 typically shows that it can pay off its short term liabilities, leveraging their available assets. A ratio less than 1, however, can show that the company might not be able to cover all debt obligations when they are due, thus potentially making it a risky company to invest in.
- Debt ratio: related to debt as well, find this ratio by dividing total liabilities by total assets. This number will give a solid understanding of current debt. A ratio that is more than 1 shows that a company has more debt than they do assets.
4. Qualitative analysis on the company
We don’t just want to focus on the numbers! While numbers definitely paint a big picture in a company analysis, we would not be doing a proper analysis without considering the qualitative data around the company. We’re talking: news reports, social media trends around the company, staffing, ethics, etc.
Take a step back from the financials now. Some areas to consider:
- Would you purchase this company’s product or service?
- Who are its competitors?
- Do you align with the company’s values?
- Are they often in the press? If so, why?
- Who makes up their executive team?
Each of these questions will illuminate important parts of a company. Don’t neglect them! And don’t discount your opinions as a consumer!
Investing is a big move. And while it can be scary to start and then venture into managing your own portfolio, you have the power and capability to really do it yourself. Review your essentials, know what to look for, and trust in yourself.