Stock analysis is a method that facilitates the analysis and evaluation of investment sectors, trading instruments or the entire stock market.
The end goal of this analysis is to provide a framework within which investors can make informed and calculated decisions. Other names used to refer to stock analysis include market analysis or equity analysis.
Stock investment is about taking risks. But it’s another thing when the risks are well calculated, based on statistics and informed by a critical evaluation of the current market forces.
That’s the reason investors will take into consideration every insight that will grant them a clearer understanding of the stock or securities market.
Before making your mind to invest in a specific equity market, you need to have a thorough understanding of the past, a comprehensive study of the present and the ability to use this information to predict the future.
Only then can you devise your methodology of entering the market. And if things don’t go as you had planned, you must always have an exit strategy at the go.
In this article, we’ll dive into the fundamentals of the stock market and all the related concepts. By the end of this post, you should have acquired enough practical tips to help you get started as a stock market trader.
How Stock Analysis Work
Here is the problem with stock market investment—a sea of companies claiming to offer authentic and profitable stock market investment opportunities.
But with so many of these, how do you know which ones are legitimate? Better still, how do you know the best place to put your money for a good return?
Should you go for Microsoft or settle for Apple? Is Google the way to go, or is Amazon the real deal? Between small and significant stock market companies, in whose hands are your investments safer?
So many questions, but the good news is that it’s the work of stock analysis to make sure all these questions are well answered.
Stock analysis isn’t a phenomenon that’s common among individual investors. Research companies and investment banks have analysts studying specific tradable securities and companies.
For instance, the analysts will thoroughly analyse a given investment fund and recommend whether it meets the necessary threshold for investment.
The company will then make available this information to its clientele or release the same into the public domain. The recommendation may be to hold, sell or buy a particular stock.
The analysis might as well come with the predicted price tags for each of the stocks in the months or years to come. You can also take advantage of the detailed data like the projected future earnings and revenues of the stock in question to gain a deeper understanding.
What Does This Mean to Enthusiastic Investors?
The good news is that you don’t have to struggle too much to access this information. Investment companies and trading platforms avail this information on their websites.
If you’re contemplating investing in a particular stock venture, it’s a good idea to start by checking out its stock market analysis information.
Places to find such information are the specific company you want to invest in and other sites that list stocks. When you get to the website, search for the section titled Stock Analysis, Research, or Analyst Report.
If you can’t see the information for the company you’re interested in, try searching for it in the search engine, starting with the company’s name followed by the term “stock market analysis.”
Besides the already available information, you’ve got the option of doing your research. The advantage is that you’ll have a report that you can easily trust since you’re the originator.
However, the process is time-consuming and requires expertise that you might not easily access.
At times, the authenticity of the reports might be questionable, especially if there’s a conflict of interest between the analysts that did the analysis.
It’s why most personal investors go to the extent of enlisting the services of private analysts to generate custom reports. It’s a good move if you’ve got the luxury of time and can afford the benefits of these professionals.
The US Securities and Exchange Commission (SEC) also supports the idea of working with an independent analyst according to the statement published on their website:
“Investors shouldn’t rely solely on an analyst’s advice on whether to hold, sell or buy stock.”
US Securities and Exchange Commission
Stock Analysis; Does It Matter?
Research is one of the most critical elements you should never overlook when making an investment decision, especially in stocks. It helps to know beforehand that the future performance and value of the stock product of your desire holds the potential of a good return.
Even though it’s not 100% guaranteed, you can’t compare that to making blind decisions that aren’t supported by any reliable data.
Stock markets work this way: When you agree to put your money in a specific company, it means you’re consenting to make a profit or loss, depending on how the firm performs.
If performance is the main factor of consideration, it’s essential to take the time to understand the company better. How is its past? Where is it currently? Are there any performance patterns you can pick out to help you predict future outcomes?
You must ensure you have clear and concise answers to these questions before making an investment decision. Resist the temptation to make impulsive decisions as attaching emotions to business decisions leads to regrets.
Types of Stock Analysis
The following are the two broad classifications of stock analysis.
1. Fundamental Analysis
Fundamental analysis is done at the fundamental financial level of the company. At this point, the investor only wants to establish whether the stock’s existing price corresponds to the company’s future value.
The analysis considers factors such as the current financial standing of the organisation and its economic environment.
The following are the key ratios that facilitate fundamental analysis.
Earnings per share (EPS): EPS works well when comparing two firms in the same industry. This ratio captures the profitability of the companies, and generally, a higher EPS is a good thing in the eyes of a potential investor.
Price to Earnings ratio (P/E): P/E ratio communicates whether or not potential investors are open to the idea of paying for the company’s earnings. If the P/E is higher, it could signify that the stock is overvalued, and a low P/E indicates that many investors will shy away from such an offer.
Price to Book ratio (P/B): from the name itself, this ratio compares the stock’s market value to the book value. In other words, it’s the value the stock market attaches to the company vis-a-vis the actual or book value.
If a company is doing well financially, it should attract a higher market price than the book value. That’s good news because investors will have confidence in the company’s growth in the future.
Dividend Payout Ratio: the ratio determines the value of the earnings paid to the owners and shareholders. After spending the shareholders, the remaining earnings are used to settle debts, whether retained or reinvested.
Price to Earnings to Growth ratio (PEG): The ratio is instrumental in determining the final value of the stock based on a company’s earnings. The combination of the PEG and P/E ratios will show you whether the stock’s current value warrants your investment.
Return on Equity (ROE): ROE indicates the effectiveness of the company is using its assets to generate earnings. A higher ROE signifies that the company maximises its available resources to make better profits.
