Stock Analysis, Stock Market Analysis

Stock analysis is the process of screening a company’s fundamentals and investigating market trends in order to identify stocks that can deliver high profits at low risk. Stock markets are volatile and go through bull and bear phases, with share prices moving up or down. Stock market analysis helps investors identify these phases. There are two distinct methodologies for stock analysis, namely fundamental analysis and technical analysis.

Stock Analysis: Fundamental

Fundamental stock analysis is based on the principle that share price movement is determined by logic in the longer term and that the market price of a stock will eventually reach the company’s fair value. Fundamental analysis involves a detailed study of different macro and micro parameters of a company.

The analysis includes analyzing the company’s management, financial health, competitive advantage and markets. It evaluates company-specific quantitative parameters such as:

Earnings: The share price of a company generating healthy EPS has a tendency to appreciate.

Debt ratio: The share price of companies with a debt ratio of more than 30% but less than 50% has potential to rise.

Return on Equity (ROE): A company that has been recording an increase in ROE for a while is considered a good investment option.

Capitalization: The lower the market capitalization (i.e. the smaller the company), the higher the risk associated with the stock.

Dividend payout ratio: This measures what a company pays its investors as dividends.

Price to Earnings (P/E) Ratio: This reflects the price that investors are ready to pay for every dollar of earnings the company generates. For the same level of earnings, investors may be willing to pay more for a company that has better growth prospects.

Book value: Fundamental analysts compare the company’s balance sheet with the share price to determine whether the stock is overvalued or undervalued.

Fundamental analysis is better for investors who have an understanding of finance and those with a long-term investment horizon.

Stock Analysis: Technical

Technical analysis is based on the belief that historical share price movements can be used to determine trends, which in turn can be used to make predictions of future performance. Variables such as long- and short-term market trend, trade volume, oscillators, moving averages and line and bar charts are used in technical analysis. The three main rules of technical analysis are:

Market action discounts (reflects) every positive and negative event

Prices move in trends

History tends to repeat itself

Technical analysis is suitable even for amateur investors and those with a short-term investment horizon.