Stock evaluation refers to a reasoned and objective analysis of a company’s finances. This includes looking at current and past earnings reports, understanding the basics of a company's balance sheet as well as relevant financial ratios. Evaluating stocks also means understanding a company’s position within its sector. This can include knowing who the company competes with and how much market share it has.
Stock evaluation also requires you to consider your own investment objectives and risk tolerance. For example, if your portfolio consists of high-quality dividend-paying stocks, you shouldn’t waste time learning how to evaluate a stock of an unprofitable company with little-to-no revenue. Riskier stocks, on the other hand, might be right for growth-oriented investors willing to take on additional risk.
Stock evaluation is also different for traders and investors. Traders are more concerned about short-term price movement in a stock (measured in days or weeks and sometimes just hours) and can include concepts such as uptrend gaining momentum. Therefore, a trader’s research falls into the area of technical analysis and involves looking at buying and selling signals.