2. Technical Analysis
It entails the analysis of data obtained through volume, prices and other market activities. The analysts will use technical tools such as oscillators and charts to calculate the value and future of a company’s stock.
From the analysis, the investor should be able to pick out critical patterns that indicate the future health of the business.
The following are the main assumptions taken into considerations during technical analysis:
History can repeat itself: that’s mostly true, especially when considering price movement.
The market is all-knowing: there’s a common assumption in technical analysis that assumes the market has a perfect understanding of the company, its product and any other factor likely to affect the company both presently and in the long run.
Price follows the previous trend: when a given stock’s price is established, future movements are likely to follow the previous trend.
3. Sentimental Analysis
This analysis takes into consideration the behaviours and attitudes of investors. The foundation of sentimental analysis is that the majority of the investors are wrong.
In other words, the stock market stands the chance of disappointing investors, especially when they believe the market prices are taking on a given trajectory.
Sentimental analysts are popularly known as contrarians. They tend to invest in the direction that the other investors are taking. Most investors anticipate given stock prices to trend higher; they’ll bid for the same product when the trend turns downwards.
What’s Fundamental Research?
Fundamental research seeks to establish the actual value of equity shares. The analyst looks into the company’s various aspects, such as competition, financial health, competitive advantage, and management quality.
The primary purpose of fundamental research is to determine the attractiveness of a business.
At the heart of this research is the assumption that the current market price isn’t a true reflection of the company’s worth. It considers external factors such as investor sentiments.
Market equilibrium means that the actual value is equivalent to the future market price.
Consequently, if investors mistake paying higher amounts, this will adversely affect their investment.
Fundamental Research Key Indicators
Fundamental Research banks heavily on the following ratios:
1. Return On Equity (ROE)
ROE indicates the earnings of a company on the equity of the shareholder. The ratio uses the profit figure to determine whether the company is running efficiently or not.
ROE = (Income – Preference Dividend)
The ideal ROE is consistent over a spread period, increasing the gradient. You can compare the ROE of different periods of the same company to determine if the company is growing.
Analysing the ROE of other companies in the same industry can reveal which one is doing better.
2. Debt-Equity Ratio (DER)
DER indicates the proportion of assets a company uses to finance its assets. The exact ratio will show the amount of financing from owners and borrowers.
DER = Total Equity/Debt
A lower debt-equity ratio on a consistent decrease trajectory is ideal for an investment decision. D/E ratio can be helpful, especially when you want to venture into industries like gas, oil, mental and capital goods.
3. Earning Per Share (EPS)
EPS indicates the amount of return the company is getting on every share. An increasing EPS is what you should look out for all the time.
EPS = Net Income – Preference Dividend/Weighted Average Outstanding Shares
The ratio also shows the amount of profit allocated to each share.
4. Price to Earning Ratio (PER)
PER is used to compare the prevailing market price with the respective earnings per share. The same will also show you the amount potential investors are willing to pay per share given the current market price.
PER = Earnings Per Share/Current Share
PER also reveals how many years you’ll need to get your initial capital investment.
A stock with a lower PER is the best choice if you’re looking for higher returns. You can use PER to analyse companies in the technology, FMCG and pharmaceutical sectors.
What’s Technical Research?
Technical Research is about studying (by professional analysts) the history of stock prices in the financial markets to understand and predict future trends based on price history and other technical indicators. The research points you towards the movement of the prices of shares. Courtesy of the study, you can indicate whether or not there will be a sharp fall or rise in the share prices.
This research doesn’t consider the recent or current events and news that already have a bearing on the prevailing prices.
Notably, the prices of the stock market most often depend on the psychology of investors. On the other hand, the investors’ emotions are swayed by the current events and news.
Technical research relies on the use of stop-losses. The research helps investors avoid bad decisions that could cost them adversely in future.
The research uses various charts such as candlestick and bars charts, providing crucial insights into stock price patterns and trends. Investors also use daily charts to study the immediate shift in stock prices.
For long term planning, the monthly/weekly charts provide essential data.
Best Technical Fundamental Analysis Tools for Investors
The brokers we’ve listed here make use of Trade Central. Most of these technical fundamental analysis tools are integrated into the trading platforms that many brokers offer.
1. Ally Invest
The platform entails a Trade Central powered stock screener and is affiliated with Ally Bank. It’s a low cost and solid trading platform. The platform also comes with other specialised tools such as dynamic profitability graphs and the probability calculator.
2. Charles Schwab
The platform uses real-time data that makes it possible for clients to filter the ETFs and stocks using technical and fundamental criteria. Recognia is one of those technical signals that Trade Central provides.
E*TRADE has a live-action scanner with 100 pre-defined screens that analyse the market in real-time to reveal the live analytical metrics, including the prices.
The platform uses earnings, sentiment, technical, fundamental and news events. It also has an oscillator that picks out oversold stock.
4. Fidelity Investments
The trading interface offers customisable charting functions and other critical tools that make the trading experience worthwhile. The software is produced to alert you of any technicalities with the stocks you’re following. It will also alert on any available open positions.
5. Interactive Brokers
Interactive Brokers also provide customisable charting tools. The user also enjoys more than 100 real-time streamers of data.
Lightspeed is ideal for consistent and frequent traders. Its flagship platform, The Lightspeed Trader, contains LightScan, a live market scanner that identifies and notifies you of available open trading opportunities.
The scanner has over 100 criteria that you can customise so that the feedback and notifications you get are identical to your needs.