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We all dream about the day when a stock we just bought starts running the very next day – reaching new highs and tripling in a few weeks. We hear about it happening everyday. Just check out the investment chat boards. People bragging about buying Yahoo or Amazon right before a major announcement and enjoying a phenomenal momentum run. Is it magic or just plain luck? It's certainly not magic, it may be a little luck, but it's definitely good, solid research. As a woman, we need to "check it out" before we buy – like when we go shopping; we look at different stores; we try things on, we compare prices; we need to know we are getting the best deal. Investing in the stock market is the same. Even if you know what you want to buy (like getting a dress for a party), you must evaluate the item – is it a fair price?; will it go up in value? (will the dress still look good next year?); does it meet my current investment objectives? (does the dress match the theme of the party?). Like finding the perfect dress for a party, researching a stock takes more time, but if you do, you'll be the hit of the party.
As always, we assume you are investing for the long term. Researching winning stocks takes a blend of technical and fundamental analysis. Here are a few very important research steps to take when analyzing an investment.
Chart Analysis (Price/Volume Chart) – Evaluate the 3-month, 1-month and 5-day charts. Use the 3-month chart to determine a stock's overall trend – either up or down. Make sure it has not violated its 50-day moving average or if it does, can it bounce back up above the moving average to show support. Check the 10-day moving average using the 1-month chart to look for present day direction of the stock. Upward movement above the 10-day moving average is a bullish sign. The 5-day chart can help you determine whether you should buy the stock today or next week. Volume is very important when evaluating charts. You need strong volume to confirm a stock's up or down direction. An increase in volume when the price trend is upward is a bullish indicator. A stock making a new "52-week high" on strong volume is a very positive sign. When the volume is high and the price trend is downward, watch out, this is a very bad sign for a stock.
Financials – Research company financial statements (click here for Edgar online) and look for healthy annual and quarter revenue and earnings growth. High growth stocks typically exhibit substantial quarter over quarter increase in revenues. Also read the auditor's opinion for any potential problems. Review legal/litigation footnotes for significant lawsuits that may affect future earnings.
Company News -- Review the news on the stock. Look for positive analyst coverage, press releases about new products, new strategic alliances or joint ventures and additional infusions of capital by investors. For new, up and coming small companies, specifically look for significant investments in the company by other large, established companies such as Microsoft, Intel or Disney. Get the "the Good, Bad, and the Ugly" about the stock/company.
Overall Market Trend – Is the market going up or down? Is the Nasdaq exhibiting strength on strong volume? Does the Dow look overextended? Did the S & P 500 Index violate its 200-day moving average? You need to ask yourself these questions, because typically three out of four stocks move with the overall market trend. Remember the trend is your friend. Don't try to outsmart the market. Stick with the trend to increase your odds of success. I always say, "You can buy a good stock at a bad time and lose money and you can buy a bad stock at a good time and make money". Don't fight the trend!
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