What is a Stock Idea
A stock idea is the initial impetus to analyze a potential equity investment.
BREAKING DOWN Stock Idea
Stock ideas can arise from any vector, including news, tips delivered by analysts, rumors and suggestions through networks of friends or workers. The distance between a stock idea and a decision on its purchase depends upon an investor’s capacity for risk, the amount of information readily available on the stock, the quality of the information, and a host of other issues. In other words, a prospective investor will likely have a lot more stock ideas than actual stock purchases, and in most cases the idea will only represent the first step in a long chain of analysis leading to a purchase decision.
For example, a financial news segment might mention a list of stocks to watch in a specific industry segment. An analyst might even run down some rationales behind why those stocks might be undervalued or likely to perform in certain ways over a given period of time. A prospective investor might find that persuasive, but a wise investor would do significantly more research before actually pulling the trigger on a trade.
Screening Potential Stocks
The sheer amount of information available on any given stock can make the journey from idea to purchase time consuming and difficult to navigate. Smart investors must be able to weed through the information available to locate the right fit for their investment and risk profile, as well as their preferred investing style. Objective statistical data form the backbone of any rigorous screening procedure. Investors can narrow the universe of stocks they need to analyze by choosing specific market segments that they can learn about and understand deeply, and then deciding upon the qualities that matter most to them when deciding on an investment. Criteria might include a stock’s market capitalization size and growth trends, whether companies tend to reinvest profits, issue dividends or undertake stock buyback programs, and so on. Financial ratios that provide apples-to-apples comparisons between companies with regard to their liquidity, profitability and debt levels can also be extremely useful when narrowing down choices.
After screening for a handful of solid possibilities, investors should find as much information as possible before pulling the trigger. Investors in this stage likely will find publicly available filings with the Securities and Exchange Commission and transcripts or recordings of any public earnings calls useful.
Alternatives to Stocks
Those unwilling to do the legwork required for a thorough analysis of potential stocks for a portfolio might find it easier to invest through mutual funds or exchange-traded funds, for which professional fund managers do the heavy lifting to locate stocks appropriate to their stated investment strategy. Other investors avoid even this degree of risk by investing in funds tied to passive investment strategies, such as index funds, which generally carry lower expenses because they do not require active management.