How to Research Stocks and Choose Good Investments

Learn about your potential investments before you invest anything

With smart and proper planning, allocating certain types of assets into specific accounts can help reduce your annual tax liability.
With smart and proper planning, allocating certain types of assets into specific accounts can help reduce your annual tax liability. Sam Edwards/Getty Images

Researching stocks for investment can be overwhelming to a new investor. However, the process of researching stocks and investments isn't as difficult as it seems, once you understand how to read financial statements.

In fact, average investors certainly can research and choose their own stocks, and potentially can do as well (or better) than some of the professionals on Wall Street. Here are some of the things you need to consider when starting this process.

How to Start Researching Stocks

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

Owning stocks is nothing more than owning pieces of businesses. Businesses that issue stock must produce public reports, and those public reports are where you should start when deciding which stocks to buy. Here's some more information:

Reading a Company's Annual Report

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

Reading an annual report is 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 really be going on with the company.

Concepts such as accounting goodwill, depreciation, and diluted shares outstanding can begin to make sense. Here are the basics:

Learn About Value Investing

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

Started by the famous Benjamin Graham, the value investing approach—either in its pure or modified form—has allowed many investors such as Warren Buffett, John Templeton, Peter Lynch, Charlie Munger, Bill Ruane, Eddie Lampert, Lou Simpson, and the guys at Tweedy Browne & Company, just to name a few, to amass fortunes in the hundreds of millions, or even tens of billions, of dollars.

These resources are designed to help you understand value investing and how you can put some of its concepts to work in your own portfolio:

Buying and Trading Stocks

Once you've done your research, you're ready to begin purchasing stocks. To do so, you'll need to understand how stock trading actually works... which means understanding the difference between a market order and a limit order, and learning a few basics about options, shorts, margins and other stock-buying concepts. This article will help: