Whether you’re looking to expand your portfolio with new stock picks or you’re an investing novice ready to dive into the world of trading, it can be difficult to know where to start when it comes to picking stocks. There are thousands of stocks to choose from, so how do you narrow it down? Lindsey Bell, Ally Invest’s chief investment strategist, is here to help you break down the process of researching stocks into three steps.
Here’s Lindsey’s first tip: Start by looking into the brands and companies you surround yourself with. For instance, which clothing brands fill your closet? What mobile phone company do you turn to when your phone breaks? Or when driving through a fast-food joint, what’s your go-to spot?
Let’s get into the details.
1. Explore the stock chart and earnings.
Once you have a stock in mind, pull up the ticker online (for instance, on Google Finance, Yahoo Finance or CNBC), and take a look at the past year and five years. Checking both views will help you get a sense of the stock’s short-term and longer-term performance.
When looking at the past five years, observe the general direction of the chart. A steady upward line is generally a good sign, while a stagnant, declining or sharply inclining line is something you’ll want to look further into and fully understand.
In the one-year chart, look for erratic ups and downs, which can point to volatility. Volatility in a stock is something you’ll want to make sure you’re emotionally prepared for, no matter which stock you’re looking at.
2. Determine the company’s growth potential.
Check out the company’s investor relations website for more information. Look for items like financial news announcements, quarterly earnings reports and annual reports that can help you better understand how the company makes a profit and what its plans are for growing profits in the future. Understanding the company’s outlook is particularly important as you try to understand if the stock can move higher.
3. Decide if the stock is a good value.
Determining the valuation of the company is essential when doing your research, and you can use the previous two steps to help you determine what a company is worth. The price-to-earnings (P/E) ratio is a valuation metric that will help you determine whether a stock is expensive, cheap or just right for you (the Goldilocks of stocks!). On the Yahoo Finance website, under the Statistics tab, you can see the P/E ratio over time. If the ratio is lower now than it has been in years past, that can indicate room for the stock to return to higher levels.
Two other items to investigate as you research your stocks are changes in earnings-per-share (EPS) estimates and the price targets recommended by Wall Street analysts — both are located under the Analysis tab on Yahoo Finance.
It can be daunting to dive into stocks, but a quick look at the brands you connect with can help you narrow down to a more manageable list of stocks to research. And from there, these three steps can help you determine if those stocks are the right pick for you.
Ready to take another step into the world of stocks?
Lindsey Bell is Ally’s Chief Investment Strategist, responsible for shaping the company’s point of view on investing and the global markets. She is also President of Ally Invest Advisors, responsible for its robo-advisory offerings. Lindsey has a broad background in finance, with experience on the buy-side and sell-side, in research and in investment banking and has held roles at JPMorgan, Deutsche Bank, Jefferies, and CFRA Research.
Lindsey holds a passion for teaching individuals how to become successful long-term investors. She is a contributor at CNBC, and frequently shares her insights with various publications including the Wall Street Journal, Barron’s, MarketWatch, BusinessInsider, etc. She also serves on the board of Better Investing, a non-profit organization focused on investment education.
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The opinions expressed here are not meant to be used as investing advice. For more information, visit our website.