Do you know why most investors fail in the stock market? The answer is a lack of proper research and analysis. It means they make investment decisions without studying the market and investigating the stock as well as the company!
There is absolutely no doubt that stock marketing is the best way to earn profits and maximize your financial gains. However, stock marketing isn’t everyone’s cup of tea. The lack of research and analysis can do more harm than good. In this article, we will discuss why the stock analysis is important and why it is important for each and every investor. Let’s begin!
What is stock analysis?
Investors and day traders perform stock analysis as it helps them to find the best and most profitable stocks. In simple language, stock market analysis helps you to determine whether or not the worth of security holds some value in the market. It involves the assessment and evaluation of individual stocks, companies or even the complete stock market, sometimes. When done thoroughly, stock market analysis helps investors to make profitable buying and selling decisions.
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Why Should Every Investor Learn Stock Market Analysis?
Companies mainly use the stock market as a key source for raising funds for their expansion. Not just that, the stock market also helps companies pay off their debts and launch new services or products.
Know that even the slightest change in the stock market has an effect on the finances of a company as well as the global economy. When investors notice that the listed company is performing well financially, they become more confident and invest their money freely in stocks, mutual funds and other options.
The common mistake most beginners make while investing is, they rush into making decisions merely on the basis of random investment tips and articles on the internet, which later expose them to market risks and they end up losing their hard-earned money. This is where performing stock market analysis becomes crucial before making an investment.
Before putting your money in, you should research the company and stocks you’re planning to invest in. You need to check how they are performing financially, if they’re under debts, what their growth and profit rate is and so on. It is like buying a new car, where you can’t simply purchase it after watching an advertisement on the television. Instead, you research it, its price, performance, features, etc. The same degree of research and analysis needs to be done for the companies you’re looking to invest in.
Different types of stock analysis
Basically, there are three types of stock analysis most investors perform today. These are: fundamental analysis, technical analysis and quantitative analysis. Let’s discuss each of them in detail.
The fundamental analysis is a process of examining the financial factors in order to predict or forecast the future price of the asset and evaluating the factors that have the potential to impact the intrinsic value of the security. Below are some common steps for performing fundamental analysis :
Learn and understand the company
You can’t simply give a huge chunk of your hard-earned money to someone you’re not familiar with, and then expect them to offer your good returns, right? The same thing applies to stocks.
The good thing is, you’ve got the power of the internet. Using it, you can learn and understand the selected company or companies. All you need to do is, visit their official site, check out their products, services, mission & vision, founders, reviews and ratings, etc. Further, you can easily find tons of information about the given company, in the form of blogs, articles and news.
After doing all of this, if you find that the company is performing financially well and is reliable, then you can carry on your research. However, if you’re not satisfied with the given company and you are doubtful about their financial position, then you can simply ignore it.
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Analyse the financial statements of the company
You’re on this step because you found the company suitable to invest in. The next step is to analyse their financial statement. It acts as a report card of the company, which shows its financial performance over a period.
Learn about the company’s debts
Businesses don’t operate on their own, so debts are pretty much common. But what matters is the fact that whether or not a company is in the position to pay off its debt.
Understand that, you can’t really expect a company with a massive debt to reward you with high returns. Here, you need to learn their debt to asset ratio as it provides you with clear insights into the financial position of the company.
Learn about competitors of the company
The last step is to study the company’s competitors. For this, make a list of companies you’re planning to invest in and research its competitive landscape. This step helps you understand the strengths and weaknesses of the company.
Technical analysis involves using traditional price charts of the past market performance, Influencing price volume and movement, in order to forecast the future price movement.
The fundamental analysis determines the security of the actual value, technical analysis, on the other hand, uses technical indicators, price charts, trading signals and other tools to examine the strengths and weaknesses of the security.
Quantitative analysis is a process of evaluating a business by taking into account the numerical value by referring to the statistical measurement. In simple words, it is used to identify the patterns to minimize the risks.
However, quantitative analysis isn’t a standalone method. Instead, it should always be used in conjunction with the technical and fundamental analysis to figure out the potential risks or rewards of your investment decision.
To become a responsible investor and to invest safely without exposing yourself to risks, it is extremely important to perform proper stock analysis before making your final decision. Although it can be a time-consuming process, it is totally worth giving time to.