Step 2: Generate a list of stocks to research
Evaluating a lot of stocks provides two important benefits: you'll be able to be more selective because you'll have more to choose from, and you'll gradually get better at the evaluation process with each stock you research. This section suggests several techniques you can use to generate a list of stocks that might be worth researching.
Stocks you already know you want to research.
You may already have a list of stocks you want to research. Maybe you read about a company doing something interesting, or a friend gave you a "hot" stock tip. If not, that's fine too. This step will help you add more promising candidates to the list.
Products or services you use.
Legendary investor Peter Lynch has often said that a great way to find investment ideas is to look to the products and services you use on a daily basis. Of course, just because you love a product or service doesn't mean that the company's stock price will go up, but it can be a useful starting point to your research.
A stock screener is a tool that lets you specify some criteria about companies and shows you the companies that meet those criteria. Screens are a great way to generate a list of companies to research further. Since they're usually limited to quantitative information, you should view the screening step as a way to generate a list of stocks which you'll look more qualitatively at in subsequent steps. If you're new to screening, some of these sites also include suggested screens and screening tips. You may want to screen based on specific investment themes (e.g. large cap vs small cap) or you may want to focus on specific countries, industries, or sectors, especially if you know more than the average investor does about those areas.
Professional investors are a great source of wisdom and ideas. Pay special attention to people who put their money where their mouth is; anyone can say something positive about a stock, but if Warren Buffett invests a hundred million dollars in a company, that's a good indication that he thinks its stock price will go up, and since he's usually right he's worth paying attention to. You can also identify mutual fund managers with outstanding performance and watch the stocks they choose. In many cases these professionals only have to report holdings to the SEC every three or six months, but this is still useful information for long-term, buy-and-hold investors. We also recommend Guru Focus (which keeps track of what the very best investors in the world are doing) and Magic Formula Investing (a simplified version of the technique used by Joel Greenblatt, one of the best-performing stock pickers of the last ten years).
Top-rated stocks and companies.
Different types of investment gains (and losses) are taxed differently, and it's important to factor this in to your overall investment strategy. You may also want to consult with a tax professional. The sites linked in this section describe various stock selection strategies, and some list the highest-rated stocks based on those strategies.
Another great way to find investment ideas is by reading business news on a regular basis. If you plan to focus on a specific country, industry, or sector, you should also read news focused on that area.
In addition to watching the news, it's also a good idea to keep up with what market pundits and commentators are saying about various companies.
Many investors watch today's top gainers and losers and most actively traded stocks to see if the market is overreacting or underreacting to the latest news. Some also check lists of stocks hitting 52-week highs (if they're momentum investors and expect the stocks to keep moving up) or 52-week lows (if they're value investors and are looking for out-of-favor bargains).