Investing in stocks can seem intimidating for beginners. However, with some basic research, you can learn how to pick stocks and make informed investment decisions. Here is a step-by-step guide on how to research stocks as a beginner:
Set Investment Goals
Before you start researching individual stocks, consider your investment goals. This will help guide your stock selections. Important factors to consider include:
- Investment time horizon – Are you investing for the short-term or long-term? Longer time horizons may allow you to take on more risk.
- Risk tolerance – How much risk are you comfortable taking? Your risk tolerance will help determine what types of stocks are right for your portfolio.
- Liquidity needs – Do you need regular access to your invested cash? This will affect how much you invest in growth stocks versus dividend stocks.
- Tax implications – Are you investing in a taxable or tax-deferred account? Taxable accounts favor dividend stocks.
Setting clear goals upfront makes it easier to research and select appropriate stocks. Re-evaluate your goals periodically to make sure your investments remain aligned.
Learn Stock Basics
As a beginner, get up to speed on stock market fundamentals. Key concepts to understand include:
- Stocks represent partial ownership in a company. Stock prices reflect perceived future earnings and growth potential.
- The overall stock market trends up over long periods, but can be volatile short-term.
- Stocks are typically divided into categories like large-cap, mid-cap, small-cap, growth, value, income, etc. Know the distinctions.
- Indexes like the S&P 500 track the overall market while sectors track specific industries. Individual stocks may out or underperform.
Having a solid grasp of market mechanics helps frame how individual stocks fit in and behave. Consult investing books, websites, and financial media to immerse yourself in stock basics.
Research Well-Known Companies
Look at stocks of companies you know and use. Being a customer yourself gives you an advantage in evaluating their products, brand, and competitive position. Some well-known stocks across sectors include:
- Walmart (WMT)
- McDonald’s (MCD)
- Nike (NKE)
- Apple (AAPL)
- Microsoft (MSFT)
- Amazon (AMZN)
- JPMorgan Chase (JPM)
- Bank of America (BAC)
- Visa (V)
Pay attention to companies you personally find impressive. Their stocks may be good candidates for further research.
Screen for Beginner-Friendly Stocks
Use stock screening tools to filter the thousands of stocks available down to a manageable watchlist. Some factors to screen for include:
- Market Cap – Larger companies tend to be lower risk for beginners. Screen for large-cap and mid-cap.
- Stock Price – Look for stocks priced above $5 per share. Avoid pennies to minimize volatility.
- Dividend Yield – Seek companies with consistent dividend payouts. This provides passive income.
- Analyst Ratings – Prefer stocks with Buy or Overweight ratings. Avoid Sell ratings.
- Fundamentals – Screen for sound balance sheets and consistent earnings growth.
Online brokers, financial websites, and stock analysis platforms all offer ways to screen stocks based on combinations of fundamental and technical criteria.
Evaluate Individual Stocks
Once you have a watchlist of potential stocks, evaluate them holistically before deciding whether to invest. Assess both qualitative and quantitative factors:
- Products and competitive advantage
- Management team and leadership
- Market positioning and brand loyalty
- Barriers to entry for competitors
- Growth opportunities and headwinds
- Stock valuation metrics (P/E, PEG, P/S ratios)
- Earnings and revenue growth rates
- Profit margins and cash flow generation
- Dividend and buyback yields
- Debt/equity ratio and current ratio
Avoid stocks with declining fundamentals, excessive debt, legal troubles, or other red flags. Favor stocks with expanding earnings, reasonable valuations, and upside momentum.
Diversify Your Portfolio
Rather than investing in just one or two stocks, build a diversified portfolio across multiple companies, sectors, and geographic regions:
- Mix stable dividend payers and higher growth stocks
- Include mix of both value and growth stocks
- Aim for sector diversification – tech, healthcare, consumer, utilities, etc.
- Consider domestic and international stocks
A diversified portfolio reduces risk and volatility. Rebalance periodically to maintain target asset allocations.
Use Limit Orders and Set Goals
Use limit orders rather than market orders when buying stocks to control purchase price. Set upside price targets and downside stop-losses to lock in gains and limit losses. Re-evaluate holdings regularly:
- Review quarterly earnings and relevant news
- Assess if fundamentals remain strong
- Adjust stop-losses or take profits if goals met
- Sell laggards to fund new opportunities
Monitor your portfolio and adjust holdings over time. Remain patient and stick with your discipline.
Summarizing Key Points
Here are some key tips for beginners on how to research stocks:
- Set clear investment goals and risk tolerance first
- Understand stock fundamentals and categories
- Start with recognizable, stable companies
- Use stock screens to generate watchlist candidates
- Evaluate stocks on both qualitative and quantitative factors
- Build a diversified portfolio across sectors and geographies
- Use limit orders and monitor holdings closely
Take time to learn proper stock diligence and portfolio management. Start small, invest regularly, and reinvest dividends. Seek advice from financial advisors when needed. With discipline and patience, stock investing can pay off for beginners.
- How to Research Stocks – Investopedia
- Stock Basics Tutorial – Investopedia
- How to Pick Your First Stock – NerdWallet
- How to Build an Investment Portfolio – Vanguard (PDF)
- Stock-Picking Strategies for Beginners – Fidelity