How to Analyze a Stock: A 12-Point Checklist for Beginners
Before you buy any stock, run it through this 12-point checklist covering the business, financials, valuation and risks.
Buying a stock means becoming a part-owner of a business. Before you invest, work through this checklist. It won't guarantee success, but it will help you avoid the most common mistakes.
The Business
- Do I understand how the company makes money? Read the Business section of the 10-K.
- Does it have a durable competitive advantage? Look for brands, patents, network effects or switching costs — see our guide to economic moats.
- Is the industry growing or shrinking?
- Is management trustworthy and shareholder-friendly? Check compensation, insider ownership and capital allocation.
The Financials
- Is revenue growing consistently? Review at least five years on the income statement.
- Are margins stable or expanding?
- Does the company generate free cash flow? See our free cash flow guide.
- Is the balance sheet strong? Check debt levels using the debt-to-equity ratio and our balance sheet basics.
- Does it earn high returns on capital? See return on equity.
Valuation
- Is the price reasonable? Compare the P/E ratio, FCF yield and other metrics with peers and history.
Risks and Fit
- What could go wrong? Read the risk factors and think about competition, regulation and debt.
- Does it fit my portfolio? Consider position size and diversification.
Write Down Your Thesis
Summarize in a few sentences why you're buying and what would make you sell. Revisit it each earnings season.
Frequently Asked Questions
How long should stock research take?
Do I need to analyze stocks if I buy index funds?
What's the most important item on the checklist?
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