STEP-1 , Examine the Company Income Statement
All companies who trade their stocks publicly are required to publish annual and quarterly financial statements showing the results of their operations, and you can find these reports (called the 10-Q and 10-K) on trading websites like Yahoo! or on the company websites themselves. These statements are a powerful research tool, as they allow you a glimpse into the nitty gritty numbers. An income statement shows what revenue and expenses the company had during a given period, and then whether or not the two netted together resulted in a profit or a loss.
The most obvious value in reading the income statement is that you can see whether or not the company is generating a profit. Generally, stock prices for the company trend upwards as profits increase, and trend downward as they decrease or as the company experiences losses. You can compare the company’s income or losses over time, to see whether or not the company is in a pattern of growth.
Remember that in choosing stocks to invest in, you are looking to predict the company’s future performance and hoping it does better than the market expects. For that reason, you can also consider investing in companies who show losses, if you believe that company is going to grow and turn a profit during the time you own the stock.
STEP-2 , Check Out the Balance Sheet
Another important financial statement is the company’s balance sheet, which shows the company’s assets, liabilities, and owner’s equity. Assets things like cash, accounts receivable, equipment, and buildings all items of value the company owns and uses. Liabilities are the amounts the company owns to others, such as loans and accounts payable. Finally owner’s equity is the amount of the business that the company itself, or its stockholders, owns.
The balance sheet, unlike the income statement, shows the company’s position on the last day of the quarter in terms of what it owns and what it owes.
A key metric for predicting growth at a company is the ratio between the company’s cash and short-term investments (such as stock the company owns), and its short-term liabilities. You can tell by comparing the two whether the company has enough cash on hand to pay their upcoming debts – if they don’t, it’s bad news.
STEP-3 , Look at the Security’s Historical Prices
You can use sites like Yahoo! Finance to view graphs showing the company’s trading price over time, going back to inception. You can use these reports to see whether the company’s stock price has been increasing or declining over time.
Most new investors avoid stocks whose prices are dropping. While you may be able to turn a profit by purchasing stock at it’s lowest price, and then selling it when it becomes valuable again, these changes are very hard to predict.
STEP-4 , Read News about the Company
Besides financial performance, stock prices also reflect the market’s expectation for a specific company, based on things like how popular or necessary its products and services are, or how the company’s competitors are performing.
For Example, Apple’s stock price often changes dramatically when the company announces the release of a new product, and then changes again based on how popular the new product is.
If you have knowledge about a company that the general public does not, or could not figure out for themselves, you should watch out for insider trading laws when making trades. This generally applies mostly to employees of a company who know what’s going to happen before the company announces things to the public. Making trades based on this kind of information is illegal.