Stock Analysis Process for Beginners: A Step-by-Step Guide
•By Neo Capitalist
Artikel ini juga tersedia dalam Bahasa Melayu
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Success in stock investing requires discipline to search, research, and analyse counters with potential. You cannot simply follow the crowd or buy stocks blindly. When losses occur, many start pointing fingers at others. This guide is based on the discipline practised by successful fund managers.
These are the fundamentals they apply before making any decision to purchase a stock. You can follow, learn, and customise them according to your own preferences and trading style.
The search process begins with identifying potential counters (using a screener), filtering out those that do not meet the criteria, conducting in-depth research on the remaining ones, selecting the best counters, and finally setting the discipline for when to sell.
Use a stock screener to find the best candidates based on preset fundamental and technical criteria. Any candidates that are listed but do not fully meet the criteria should be eliminated. This strategy starts with a selection of 10 to 20 counters. Researching a stock requires diligence and time, so once weak candidates that do not meet the criteria are eliminated, conducting in-depth analysis on the remaining ones becomes much easier.
The quick pre-screening is to eliminate any counters that do not fit your criteria or suit your trading style. For example, counters whose businesses are not particularly profitable but receive a lot of market hype. Or counters that are unsuitable for growth investors due to excessive speculation and attention.
Here are the criteria you should include in your quick pre-screening:
Study the company''s business and industry. The company may be in an industry you are targeting or one you wish to avoid. For example, economists predict that global crude oil demand will exceed supply in the future, causing world oil prices to surge. Conversely, some disagree. This debate will influence your thinking towards oil & gas companies and their stock price performance.
(Shares Outstanding x Market Price) represents the current total market value of the company — the amount you would need to pay to buy all its shares. Blue chip companies such as Tenaga, Maybank, and IOI Plantation fall under the large cap category, while smaller companies are categorised as mid caps, small caps, and micro caps. There is no inherent advantage or disadvantage to market capitalisation; each size has its own return potential and risk. Typically, large cap companies represent safer investments with stable dividend returns, while small cap companies tend to have greater growth potential.
Ratios such as P/E and Price-to-Sales (P/S) reflect market participants'' valuation of a particular counter. High market valuations indicate stocks with potential for rapid future growth — these are favourites among growth investors. Meanwhile, value investors prefer stocks with low ratios, as they believe growth investors overlook these stocks'' potential. You will use valuation ratios to identify whether you are a value or growth investor.
The average number of shares traded per day. Avoid low-volume stocks as they are easily manipulated. Additionally, mutual funds and major market players are not permitted to buy such stocks. Therefore, any stocks falling under your low-volume criteria can be eliminated early on.
Large blue chip companies have relatively large floats, typically in the billions of units. Investors seeking stocks with maximum rapid growth potential should look for floats below 25 million units. These stocks can rise quickly when there is positive news about the company''s current earnings performance. Low supply combined with high demand will cause the stock to surge within a short period.
Cash flow is the money flowing in and out of the company''s accounts. This is real money, unlike net income and revenue which follow accounting standards. Cash flow is the true measure of whether a company is genuinely profitable or otherwise. Growth counters typically have positive cash flow, with cash consistently coming in, making them suitable candidates for your shortlist of potential stocks. Avoid companies with negative cash flow.
Choose companies with an excellent track record of year-on-year sales and earnings growth. If your screener results still include companies that do not meet this criterion, quickly remove them and do not waste time analysing them. Focus on the best companies. Examine the products, sales, and services of the company you are studying. It is a waste of time to focus on a company whose products and services are experiencing declining sales.
Typically, companies in this category are facing intense industry competition that is eating into their profit margins. If you are looking for growth stock candidates, news of a company''s business decline is important as you can eliminate their stocks early on. Based on the quick pre-screening technique, you can now remove the list of stocks that did not pass the screening tests above. Stocks that pass are worth further research as it will save you time.
The stock analysis process requires discipline and a systematic approach. As a new investor, you need to learn how to screen counters, read financial reports, and understand technical charts before making investment decisions.
The first step is to screen counters using a screener on platforms such as Bursa Malaysia or TradingView. Filter based on basic criteria like trading volume, market capitalisation, and your preferred sector.
Yes, both are important. Fundamental analysis helps evaluate a company''s financial health, while technical analysis helps determine the right time to enter and exit the market.
For beginner investors, focus on only 3 to 5 counters at a time so that your research is more in-depth and less confusing.
Common mistakes include only looking at prices without checking fundamentals, ignoring trading volume, not setting a stop loss, and buying stocks based on tips without conducting your own analysis.
Mastering the stock analysis process is a fundamental skill every investor needs. Begin your investment journey with the right steps.
Open your CDS account today through our step-by-step guide here to start investing in the stock market.
Download the free stock basics ebook to learn the fundamentals of stock investing from scratch.