When you are starting the process of choosing stocks to invest in, it may be tempting to choose whatever acronyms are showing up on the ticker and increasing in value. But it’s good to remember that those aren’t just letters and numbers you are putting your money towards - they’re companies. Businesses with core values and mission statements and quarterly financial reports.

There are a lot of things that need to be taken into account when researching new stocks. Here are a few essential steps to get you started.

Step 1: Find Your Focus

Reading a financial report may not give you all of the information you need about a company and its stock value; or, at least, you may not realize what information the report is exactly giving you. Understand the different listed items on a financial report and what their ratings mean:

  • EPS (Earnings Per Share). Earnings per share is the total earnings divided by the number of shares you can trade. This resulting number, or EPS, indicates how profitable a company is per each share they have.
  • Net Income. This may be the easiest term to understand, especially since it’s not just companies who use it. It might go without saying, but net income is the total amount of money a company made after subtracting expenses, depreciation values, and taxes. Net income is also known as the “bottom line”.
  • Revenue. As opposed to net income, revenue is the “top line”. Revenue is the total amount of dollars the company brought in, before operating expenses or taxes are taken into account.
  • Price-Earnings Ratio (P/E). If you take the price of a company’s stock and divide it by its EPS, you will get the price-earnings ratio. This will tell you how much money an individual investor would pay to have $1 in shares.

Financial reports are a great and essential first step to researching companies on the stock market.

Step 2: Get Qualitative

Reading the financial reports is a necessary step, but it’s not the only step. It’s not the only vital piece of information you need to learn the ins and outs of a company’s value. There are plenty of qualitative research opportunities that you should be investing in as well.

You can get qualitative information by interviewing business partners and asking questions that revolve around the company’s operations and strategies for success. For example, you should find out in what ways the company actually makes its money. What is its largest source of revenue? Is it something that you can understand or support?

Does this company have a great management style? Is it set up for success and protected against failure in the event something goes wrong? Will something go wrong? Can it stand up to its competitors?

Step 3: Consider Investing as a Partnership

Investors take stocks for the long haul. When you are giving a company money so you can have shares in its stock, you are placing your trust and value in this company for many, many years to come. You should be quite certain that this company will be able to stick around and continue to grow while providing strength in operation and in profits. While you’re at it, make sure you check out Sam Shiah to learn more about this topic.

Using the data you’ve gathered from the steps above, compare what you’ve learned with the data from other companies to determine who will work best for you. That way, you will have a far better understanding of who and what you are giving your money to.

Author's Bio: 

Kathy Mitchell is a writer and avid researcher on the subject of health, beauty, nutrition, and general wellness. She likes to go out with her friends, travel, swim and practice yoga.