Stock Market Analysis helps the investors in formulating their investing/trading techniques prior to the opening of the market. This helps them to confirm their conviction on trades. Stock Market Analysis deals with the performance of the stocks in particular and the indexes in general.
Stock Market Index typically gives the overall performance of the market or of a specific sector. It is based on the statistical compilations of the prices of the representative set of stocks and reflects a composite value of its component stocks.
There are many factors affecting the collective mood of the stock market. Stock Market is a dynamic one which changes with every information due to change in perception of the investors. Stock Market believes in supremacy of the market and considers that demand-supply mechanism leads to efficient price discovery. It also considers that the market discounts/considers everything and presumes every investor to be rational who invest by considering all the informations (economic and political (domestic and international) scenario, weather condition, company specific news, international relations, monetary and fiscal policies, international Stock Market behavior and many more) available to him.
Stock Market Analysis is a prerequisite for any investor for extracting profit out of the sock market. But most of the investors don't have the time and knowledge for analyzing the market. So, they take the help of professional Stock Market Analysts who guide them through the financial jungle to a profitable outcome.
Stock Market Analysis is basically of two types :-
• Fundamental Analysis
• Technical Analysis
Fundamental Analysis
Fundamental Analysis tries to measure the intrinsic value of a stock by going through its financial, economic, quantitative and qualitative factors. It also considers the macroeconomic factors (both domestic and international) that could have an effect on the value of the stock . Some of the company or industry specific factors are Sales figure of the company (Quarterly, Yearly, etc.), Earnings of the Company, Assets and Liabilities of the Company, Management Efficiency of the Company, Company's competitive position among its industry rivals. Fundamental Analyst s rely on the balance sheets of the company for arriving at its book value. This helps them to compare the actual value of the stock in the secondary market with that of the book value in order to evaluate whether the stock is overvalued or not. When the Market Value of a stock exceeds its Face or Intrinsic value then it signifies that the expectations of the investors are higher than the real value of the company. Hence, a correction in its price is evident. Fundamental Analysis studies the fundamental strength of the company which is effective in gauging the long run scenario of the stock price rather than the short run fluctuations.
Fundamental Analyst look at the following aspects for judging the fundamental strength of the company :-
• Balance Sheet
• Return on Assets
• Net Income
• Revenue
• Cash Flow
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Balance Sheet
Financial position of a company is reflected through its Balance Sheet where the detailed numerical of the assets and liabilities are recorded. It is always desirable for a company to have Assets > Liabilities which reflects its sound financial condition.
Return on Assets
It measures the profitability of a company.
Return on Assets = (Net Income of the company for the last 1 year) / (Total
Asset of the Company)
This shows the company's strength from the long term perspective and is a good indicator for the long term investors.
Net Income
Net Income =(Total Revenue of the Company) – (Total Cost to the Company)
Revenue of a company comprises of income from the sales of its products, and other incomes.
Cost of a company comprises operation costs, servicing of depreciation, interest payments, etc.
Another business and economic jargon for Net Income is Bottom Line.
Revenue
Revenue of a company comprises its income from sales of its products, and other associated incomes. It indicates the demand scenario of the company's products which are also an indicator of its growth.
Cash Flow
Cash Flow of a Company (for a particular period of time) = (Cash Receipts of
a Company) – (Cash Payments of the Company)
Liquidity Position of the company can be gauged by analyzing this tool.
Hence, Fundamental Analysis is a part of the Stock Market Analysis which uses the fundamental aspects of the companies and the economy for predicting the future direction of the stock in particular and the economy in general.
Technical Analysis
Technical Analysis assumes that the historical price movements of stock s give indications about its future performances. It uses charts and other statistical tools to identify the pattern of the stock and index movements and accordingly predict its future activities. Technical Analyst s are not concerned about the intrinsic or fair value of the company but are only interested in the historical price movements along with the volumes. They consider that the price movements are repetitive in nature because the psychological setup of the investors are seen to follow a certain pattern. Technical Analyst s analyze a wide array of variables such as Long term and Short term market trend, Volume of trade, Oscillators, Moving Averages, Crossovers, Candlesticks, Relative Strength Index , etc. which could throw an idea about the future movement of the Stock .
Thus, Stock Market Analysis helps both the investors and the traders in taking calculative risk for churning out money out of the Stock Market .
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