A stock idea is a projection that a particular stock price will rise in the future. It is based on some type of analysis of the company involved. One strategy for evaluating a stock idea is to analyze a company’s future growth potential. This can be achieved by looking at either quantitative or qualitative factors of the company. A stock idea can also be centered on finding a stock whose value the market has underestimated. Stock ideas are discussed among investors to help them pick the most promising stocks.
Stock is a form of ownership in a company; investors who possess the stock of a successful company will see the value of their stock rise. Therefore, if investors knew which companies would attain the most success, they could profit along with them. No one theory can explain exactly why some businesses outperform their competitors. Rather, a collection of theories attempt to establish the growth potential of a company. This process of analyzing a company is known as fundamental analysis.
One part of fundamental analysis—and, therefore, of generating a stock idea—is looking at a company’s quantitative characteristics. An important characteristic is the company’s revenue, a vital measure of the value of a company. More important for a stock idea, however, is a company’s future cash flows. After all, investors will only profit if they see their stock rise in value, regardless of starting price. Investors seek to predict a company’s future cash flows by analyzing quantitative credentials, including number of new hires, number of new branches opened and recent increases in sales.
Another part of generating a stock idea based on fundamental analysis is to look at qualitative aspects of a company. Future cash flows will also be affected qualitative factors of a company that cannot be easily quantified. These include caliber of employees, management strategies and customer tastes. For example, an automaker may suffer low car sales if it develops a car that is not considered stylish by consumers. While this factor is difficult to quantify beforehand, a keen investor may accurately predict the result qualitatively.
A stock idea can also be based on value investing. Value investing seeks to locate stocks whose price is below its company’s inherent worth. Like all methods of stock analysis, this is a difficult objective to achieve. Nonetheless, many investors claim to have identified undervalued stocks by looking for companies with strong fundamentals that go unrecognized. The value investor relies upon the market, eventually correcting its error and buying the stock, which will raise its value.
