How to Research Stocks and Choose Good Investments

woman looking at financial papers next to laptop and calculator
••• PeopleImages/DigitalVision/Getty Images

Researching stocks that you're thinking of investing in can be overwhelming and intimidating when you're new to the process. But researching stocks and investments isn't as difficult as it seems at first glance—at least when you understand how to read financial statements.

Average investors can research and choose their stocks and potentially do as well or even better than some of the professionals on Wall Street. You just have to educate yourself first. Here are a few things you might want to consider as you begin the process.

How to Start Researching Stocks

You most likely wouldn't make a major investment in a product—like a car, for example—without first doing some research on your preferred model and its closest competitors. You shouldn't invest in stocks without knowing something about the business, either. 

Owning stocks is nothing more than owning pieces of various businesses. Businesses that issue stock are required to produce and publish public reports, and those public reports are where you should begin when you're deciding which stocks you should buy. 

Reading a Company's Annual Report

OK, now you've got several companies' annual reports in hand. How do you read them to get the information you need?

They'll probably seem like Greek at first, so you might consider meeting with a financial advisor for a quick lesson. Yes, you'll pay for his time, but in the end, you'll gain an invaluable understanding. 

Reading an annual report is the key to being able to value a company. With a little bit of practice, you can learn how to look at the numbers and see what appears to be going on within the company. Concepts such as accounting goodwill, depreciation, and diluted shares outstanding will begin to make sense.

Value Investing

One of the most successful stock-picking and investment methods in history is value investing.

The value investing approach—either in its pure or modified form—was started by the famous Benjamin Graham. Read up on his seven investment secrets before you get started. His approach has allowed many investors to amass fortunes in the hundreds of millions or even tens of billions of dollars, including Warren Buffett, John Templeton, Peter Lynch, Charlie Munger, Bill Ruane, Eddie Lampert, Lou Simpson, and the guys at Tweedy Browne and Company.

Buying and Trading Stocks

You're ready to begin purchasing stocks after you've done your research, which includes an understanding of the difference between a market order and a limit order, and a few basics about options, shorts, margins, and other stock-buying concepts. Find out the types of trades you can place at your broker as well. 

NOTE: Please consult with a financial advisor for the most up-to-date advice and answers to any specific questions you might have. The information contained in this article is not intended as investment advice and it is not a substitute for investment advice.