In short: Research stock: a repeatable process to research any public company, from reading its filings to checking cash, debt, growth and risks.
Good research is a process you can repeat, not a feeling. The steps below work for large companies and for small ones. They help you find facts, spot problems and decide whether a company deserves your money. You do not need a finance degree. You need a checklist and the patience to follow it.
Step 1: Understand the business
Write one sentence on how the company makes money. For example, it sells software by subscription, or it earns fees from lending. If you cannot explain it simply, keep reading or move on. You should not own something you cannot describe.
Step 2: Read the filings
Public companies file reports. US companies file on SEC EDGAR, and Canadian companies file on SEDAR+. Start with the latest annual report and the most recent quarterly report. Our guide on how to read an earnings report in five minutes shows what to look at first. Press releases are written by the company to sound good. Filings are written to meet legal rules, so they are more reliable.
Step 3: Check the balance sheet
Look at cash, debt and what is due in the next year. A company that owes more than it can pay may need to raise money, which can hurt shareholders. See what is a balance sheet for a plain walk-through.
Step 4: Check growth and profit
Is revenue rising? Compare to the same quarter last year, not only the quarter before, so seasons do not fool you. Are margins improving? Does the company make a profit, or is there a believable path to one?
Step 5: Look at the share count
If a company keeps issuing new shares, your slice of the company shrinks. Compare the number of shares now with a year or two ago. A fast rise is a warning sign, especially for small companies.
Step 6: Understand the risks
The risk section of the annual report is required reading. Companies must list what could go wrong. Also check who is promoting the stock and whether they were paid, using our red flags guide.
Step 7: Check how it trades
Look at volume and the spread. If it is hard to sell, plan for that before you buy.
Step 8: Compare with others
Look at two or three similar companies. Is this one growing faster, or carrying more debt? Comparison shows what is normal for the industry. You can browse companies by theme in StockVert.
Step 9: Decide size and exit
Set your loss limit and size the position with the calculators before you buy. Decide what would make you sell, both on the downside and if the story changes.
Step 10: Write it down
Record your reason for buying in a journal. When the price moves, you can check whether your reason still holds. Add the new facts as quarterly reports arrive.
A quick research checklist
What does it sell, and to whom? Is revenue growing? Is it profitable, or how far from profit? How much cash and debt? Has the share count risen quickly? What are the top three risks? Who owns it? What would make me wrong?
Frequently asked questions
How long should research take?
For a first look, an hour or two. For a larger position, more.
Do I need to read the whole annual report?
Not at first. Read the business description, risk factors, management discussion and the financial statements.
Should I trust analyst ratings?
They can be a useful input, but they are opinions and can be wrong. Do your own checks.
Keep learning about research stock
Reading is a start, practice makes it stick. Run the numbers in our investor tools, test yourself in Stock Jeopardy, or follow the start here guides to see what to read next after research stock.
Further reading: Investor.gov from the U.S. SEC and the Canadian Securities Administrators investor education site offer free, independent guides for new investors.
A research example with made-up numbers
Let’s practice on a fictional company called Harbor Tools. Suppose its latest report shows cash of $12 million, and the company used $3 million of cash in operations last quarter. Divide $12 million by $3 million and you get four quarters. That is the cash runway if nothing changes. A company with four quarters of cash may need to raise money soon, and that could mean selling new shares. Now suppose Harbor Tools had 40 million shares last year and has 55 million now. That is an increase of 37.5%. Your slice of the company has shrunk by about a quarter unless the new money creates real growth.
None of this means the stock is good or bad. It tells you what questions to ask next.
Know the size of the company
Share price alone says little. A $5 stock with 40 million shares has a market value of $200 million. A $5 stock with 4 billion shares is worth $20 billion. Use the market cap calculator to see the real size, and use the free cash flow calculator to check how much cash the business makes after its spending.
Read the notes, not just the numbers
The notes to the financial statements explain things like debt due dates, lawsuits and how revenue is counted. Two items worth looking for are a going concern warning, which means the auditor has doubts the company can keep operating, and related party deals. You do not need to understand every line. Learn to spot the words that signal trouble, then ask questions.
Mistakes new researchers make
- Reading only the good news in press releases.
- Spending hours on charts and minutes on filings.
- Falling in love with a story and ignoring the numbers.
- Skipping the step of writing down what would prove them wrong.
Time box your work
Research can go on forever, so set a limit. Give yourself 90 minutes for a first pass. Use the first 30 to understand the business, the next 30 for the reports, and the last 30 to compare with two peers. If you still have big unanswered questions after that, you can decide to dig further or walk away. Walking away is a fine result.
What to do next
Choose one company you use or know well. Run it through the steps above and write a one page note with your answers. Then compare what you found with what the headlines say. If you want help turning the numbers into a view on price, how to value a stock is a good next read. For official guidance on reading company reports, visit Investor.gov.
Education only, not investment advice.
