How to Research Stocks: A Step-by-Step Guide for New Investors

Analysis, Halal Investment, Investment Strategy, Personal Finance, Tutorials |

Written by Haider Saleem
Journalist and Political Analyst | LinkedIn / X

This article breaks the process of researching stocks six beginner-friendly steps (and an extra for sharia compliance):

1.     Step 1: Know Your Goals and Risk Comfort
2.     Step 2: Understand the Business
3.     Step 3: Fundamental Analysis
4.     Step 4: Qualitative research
5.     Step 5: Compare and Contextualize
6.     Step 6: Estimate Valuation and Set Expectations
7.     A Note on Halal Stock Screening

Step 1: Know Your Goals and Risk Comfort

Before diving into numbers or charts, ask: Why am I investing?

Are you looking to grow your wealth over decades, earn dividend income, or simply preserve value in uncertain times?

Your personal financial goals will shape the kind of stocks you research:

·         Growth investors might focus on newer, fast-expanding companies.
·         Income investors may prefer established firms with regular dividends.
·         Halal-conscious investors screen out companies under Shariah-based financial guidelines.Also important is understanding your risk tolerance. If short-term price swings make you uncomfortable, you might look for lower-volatility companies in sectors e.g. consumer goods or utilities.

Step 2: Understand the Business

Sounds obvious – but the starting point could be: What does the company actually do?

Legendary investor Peter Lynch famously said, “Buy what you know.” Find out how the business earns money, and whether it has a strong future.

Start with:

·         The company’s website, especially the ‘Investor Relations’ section
·         Its annual report, which usually includes a letter from the CEO and an overview of operations
·         News coverage or interviews with leadership

Look for clear answers to questions like:
·         What product or service does the company provide?
·         Who are its customers and competitors?
·         Is it dependent on a single revenue stream?

Step 3: Fundamental Analysis (digging into the financials)

Once you understand the business model, it’s time to explore the numbers.

This is known as fundamental analysis – evaluating a company’s financial health to understand it’s long-term value.

You can use key documents like:

·         Income statement (profit and loss)
·         Balance sheet (assets vs. liabilities)
·         Cash flow statement (how money moves in and out)

I’ve written about these documents here.

Here are a few beginner-friendly metrics to focus on:

MetricWhat It Tells You
P/E RatioHow much investors are willing to pay for $1 of earnings. Lower can mean better value.
PEG RatioP/E ratio adjusted for expected earnings growth. Useful for spotting growth at a reasonable price.
Debt-to-Equity RatioA measure of financial risk. Lower is generally better. For halal investors, debt should stay below 30% of market cap.
Free Cash FlowThe cash left after expenses – used for dividends, debt, or reinvestment.
Dividend Yield & CoverYield shows income potential; cover tells you if dividends are sustainable.

Start Your Halal Stock Screening Journey

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Helpful tools to Research Stocks

SourceUse
MusaffaHalal screening, sector and financial filters
Yahoo/Google FinanceNews, basic metrics, charts
EDGAR (US SEC)Official filings like 10-K, 10-Q
London Stock ExchangeCompany announcements
MorningstarAnalyst reports, fund breakdowns
Interactive InvestorNews and performance history

Step 4: Qualitative research (thinking beyond the numbers)

Financial metrics don’t tell the whole story.

Qualitative research – the “feel” of the company – helps complete the picture.

Ask:

  • Is the company well-run? See leadership bios, CEO experience, and recent management changes.
  • Does it have a competitive advantage (a “moat”)? E.g. include strong brand recognition, unique technology, or patents.
  • Is it innovating or stagnating?
  • What could go wrong long-term? Is there industry disruption, regulatory risks, or overreliance on a single market.

One red flag to watch: companies with frequent executive turnover or unclear future plans.

Step 5: Compare and Contextualize

A company’s performance is most meaningful when compared to its peers and industry benchmarks.

For example:

  • Is its P/E ratio lower than others in the same sector?
  • Is its revenue growth outpacing competitors?
  • How did it handle past recessions or market dips?

Also consider macroeconomic factors:

  • Is the sector in decline or growing (e.g., AI vs. oil)?
  • What’s happening with interest rates or trade policy?

Analyst reports (from Morningstar or your broker) can be helpful. They also help highlight what the broader market is expecting from the company – useful context when building your own view.

You don’t treat their recommendations as gospel – it’s additional help, and they could spotlight risks or trends you may have missed.

Step 6: Estimate Valuation and Set Expectations

Even if you love the company, is it worth the price?

That’s where valuation comes in. Some investors try to estimate the company’s intrinsic value – its true worth based on future earnings – and compare it to the current market price.

One basic method:

  1. Estimate future earnings per share (EPS).
  2. Multiply by a realistic P/E ratio.
  3. That gives you a target/reasonable price range – not a precise prediction – for where the stock might trade.

Note: Stock prices are rarely exact. Think in ranges, not certainties – and consider setting a personal buy/sell threshold.

A Note on Halal Stock Screening

Muslim investors often add one more layer to their research: Shariah compliance. Tools like Musaffa help investors assess stocks against commonly used Islamic criteria, such as:

  • Revenue filter: Less than 5% of income from non-compliant activities (e.g., alcohol, gambling).
  • Debt ratio: Interest-bearing debt under 30% of market cap.
  • Asset filter: Interest-based assets under 30%

Disclaimer: The content is for informational purposes only and does not constitute legal, investment or financial advice.
It is important to conduct your own research or consult with a financial or investment advisor. Past performance is not indicative of future results. All logos or brands are referenced for identification purposes only and do not constitute an endorsement of any kind. This information is accurate as of the date of publication and may not reflect recent changes. Access our comprehensive legal disclaimers at https://musaffa.com/disclaimer.