How to Evaluate Individual Stocks


A stock is a unit of ownership in a company that is traded on the public markets. Investors purchase shares of companies in the hopes that their value will increase and they can sell them at a profit. Stocks are different from other investments, such as bonds and mutual funds. Investors typically use multiple methods to evaluate stocks and determine whether they are overvalued, undervalued or at fair value. These methods can include calculating financial ratios, reviewing financial statements and using technical analysis.

Many investors use individual stocks as a way to diversify their investment portfolios beyond the offerings of diversified mutual funds and exchange-traded funds (ETFs). Individual stock trading is conducted through broker-dealers and is monitored by governments and securities regulators to prevent fraud and ensure that shareholders’ interests are protected. When choosing individual stocks, investors should consider the potential to grow their investments over time, the ability to earn income through dividends and how they will fit into a long-term investment strategy.

When a company issues stock, it allows shareholders to buy fractional ownership in the corporation in proportion to the total number of shares. Shares can be issued by a company to raise capital for growth or other projects and can also be bought and sold on the public markets, which are overseen by government and regulatory bodies. The price of a stock can rise and fall on the market, but overall large companies as a group have lost money on average about one out of three years.

A stock’s value can be determined by a number of factors. A common approach is to calculate the intrinsic value of a company, which can be done by looking at the assets that are owned and the projected future earnings. Then, subtracting the company’s liabilities from that figure will yield the stock’s value.

Other approaches to stock evaluation include evaluating the quality of management and examining the company’s competitive strengths and weaknesses. These qualitative assessments can help investors understand how the company will create and maintain value, which may drive stock prices over the long term. For example, a company with a defensible economic moat is more likely to compete against new competitors, while a company that has a broad user base may benefit from network effects and enjoy higher profitability.

A stock’s value can be driven by a variety of short-term market factors, such as supply and demand, which are often the result of speculation. Investors who wish to make short-term profits from changes in stock price may engage in short selling, where they borrow shares and then quickly sell them before their price decreases (while paying interest on the borrowed amount). Regardless of how a stock is valued, it is important for investors to evaluate each stock within the context of a comprehensive portfolio strategy.