Investing in stocks comes with challenges like anything, but Aussie investors are moving their interests back into the share market like never before. As we share these stock research tips for beginners, you’ll know why.
Stocks are backed by a company’s value, be it the income it generates, the capital or assets it holds or it’s concept and future value. The reason financial institutions are able to invest in stocks is that they have reason to exist and a definable value behind them. Finding that value through stock research, is what we look into in this guide.
While investing as a beginner can be scary, it can help to remember the shareholder protection you have as an owner of shares in a listed ASX company. A quick overview is the assignment of a HIN number, meaning that you are registered against the stock regardless of third party risks like broker. Secondly, since a company has value, the stock will often struggle to fall below certain price points as savvy investors lay in waiting for opportunities to arise, meaning good stocks don’t stay down forever.
What’s Really Scary about Buying Stocks?
Buying into hype is one of the scariest things an investor can do. While it works sometimes, there’s less to fall back on if the company stops performing.
So how can you choose a company that holds real value?
Stock research can crush hype and zone in on what really matters. There’s a couple of forms of value that this guide will discuss. One form is value through price, in that the price of the overall market, industry or company is worthwhile. The other form of value is intrinsic in the stock, such as the assets, income, processes and more direct value that the share provides.
Index Position
The history of stock market indices has shown that eventually the index finds new highs. Stocks fall out of the index and are replaced with better performers with more market cap, giving the price of index markets a bias upwards. This points to the idea that getting in near the highs isn’t a bad thing, but you may have to wait for the market to retrace before returning to higher highs in the future. It also points to the concept that buying when the index has dipped lower could be beneficial.
But having the research to back your selections is critical, as the index often won’t stay low for long (unless there’s a downturn, creating even better opportunities in the future).
The concept of indices often reaching higher highs leads to the point that share market investing is a long term game.
Sector Fluctuations and Stock Research
Sectors such as telecommunications, mining, banking, healthcare and so on often fluctuate, meaning that there can be opportunities where the market has fallen out of love with a particular industry, yet the underlying companies may not have shifted in assets, earnings and value. Running a sector valuation can often be a great way to identify what industries you may want to focus on, when it comes to researching your next stock selection.
The index has hit the dip, you’ve laser focused on a sector and industry and now its time to find a high value share to research. Many new investors have no idea where to start, so this guide will take you on the journey and take some of that unknown pressure off you, and put the pressure on the company you’re looking to invest in.
Picking a Stock to Research
You may have a stock in mind, or perhaps you’ve ran a filter on fundamentals and you’ve picked out a couple of stocks to research. Perhaps you’ve viewed the charts and looking for price based value before going in deeper, or you’ve found a list of stocks in the sector and chosen a few that appear to have what you’re looking for. This part isn’t where you get stuck, and you can adjust as you find new information and come back to research a different stock if this one doesn’t quite pan out.
The Hunt For Stocks
A wise investor once told me to look for reasons to not invest, and that hope is not an investment strategy. There’s always a reason to invest, particularly when there’s hope the price will go up. Hunting for holes in the company’s story is an important part of the research process. When I say story, I’m talking about their books (financial accounts), their methods of doing business and even their product or service. Identifying reasons that might land the share in hot water down the track will at least give you awareness on what could go wrong.
Where to Hunt for Stocks
When you’re trading ASX shares, you can find company information like annual and quarterly financial reports, dividend payments and other key details on the ASX website and then search for the company of interest. This is where you’ll find the majority of the detail you need as an investor. If the numbers don’t add up, there’s little point in going further.
You will likely want to review their company website, visit a store if they have one, experience what it is they offer or at least look at reviews and see what other people have to say about the company, what it’s like to work there, what values they have and so on.
The leaders of the company and board of directors are often a great place to look to ensure values align, goals for the company and decisions are likely to continue to follow what you would expect from the company you invest in. Searching for information about the directors, their past successes and understanding what they bring to the table can be beneficial when choosing whether to invest in a stock or not.
Price charts are great for technical information, news articles can share insightful views and new intel which can all be found inside the broker platform with us.
Once you’ve developed your own viewpoint, you may also wish to see what research houses and analysts think about the stock, which can also be found in our platform.
