How To Become A Successful Stock Analyst
Hollywood films like to portray the trade of stocks as a thing done by skill brokers in massive firms, a la Wolf of Wall Street, but the truth of the matter is it is something anyone can do as long as you know what to look for and how to find value.
Other than the basic rules of investing, there are a few other things to take note of before diving into the world of stock analysis. No one can just jump on to the stock market and bumble their way around to success. It is a process that involves time and a lot of hard work. Going in blind is just a recipe for savvy stock investors to make a packet off you rather than the other way around.
To start, pick an industry that you are somewhat familiar with. It won't serve you well if you need to learn about a new industry and stock analyses at the same time. Once you've picked an industry and company you are comfortable understanding, it is time to do your research, lots and lots of research.
Business Model Analysis
When considering whether to invest in a particular company's stock, one of the most important things for you to understand is how they conduct their business, the company's strengths and weaknesses and how those attributes play into the business model overall. If a business's strengths don't directly contribute to its brand value, customer acquisition, and retention, or the bottom line, it may not be worth investing in.
However, this could also represent a company with the potential for growth and improvement, so their stock may be undervalued and a bargain as a result. That's why it is so important to analyse and understand a potential investment's business model: to find value others have missed, or dodge a pitfall no-one else has seen.
One simple truth of stock analyses is that the prices of stocks and the value of a company are directly influenced by income and earnings. Buying stocks of a company that is turning over packets is going to be expensive, which makes growth analysis one of the essential tools in the arsenal of a stock analyst.
Using data about past growth, year-to-year sales performance numbers, analysing profit margins, and how the company is manipulating those margins, as well as taking into account market and industry trends, can all give an analyst a pretty good idea of the growth potential of the company.
A great example of this would've been how PayPal has grown in 2020. If you had done a market analysis and figured out e-commerce would do so well this year, investing in the online payment platform's stock before it exploded would have made a lot of money. With so many more people working from home in 2020, PayPal has become the go-to platform for companies in the retail, food, and entertainment industries. Within the latter, PayPal has become so ubiquitous in the iGaming industry for example, where many online casinos allow players to conveniently deposit and withdraw funds. We're even seeing specific bonus codes from sites that have PayPal as a payment option.
Similarly, being able to read and understand financial statements to gauge the monetary strength of a business is one of the most important skills to learn. Without the knowledge to understand balance sheets, income statements, and cash flow statements, investing in stocks is just a guessing game.
It's easy for a CEO to spin a yarn and talk big about growth potential and future earnings, but financial statements are cold, hard facts and often tell far more of the story than any quarterly earnings call.
While not necessarily as flashy or directly impactful to stock investing as say financial or growth analysis, conducting a thorough and effective analysis of the industry within which the company's stock you want to purchase operates.
It is crucial because even the most robust and financially sound companies will struggle in the face of market and industry pressure. Just look at the publishing industry, even the biggest and most famous publications are having to rethink their business models.
In the end, stock analysis is not an exact science. No one can predict the future, but conducting effective analyses can remove most of the guesswork.