Imagine you are buying a car. You would not simply go in and get the first car you see, right? You would first try out a few of the cars which fit into your budget and then finally zero in on the best one.
Well, it is not much different in the case of stocks too. Before buying a stock, it is important to perform adequate research in order to zero in on the stock that would give you good returns.
The Two Types of Research
Before finalizing a stock to trade, there are two types of research done in the stock market. They are fundamental research and technical research.
Fundamental Research: Here, the economic aspects of the company and its impact on the company’s health are analyzed. This is typically performed for stocks that are intended as a long-term investment. The various aspects of fundamental research that are analyzed for determining whether the company is a good or bad stock are
- Financial Data like balance sheets, results, assets and liabilities, revenue model, etc
- Industry Trends, future scope of the industry, and various the factors that affect the company’s growth rate.
- Competitions in the market in order to determine the strength of the company and its future growth prospects.
- Updates on economic events, Return on Equity (RoE), and Return on Assets (RoA).
Technical Research: Here, the stock price is given more emphasis. The future prices are predicted using the historical data of price. The various aspects of technical research that are analyzed for determining whether the company is a good or bad stock are
- Price movements and stock patterns
- Market psychology
Why Should You Perform Research?
There are many reasons why performing research is important
- Research helps to identify whether the company is having less debt, has good customer satisfaction, has sufficient revenue, has a good valuation, and is doing the necessary investments for the future.
- Research helps in identifying whether the company is stable and has the potential for continued growth.
- The stock market is inherently risky. Hence, if you want to make good yields, you must take analytical informed decisions through research.
- Without research, you would be susceptible to make emotional decisions like taking heavy positions and investing a lot of money in unknown companies. These could prove to be quite disastrous.
- Research helps in avoiding herd mentality. Many times, the decision to invest in stocks is influenced by the input from acquaintances and friends. On doing proper research, the decisions would be automatically based on personal risk capacities than blindly following the herd.
Research helps in building discipline. With proper research, it would be possible for you establish a proper trading plan and clearly know when to book profits and losses. This helps to avoid panic when trades do not go in the same direction as you intended. It also helps to avoid greed if a trade goes well. You would be able to retain the profits made and exit the trades at a good level. All these build discipline, which is the very cornerstone for profitable trading.