Digging into the Financials – Real Stock Research
Reviewing the financials may seem daunting, but it’s an important step in understanding what you’re investing in. There’s two main reports you want to dive into for each company you do stock research on, a Balance Sheet and Profit and Loss also known as the P&L.
Pull up a recent financial report for the company, view the balance sheet, profit and loss statement and the other information that is provided.
Remember, you’re looking for value, so consider how this company may be creating value that is likely to contribute to your bottom line.
1. Finding The Value
When we talk about value, we are talking about the likelihood of the stock price increasing from where it is now, to a higher future value. Defining value often comes from assessing the whole picture of the stock and could be in the form of excellent revenue stream, well managed debts, strong book of assets, profit margins, stockpiled commodities, strong team, powerful marketing and vision.
Finding one great thing about the company isn’t enough though, it’s also about filtering out any issues that may counteract the positives. Things like overspending, poor dividend management, poor business decisions, short term thinking, overleveraging debt, overpaying directors or poor culture could all be considerations that may give you the indication to not buy a stock and continue your search elsewhere.
2. How is Cash Being Used?
I mentioned earlier that you’re also looking for reasons not to invest, things that might rule out this stock from your portfolio. This could be things like over or underpaying dividends, where the board of directors may not see the ability to use those funds to grow the business, or don’t want to share excess cash with investors. It’s not so much about them paying too much or too little, but the reasons behind why they are making that decision. Financial reports are like a blood test for a company, it picks up a range of numerical data that can pinpoint where issues may lie in the business.
3. Overspending
Overspending compared to revenue can be common in startups, but when it comes to large, stable companies this could mean the board of directors having less control over expenses or a level of carelessness in the financials. The idea of a business is to generate returns, so overspending isn’t an attractive quality unless it is for a longer term goal or greater good. When running your stock research, spending can be found in the Profit and Loss statement.
4. Responsible Debt Usage
It could be that the company isn’t taking on enough debt to take on new opportunities and grow, or it is taking on too much debt that may not be sustainable. The way debt is used is often a great indicator of how responsible the company is with finances.
5. Paying and Getting Paid
When checking previous financial reports, the numbers might highlight inconsistent revenue or profits or that taxes are being deferred over and over again, creditors (the company owes someone) aren’t being paid or debtors (customers owe the company) are growing, which could indicate cashflow problems, unhappy or unstable client base or poor internal systems.
6. Future Plans
Company reports will often share upcoming deals and projects, which can create a value proposition for investors. This is particularly important for those in the know when it comes to themes like new mine sites, artificial intelligence or tech projects and the like. Be sure to consider future changes in policy, government, rules and more. The tariff saga really impacted a lot of business, so rather than just looking internally, also look outside of the company and what could be coming on a macroeconomic scale.
7. Director Incentive vs Shareholder Focused
The reports also show the remuneration of board members and sometimes key staff, which can detail what they receive. Often a red flag will raise when you see the board taking massive pay checks without earning return for shareholders. This might indicate the company is more centric on helping the directors rather than working towards creating shareholder value.
8. Look for Gaps with Stock Research
Sometimes there’s hidden gems in the financial reports, that would mean the company has a big advantage. This depends on the nature of the company and often requires strong attention to detail. This could be something like the write-off of debt against assets during negotiations which has not been priced in, or a stockpile of commodities like gold or oil that you believe will rise in value, or a well structured revenue stream that protects against long term uncertainty.
When a listed company makes smart moves, you can be there to reap the benefits. But you have to do the research to find the gems.
How to Know if you Should Buy a Stock?
Every decision comes with pros and cons, and people will always find arguments for either side. The key is to make choices that stack the odds in your favour, using the information available. Don’t let complex financial jargon or ratios discourage you from investing. At its core, stock research and investing are simply about asking: is this a company that’s likely to do well, or not?
Where to Buy ASX Stocks?
Do the stock research and buy your stocks via the Macro Global Markets platform, access tons of research, analysis and charting tools. See how the platform works in this basic tutorial or dive right in and get an account. With low costs, excellent reporting and great service, you’ll be glad you trade with us.
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