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How to Research a Stock

When investing in stock market, many investors have a herd mentality i.e. they just follow the trend in the market and invest without conducting any analysis of their own. Although it is human to follow the crowd and base your decision on what others are doing, there are far too many examples in the history of stock market that show such herd mentality can result in huge losses. The dot.com bubble in the U.S., when everyone thought they could make millions by buying shares of a dot.com company is one such example.

So why do investors make such mistakes tine and again? Although difficult to put a finger on anyone point, one reason is that most investors do not conduct a proper research before they invest. In this article, we will look at the ways you can conduct research on a stock.

If you are a long-term investor then ideally you should do a fundamental analysis of the company before you invest in its stock. So what things should you look at when you do a fundamental analysis? The best place to start is the company's balance sheet. Here are there a lot of indicators that can help you in making your investment decision. In the balance sheet, if you see that the company has a very debt to equity ratio then it may be a risky investment. The other thing that you should look at is the company's cash position. If the company has strong cash position then it may be a safe investment. From balance sheet, you can move to the company's cash flow and see how much free cash flow the company generates. Apart from these, the other things that you need to look at when you conduct fundamental analysis are the company's competitive positioning, its future growth strategy, its product pipeline and the macro environment.

Although fundamental analysis is more useful in long-term investing, you can use this type analysis for short-term investments as well.

Another way to conduct analysis on a stock is through technical indicators. In this type of analysis, we are not really looking at the company's business, financials etc but at the stock's movements. This type of analysis is used more often by Day Traders and short-term investors, who look to profit from daily swings in stock. In technical analysis, one of the things that you can look at is the stock's support and resistance level. The support and resistance level help traders and investors in deciding at what level they should buy or sell the stock. If the stock is close to its support level then it is an indication to buy and if it is close to its resistance level then it is an indication to sell. The stock's 50-day, 100-day and 200-day moving averages can also be helpful in making buy or sell decisions. The stock's MACD is also very good indicator.

With a little bit of research, you as an investor can go long way in investing.