Money and investment chat often comes with a solemn disclaimer: this is not financial advice, we recommend you do your own research! We get it. Companies (us included) need to cover their assets, but how do you research shares?
We won’t just tell you to do your own research, we’ll show you how you can start to research shares. By defining your goals, starting off with what you know, learning a bit of lingo and knowing where to go to find the info you need, you’ll have a good base understanding of how to research shares before you start investing.
1. Determine your investing goals
When it comes to investing, what's right for you won’t be right for someone else; it’s not a ‘one size fits all’ situation. Before you start looking at how to research shares, you need to decide on a few of your own criteria.
What’s your goal with investing; are you looking to earn passive income, to preserve your wealth, or to grow your money? Your answer will have an impact on the types of companies you’ll start to look at. Younger investors might be looking to maximise growth over the long term and could have an appetite for more risk, so might consider companies with high growth prospects. Investors closer to earning their gold card might be prioritising stability over the chance of growing returns, and those looking for passive income could focus on companies that pay dividends.
If you want your investments to reflect your values, that’s also going to have an impact on which stocks will tick your boxes. High growth prospects but a dodgy leadership team? Great dividends but questionable ethics? Defining your goals and values will help to filter out companies that don’t align with your strategy, which leads us to step two.
TIP: Having a goal or a ‘why’ can help to keep you on track with your finances when things get tough, or boring, or you’re tempted to divert that investing cash towards something shiny and new.
2. Start with what you know
Investor Warren Buffett refers to what he calls the "circle of competence” - the circle of companies an investor is most familiar with. For example, someone who has spent years working in a clothing store might be able to pinpoint the strengths and weaknesses of retail businesses and compare them to the competition. Likewise, an agricultural contractor would be able to draft the studs from the steers when kicking the tyres of agribusiness companies.
With starting to research shares, Buffett suggests it’s practical to begin with a sector or a specific company that you know. Think about the products or brands you already buy - like streaming services, clothing brands, vehicle manufacturers, airlines, etc - and companies whose business models you understand - like retailers, cruise liners, video game makers, etc. Then you can create a watchlist in Hatch of some of these companies that you’re familiar with and use it as a reference point when you kick into the next phase of your research, step 3.
3. Learn investing metrics
As if getting your head around basic investing terms wasn’t enough! If you want to know how to research shares, there are some must-know metrics that you’ll want in your back pocket.
Think of investing metrics like categories in a restaurant review. Is a five star price rating going to dictate where you dine if the restaurant gets half a star for service, and two stars for taste? It’s a smart idea to use a combination of investing metrics and other types of analysis to help you to compare similar companies against each other, and decide if it’s worth owning a slice of that company’s pie.
Price-to-Earnings (p/e) ratio
The price-to-earnings or p/e ratio is a metric that compares the share price to the earnings per share. P/e ratio can be really useful when combined with other metrics for comparing;
- Similar companies working within the same industries
- The same company’s performance over a specific period of time
Different sectors have p/e ratios that are considered normal for their industry. For example, semiconductor manufacturers might have an average p/e ratio of around 28, whereas banks typically have a much lower average p/e ratio of around 8.
Like all metrics, p/e ratio is only useful when you use it within a wider context alongside other types of analysis. Companies with a higher p/e ratio may still be considered a good buy by some investors because they have much higher growth rates, while other industries with a lower ratio might not be signalling those same growth prospects.
Net profit margin
The profit margin is what’s left after all costs, taxes, and other expenses are all accounted for and tells us how much money a company makes. If your lemonade stand has $50 in revenue and $25 left after expenses are deducted, then it has a profit margin of 50% (profit divided by revenue). In this example, your thirst-quenching side hustle has a net profit of $0.50 for each dollar of sales generated.
What investors want to look for is the trend over time – whether the profit margin is stable, increasing or decreasing and what reasons there could be for that (like a bumper lemon crop on your parents’ tree). Profit margin, like p/e ratio, is a useful tool when comparing companies in the same sector.
Earnings per share (EPS)
Find this metric by dividing a company’s earnings by the number of common shares available to trade. The higher a company’s earnings per share, the greater the profitability and income to support future growth. However, keep in mind that some companies reinvest earnings straight back into the business, while others might pay out those earnings as dividends. Use the EPS metric to help calculate the ‘E’ part of the PE ratio!
There are so many different metrics you can use to research shares, learning how they work will take time, but we all have to start somewhere! The most important thing to take away from this, is that you shouldn’t use any one of them in isolation. Look at a range of metrics and information when you’re researching shares, which brings us to the next point on where to start looking for all this information.
4. Where to find the info you need
A common place to start researching shares in a company is through its annual report. A research tool that almost puts the ‘fun’ in fundamental, you’ll find this wordy document in a company’s investor centre. If you’ve watch-listed shares in Hatch, there’s a link to the investor centre at the bottom of each company’s page, how good!
Reading financial statements for the first time can feel like tackling the Iliad when you’re used to reading Harry Potter, but unpacking an annual report can be the key to understanding the value of a company.
Websites for world stock exchanges, such as the NASDAQ and NYSE are another way to find annual reports and other valuable insights. Searching a company or ETF on its exchange will give you links to recent earnings and financial reports, news and press releases, and real-time data for the current share price.
Many countries have regulatory bodies that oversee and regulate the share markets, and these are excellent sources of unbiased and factual information. For companies trading in the US, this is the Securities and Exchange Commission (SEC), and all publicly traded companies are required to file info with them about their finances. In New Zealand we have the Financial Markets Authority (FMA), which alongside The Companies Office works to regulate companies publicly trading in NZ and make sure they comply with financial reporting requirements.
5. Watch and learn
Apparently, Warren Buffett spends five to six hours a day reading newspapers and corporate reports, after all that’s his job! If you had a spare six hours a day would you spend it researching shares? Possibly not.
Start small, make a habit of reading, listening or watching investment news a few minutes a day. We surveyed our Hatch investors and their favourite go-to for investment chat and resources is websites, with similar portions of people tuning in to YouTube and podcasts for their investment news fix. Remember one size doesn’t fit all, you can choose what best works for you as you learn more about investing.
Thinking back to point #3, always remember to put your investing news into a wider context. Read the news in general to learn what’s going on in the world, look at multiple sources, and learn how to balance out the noise and hype with the fun facts and figures in company fundamentals.
TIP: Make learning a part of your weekly routine by following investing accounts on social media, or listening to podcasts on your commute to help you to keep investing top of mind.
Yikes, doing your own research can be a lot of work!
Depending on your investment strategy, researching shares can require a lot of ongoing time and effort. If you’re not hot on doing the heavy lifting when it comes to research, exchange-traded funds (ETFs) could be another avenue to explore (just make sure whatever you do, it ties back to your original goals!).
Start with a small action today. You could download an annual report, watchlist some companies or ETFs in sectors you are familiar with (your own ‘circle of competence’), or subscribe to an investment newsletter (we know a good one!). When you’re good n’ ready, incorporate some of the steps above, and you may be on your way to a strong investing game.