For individual investors, picking the right stocks can be a daunting task. But if you want to manage your own portfolio, you can use the same methods used in Wall Street research and analysis.

Not sure how to get started? Use these 5 steps to guide your community.

Step 1: Understand the types of stock analysis
The first step to researching stocks is to understand the different types of stock analysis. There are three main types of analysis when looking for stocks:

Fundamental analysis: examines fundamentals such as earnings, cash flow and financial position to predict performance.
Technical Analysis: Uses past prices and trading patterns to predict future price movements.
Quantitative Analysis: Using mathematical and statistical models to estimate stock prices.
Each approach has advantages. However, in many cases, the fundamental analysis should be the primary tool for evaluating the value of a given stock, according to Robert Johnson, chairman and CEO of index provider Economic Index Associates.

“Investors should be primarily interested in the company or its asset fundamentals (earnings, cash flow, financial position, products, etc.).”

This is because due diligence can interfere with a company’s real-world operations. Technical analysis, on the other hand, can reveal anomalies in asset prices. But it can be for many reasons, such as negative news.

“Technical analysis is a statistical evaluation produced by market activity, such as past prices and volume,” says Melanie Mortimer, president of the SIFMA Foundation, which offers financial literacy programs. “Technical analysts use charts and other tools to predict future security performance based on data patterns.”

Quantitative analysis may use some of the same criteria as technical analysis but may involve statistical modelling to determine whether a stock is a good investment opportunity.

“Digital funds rely more on valuation metrics and market techniques such as price momentum,” said Carl Ludwigson, managing director of research at Bel Air Investment Advisors.

Step 2: Determine your risk tolerance and budget
Before looking for stocks, it is important to determine your risk tolerance and budget. After all, there are many types of stocks and theoretically, there is no limit to how much you can invest.

For example, blue-chip stocks, such as those included in the Dow Jones Industrial Average, can generate consistent returns, but as startup companies, they don’t have many opportunities to make a profit. However, there is a greater chance that the startup will run poorly or quit. So you have to determine the balance between how much risk you are willing to take and what return you expect.

“With more time to retire and more financial obligations, a person can absorb some volatility in their investment portfolio, knowing that it can offset short-term losses over time with long-term returns or economic downturns,” he said.

Risk appetite, on the other hand, is more subjective.

“One way to determine a person’s risk appetite is to ask just one question: If your portfolio suddenly dropped by X per cent, would you go to bed with so many regrets?” Johnson says. “If the answer changes from ‘yes’ to ‘no’ when X is 10 per cent, one has very little risk appetite and, frankly, limited investment options.”

Your budget also plays an important role. There is a big difference between a 10% return on a $1,000 investment and a 10% return on a $100,000 investment. In other words, if your budget is small, you need to take more risks to see the results you want. This is unusual because early career entrants have less investment but more time to take risks. Understanding where this spectrum lies is key to developing an investment strategy.

Step 3: Know which investment criteria to focus on
There is no shortage of investment criteria, especially for large and well-known companies. Some were more critical than others. Key criteria to consider:

Price/earnings ratio
Price/book comparison
Net income
Free cash flow
Capital turnover
Return to assets

Which metric is most important often depends on your investing style. For example, two common types of investing are value and growth investing. Value investing involves buying shares in companies that are undervalued and thus selling them at a lower price. Growth investing, on the other hand, means buying stocks of companies that are expected to grow faster than the market.

“Value-oriented managers often focus on price-to-book, price-to-cash flow, and other measures that show the declining value of the business relative to normal earnings or intrinsic value, which creates a margin of safety,” he said. Ludwigson. In other words, the key metrics for value investors are those that show price-to-earnings or book-to-book value lower than competitors’ stocks. The lower the ratio, the better.

One thing to keep in mind with value investing, Johnson says, is the mean return.

“Historically, asset prices and historical earnings tend to move past their long-term averages. Therefore, if a particular stock is trading at a P/E lower or higher than its P/E or price-to-sales ratio, it will return again. to average at some point,” he said.

Growth investors take a completely different approach, says Ludwigson.

“Growth managers pay less attention to metrics such as earnings and revenue growth than to prices because they expect their earnings to expand over time to get the right price.” Growth stocks are often immature companies, so revenue and earnings growth are more important than price.

Step 4: Find the information you need to start your search
Now that you know which company you want to research, it’s time to dig deeper. Here are some documents, reports, and tools you may want to check out:

SEC reports
Company’s revenue and profits
The online brokerage search platform
company press release
One Stock Screeners
Industry trends

When you first start your research, you can check each company on an online brokerage research platform and stock filter. This is a good way to check certain metrics like profit margin and cost recovery. Then you can dive deeper into reports on companies that look good.

There is no shortage of detailed reports on companies you are considering investing in. However, there are some areas you should focus on first, says Kevin L. Matthews II, founder of investment education firm BuildingBread. “Any company you look at usually has an investor relations section on their website. If you go there, you’ll find important press releases, financial filings and filings with the SEC, like 10-Ks and 10-Qs,” he says.

Matthews says the 10-K (annual report) is his favourite document to help research a company because it shows performance, potential risks and other strategic and financial details.

In addition to the information found on the company’s investor relations page, there are a few other facts you should know, Johnson said. “The SEC’s role in managing the EDGAR database is very important for investors. The main types of filings on EDGAR include annual reports (10-Ks), quarterly reports (10-Qs), proxy statements (DEF 14As), and prospectus (S.-1s) and interim statements of financial events (8-Ks).

Step 5: Narrow your focus and choose the right stocks for your portfolio
As you may have discovered, there is no magic bullet that will fit your portfolio. Instead, you should look for investments that match your investment goals. For example, do you like value or growth investments? What is your budget and risk tolerance?

Once you answer these questions, you can formulate your investment strategy. Certain metrics, such as return on cost, lend more value to investment, while metrics such as profit margin are more important for investment growth. You can then use online brokers and company reports to learn the fundamentals of the company to determine which stocks are right for you.

Depending on how risky a given stock is, you can assess your risk tolerance and budget to determine whether you should invest – and if so, how much. You can then continue to evaluate the company using future quarterly and annual reports to determine if it still fits your strategy.

Bottom line
Search engines can seem overwhelming, but they don’t have to be. First, determine your preferred investment style, budget, and risk tolerance. You can then use online brokers, internal and external company documents to learn more about each stock you are considering.

Once you have done this, you will be ready to start investing. Continue to evaluate each of your investments quarterly or annually. If a company no longer fits your strategy, you may want to move – be aware of capital gains tax if you decide to sell.