How to choose a stock
If you’re wanting to take charge of your investments, you may be looking to add stocks to your portfolio. But with thousands of companies listing their shares on North American stock exchanges, how can you narrow the playing field to identify the ones best suited to your objectives?
In this article, we'll review a few places where you can start hunting for broad investment themes and take a look at a few of the key tools and resources to help you identify, monitor and evaluate specific stocks.
Where to look for broad investment themes
Economics and politics: Economic and political trends can have a powerful influence on a company's performance. Every country's economy moves through different cycles, from expansion and growth to contraction and recession. Some companies do better at different stages of that cycle. At the same time, major opportunities or challenges for companies can result from government decisions around taxation, interest rates, privatization, minimum wage laws, and so on.
Demographics, social themes and trends: From aging populations to the rise of Millennials, large demographic shifts can create new markets or new demand for certain goods and services. Big-picture themes, such as the environment, social justice and gender equality, can also present opportunities for investment. Witness the rise of environmental, social and governance (ESG) investment, which measures more than a company’s profits. And in various sectors, such as energy, health care, technology, and other areas, major shifts could drive growth for companies that provide solutions.
Company announcement and industry trends: Financial results, mergers and product launches — these kinds of company announcements can drive share prices in the short term and sometimes over the longer term as well. Bad news can push prices down as investors shed their shares, but good news can boost a company's stock price. As a stock investor, you'll want to keep tabs on the financial media and watch for developments in the industries and sectors that interest you. You may even want to directly monitor specific companies in order to get news as soon as it's released. Find this information when you log in to your Qtrade account, and go to Quotes & Market Info.
Analyst picks: Financial analysts continuously update their lists of “stars” and “dogs” — stocks they think are a good buy and others they recommend selling. Their reports provide specific insights and opinions into what companies are doing right, what they're doing wrong, and how that may or may not translate into gains and losses. Analysts aren't always right, but over time you may find some to trust more than others. Just log in to your Qtrade account, and go to Research > Analyst recommendations to learn more.
There are two main approaches for analyzing stocks:
Fundamental analysis focuses on concrete information about a company’s financial health and productivity. Investors study fundamental data to determine a company’s intrinsic value. If you decide that a company’s stock is priced below its intrinsic value, you have an attractive investment. See this information by logging in to your Qtrade account, and going to Quotes & Market Info > Quotes & Charts (type in company name or symbol) > click Fundamentals tab.
Technical analysis attempts to identify trends in the direction of a stock price by focusing on pure market forces, such as price and volume. Investors who study technical data look for buy and sell signals in the data patterns. See this information by logging in to your Qtrade account, and going to Research > Technical Research.
Which approach is better is often under debate. Many investors start with fundamental analysis before exploring technical analysis.
Do your due diligence
Once you’ve identified some themes and trends you want to explore, you need to look at the individual companies to find the ones that are best suited to your goals and objectives. You’ll need to do some research into the companies you might want to invest in, read their press releases and review their financials. Most publicly traded companies devote specific “Investor” sections of their websites to provide information for shareholders.
Qtrade provides extensive fundamental research data to help in your due diligence. For any company, you can delve into key performance metrics from its most recent financial statements, along with data on its performance history, ratings, and more — everything you need to evaluate the company and compare it to its peer group.
|What it indicates
|1. Earnings Per Share (EPS)
|Yearly profit / number of shares on the market
|2. Price to earnings ratio (P/E)
|Price per share / Earnings per share
|Amount investors are willing to pay per $1 of earnings. The higher the ratio the greater investors' expectations for earnings and profit growth
|3. Debt to equity ratio
|Total liabilities / Shareholders' equity
|How leveraged the company is; how much debt it has relative to equity.
|4. Free cash flow (FCF)
|Operating cash flow - Capital expenditures
|How much cash the company generates after putting money into capital expenditures such as buildings or equipment. Improving cashflows are a good sign.
|5. Profit margin
|Net profit / sales
|How much a company earns from every dollar of revenue. Higher is better. Higher earnings with the same or lower profit margin indicates challenges controlling costs.
Tools and resources to identify specific companies
Qtrade Direct Investing also provides many useful tools and resources to help you find and evaluate stocks:
- Screeners allow you to filter stocks using prebuilt screens, such as undervalued stocks or high dividend yield stocks, or screen them using customized criteria such as sector or market capitalization.
- Analysts' recommendations provide well-researched, expert reviews of Canadian and U.S. investments, including top picks for growth, value and income stocks.
- Analyst Ratings shows you consensus ratings from a strong buy to a strong sell, as well as price targets for the past 12 months and summaries of individual analysts.
- The News Analysis tool provides easy visuals on media buzz, news sentiment and scores. Find out whether the news on a company is bullish or bearish, and how it compares to the industry.
- The Morning Briefing gives you the day's top headlines and insights, so you can scan the latest company, market, business and economic news.
- The New Issues centre give you access to initial public offerings (IPO), so you can be one of the first to invest in new securities when they start trading.
Tools that allow you to monitor companies you're considering include:
- Real time quotes that allow you to follow companies and market indices.
- Watchlists that allow you to create a portfolio of stocks you would like to monitor.
- You can also set alerts to be notified when market events or stock price changes occur.
Researching, choosing and monitoring stocks takes time. The more stocks you own, the more homework you’ll have to do to monitor the companies’ performance and to remain aware of developments that can impact the companies and their sectors. However, it you prefer to leave the stock picking to others, there are other ways to get exposure to stocks, such as through exchange-traded funds (ETF) or mutual funds. Or consider investing in an automated investing service, such as Qtrade Guided Portfolios*, which designs a portfolio matched to your financial goals.
*Qtrade Guided Portfolios is a trade name of Credential Qtrade Securities Inc.