Getting started with stock marketing? If so, then stock analysis is the most important process you should know about. It is the key to get high returns on your investments. With that in mind, we have compiled this stock analysis guide to help you learn what it is, how it works, how to get started and more. At the end of this article, you’ll be able to analyse stocks in a better way and increase your chances of getting valuable returns. So, keep reading!
What is Stock Analysis?
Stock analysis is a method used by traders and investors in order to evaluate and learn about stocks, a particular trading instrument, sector, or a complete stock market. Stock analysis is also known by other names such as market analysis or equity analysis because it provides you with a complete overview of the investment options you’re planning to put your money into. A proper stock analysis allows investors to make profitable and safe buying and selling decisions.
The method of analysing stocks or equity allows you to gain in-depth insights into the stock market, economy, and/or securities. The process generally involves studying the present and past marketing data, creating well-researched and optimized strategies to pick stocks for trading, and identifying ways to enter or exit from the stock market.
Why is stock market analysis important?
If you don’t already know, the stock market is the main source of the companies wishing to raise funds for their growth and expansion. Also, the stock market offers a way for companies to launch new products and services and clear off their debt.
Know that any changes in the stock market have a great impact on a company’s finances and in fact our country’s economy. This is the main reason why performing stock analysis is important before investing your valuable earnings. Also, relying on stock investment guides and tips isn’t enough to provide you with an assurance that you’ll make fruitful investments.
If you’re going to invest your hard-earned money in trading, then you must research about the company to determine whether or not it is performing well. You need to go through their financial history to make sure that they are not under any kind of debt, and has a positive growth rate and satisfied customer base.
Different Types of Stock Analysis
There are basically three types of stock analysis :
1. Fundamental Analysis
Fundamental analysis involves evaluating the basic financial level of a business or company. Investors mainly perform fundamental analysis to learn whether or not the current price of a stock signals the future value of that company.
The process of fundamental analysis includes several factors like the current finances and economic environment of the company for estimating its stock value. Moreover, multiple key ratios are also used to estimate the financial health and well-being and true value of a company.
Below are the key factors and rations analysed during the fundamental analysis:
Earnings per share (EPS)
Earnings per Share or the EPS is helpful when the companies or businesses operating within the same niche needs to be compared. The EPS of a company gives a hint of its profitability. Therefore, investors consider an increasing EPS as a green flag. The higher the EPS is, the more valuable are the shares of that company.
Price to Earnings ratio (P/E)
The P/E ratio shows how much traders are willing to pay for a company’s earnings. Generally, a higher P/E value means an overvalued stock. Besides, it could also mean that the market is expecting that particular company to perform extremely good over time. On the contrary, a lower P/E value is considered as a red flag by the investors.
Price to Earnings to Growth ratio (PEG)
The PEG ratio gives you an idea about the value of a stock with respect to the growth of the company. When combined, the PEG and P/E ratio helps investors obtain a clear picture of a company’s stock.
Dividend Payout Ratio
The Dividend Payout Ratio is used for measuring the percentage of a company’s earnings paid to its owners as well as shareholders. The remaining earnings of a company that aren’t acquired by the shareholders are used to clear off the debts and reinvest for the growth and betterment of the company in future.
2. Technical Analysis
Technical analysis is a process that involves analysing data collected from stock marketing activities such as prices, volumes, etc.
To perform a thorough technical stock analysis, the investors use technical indicators and stock analysis tools such as oscillators, charting software, which help them identify the direction in which stock prices are moving.
Technical analysis also helps you determine and analysing the historical trading data of a stock or equity and estimate the future growth of the security. It is mostly used for commodities and forex.
Below are the key assumptions on which technical stock analysis works on:
3. Quantitative analysis
The third category of stock analysis is quantitative analysis. It involves examining the companies or stocks in terms of some numerical values. During the process, the analysts of investors analyse the stocks by doing in-depth research and referring to the statistical model. This type of analysis is mostly carried out to identify the patterns in order to bypass the risks and invest safely. However, it isn’t always used as a standalone process. Instead, it needs to be performed alongside technical and fundamental analysis to first determine the risks, and then devise strategies to bypass them before making any final investment.
So, this is what stock analysis is and how it works. The above-mentioned steps may look time-consuming, but following them is extremely important if you want to gain better returns on your investments.