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Research
Researching companies requires many hours of concentrated effort. It can't be done in a few minutes.
Sure you can get a quick glimpse of a company's past performance by looking at it's chart however, if you're
intending to invest money into a company you really need to spend the right amount of time.
Research requires a series of steps to get the overall picture of a company.
Keep in mind that even though a company looks really good on paper, its no guarantee that it will perform the way
you expect. There are also many daily factors including company news, press releases, national news, buyers,
sellers, and many more factors that affect a stock's movement each day.
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Developing your research skills and your
trading strategy is a simple step by step process. However, you must be willing to devote the time required
to master these skills. The following technique is one of many methods use in Technical Analysis. This
process works well for many people however, it may not be your style. Give it a try. If it doesn't
work for you then you might want to visit our Technical Analysis section and try another style.
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| Step 1. |
Select your price range according to your
cash budget. If you start with $20,000 cash your broker will setup a
$40,000 margin account for you. They say that you can buy up to $40,000 worth of stock, however, they don’t
often stress that you are borrowing $20,000 from them and they are going to charge you for it. When you are first
starting to trade, never, ever, use the margin money. Only trade with your
cash and keep your own record of how much money you are spending.
Only trade 100 shares of stock. Do not
make the common get-rich-quick mistake of thinking that you need to trade 1,000 shares of stock. Remember your
risk management process. When trading 100 shares of stock with $20,000 cash you can buy stocks with a price
range from $0 to $190.00 per share. Remember to save some for the broker’s commission.
If you try to trade 1,000 shares you are limited to stocks priced from $0 to $19.00
per share. Often these lower priced stocks have a price swing of from 1/32 to 1/8 of a point per share. At a
thousand shares that’s only $31 to $125 per trade gross profit. These lower valued stock often have a price
swing once a day or once every several days.
However, if you trade 100 shares of a higher quality stock that has a price swing
of 3 to 6 points or more per swing then that’s $300 to $600 gross profit per trade. The higher value stocks
often have two to three price swings a day and the alert trader can take advantage of at least one or two of these
swings each day.
A quick way to find a group of stocks to start analyzing is to go to our Market Overview page and find stocks that
meet your budget.
Other sites to review are:
Select those stocks that have a price that fits your "cash budget".
Research the chart of your candidates and look for a stock that shows a growth
trend. (upward movement) and cut your list down to growth stocks.
Many on-line chart research sites will also display a news history for each stock
you look up. Check the news services for any recent news about your
candidates that could influence a change in the stock price. Cut your list down again.
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Now, you can either purchase a chart analysis
package or you can use any one of the many on-line research sites. Many on-line brokers provide stock
research tools however, many of these can be very slow.
This is where you apply the information and methods that you learned in
the Technical Analysis Short Course and Reading the Charts steps
on the Learn to Trade web page.
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Three of the better on-line chart sites
are:
Big Charts at http://www.bigcharts.com ,
Stocktools at http://www.financialweb.com/stocktools/ and
Stock Map at http://www.stockmap.com/
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If you prefer an off-line chart analysis
package like we do, we recommend Power Investor from Investor's Alliance at: http://www.powerinvestor.com. Power Investor comes with their basic annual membership plus you
get daily market updates after the close of the market. Its a lot faster than going on-line when you're
trying to research multiple stocks or even a full market sector.
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Ok, I know, once you get
to the desired chart how do you know what you're looking at. Right? Well, you can start with the
reading graphs in the education section from Clear Station at: http://www.clearstation.com/education/cover.shtml
Also, remember all those books you should have read. Well, now's the time to
go back and read the sections on chart analysis or go to our Technical Analysis course.
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| Step 2. |
Look for news reports.
Are they good or bad. There's an old saying in day trading, "Buy on the rumor and sell on the
news." Often, many people think that an announcement of good news will drive the price up.
Hmmm....don't count on it.
Often, traders are just waiting for news to bring in the buyers so they can sell as the price of the stock
peaks. Ok, I know...how did they know to buy the stock earlier? Well.. they did their research.
