- 1). Read corporate income statements. These documents specify revenue and profit (money retained after expenses). This is an important distinction. Investments, royalties, tax treatment and other factors affect what portion of revenue remains as profit. A company may have negative profits if financial obligations exceed revenue.
- 2). Look over stock ratios. Stock often (but not always) has financial ratios, such as debt/equity or price/earnings associated with it. Such ratios provide insight into past and likely future company performance. Which ratios are "the best," or even the extent of their relevance, is disputed between various traders and investors. It is important to remember that none give flawless insight into future stock performance.
- 3). Consider if cash flow is positive or negative. Cash flow is the increase (or decrease) in value as money "flows through" a company's operations. If cash flow is positive, the company is, for the time being, on solid financial ground. A company can make profits with negative cash flow, though it would typically have to issue debt (or some other way of financing operations) to do so.
- 4). Incorporate sector and competing companies into your analysis. Companies in different economic sectors (healthcare, technology, financials, etc...) behave differently. Two companies with similar profits, ratios and cash flows may not be equally attractive to potential investors since each company focuses on a different service (bank vs. an architectural firm for example).
- 5). Keep in mind that company stock does not exist in isolation. Market trends and unexpected external events (conflicts, natural disasters) can influence stock price and trade decisions. Frequent trading is costly since every buy/sell action requires a broker commission; therefore, every transaction works against the trader, increasing losses and lessening gains.
- 6). Decide if you would like the services of a full broker or a discount broker. A full broker can offer insight and advice on stock behavior, but at a higher cost. Discount brokers only carry out buy/sell requests at a lower cost. Remember, a broker makes money if you trade, not necessarily if that trade is to your benefit. Chances are, a broker will be "pushy" and encourage you to buy or sell--they get paid regardless of your profits or losses.
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