Free Realtime Stock News Email
You to can get your FREE news delivered directly to your Email inbox in Realtime. Headline News about your favorite stock delivered directly to your Inbox as it occurs. Click Here for more information.
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There are so many places
to look for news reports that we couldn't begin to list them all. You might start with the "General market info / news" section of our Due Diligence page.
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| Step 3. |
Now, how about some heavy
stuff. Yep, the financial statement.
Check out the financial basis of the stocks.
Do they have good earnings reports? Do they have growing profits? Do they have growing revenues?
What’s that you say? Why worry about financials? Well my friend, for one point,
you need to know if the company is going to be around long enough for you to learn how to trade it. That's right,
"Learn How To Trade The Stock". This reason will become clear in a few minutes.
Besides, you don’t want to have some news reporter or Wall Street analyst break a
story that the company you are trading is just a smoke, magic, and mirrors operation right in the middle of the
day, just when you executed a buy order. Opps, too late. Your toast. Yep…it happens all the time.
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For now, it's best to
start with the Fundamental Stock Report. Go to either The Street.com at http://www.thestreet.com/tsc/tools/ or SmartMoney.com at http://www.smartmoney.com/
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As
an example, here's the report for Microsoft who's symbol is MSFT: http://www.financialweb.com/rapidresearch/datasht.asp?ticker=msft&name=Go
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Ok, I know..."How do you
read the blasted thing." Again, read the books. Also, if you're real nice and say nice things
about us, we just might write a new section on reading this stuff. However, for now, get out your books and
review the sections on financial data.
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You can research company information from Zacks Research Reports
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Or, you can customize your research at Market
Player: http://www.marketplayer.com/client/screening/
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| Step 4. |
Again, we're going to look at some more heavy
information. It's the 10K filings report made to the SEC.
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There are two sites for this information.
One is EDGAR on-line at http://www.edgar-online.com/bin/esearch/?qt=1&query and
the 10K Wizard at http://www.10kwizard.com/ . Many people look at these reports to see if the insiders (Corporate Officers)
are either buying or selling their stocks.
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| Step 5. |
Check out what others are saying about the
stocks that you might be interested in. For starters, signup for the free e-mail stock tips of the various
web sites and compare their picks with your research. They can be found on our Picks and Tips page and on our Due Diligence page.
Check out the Insider Trading activity at Insider Trading News.
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| Step 6. |
Out of your remaining candidates, pick one stock that appears to meet all of your criteria.
Start to watch your stock using the Intraday charts. Learn how the price of the
stock goes up and down.
Watch how the stock moves in relation to the DOW Industrial Averages or the NASDAQ
Composite depending on which market it is in.
Watch how the stock reacts to world news and the news of other leading stocks. And
yes, even to it’s own news.
Learn the various moods of the stock so that you learn to anticipate when it will
change price direction.
Once you feel that you know the stock fairly well, start to paper trade it. Once
you can consistently paper trade the stock 8 times out of 10, at least 4 paper trades per day, for several weeks, you are ready to start trading the stock in real time.
As you gain experience successfully trading that one stock for at least several
months, you will be ready to take on a second stock. Don’t get greedy. Limit yourself to watching two to three
stocks as your ultimate goal. No one can keep up with multiple stocks in a fast moving market. In time, you will
build up a knowledge of many stocks so that you can switch to another one when the current stock stops showing
consistent price swings that make for good day trading.
If for some reason your stock pick doesn’t seem to be going anywhere, drop it and
start to study another stock.
Also, remember your risk management process. Use Stop Loss orders on your trades
to get you out of a trade should the stock suddenly fall. A good measure for a stop loss is approximately 5 to
8% of the value of the stock and depending on the amount of price swing the stock is making that day. 100 shares
of a $60 dollar stock is a $6,000 investment. Your risk position for this stock should be around a stock price of
$55 to $56. This means that if the price is rising then, suddenly it drops below $57, you should have a Sell Stop
order already in the system for $56.
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| Step 7. |
Now try some real serious reading with the Stock Selection Guide Tutorial
by Douglas Gerlach |
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