Now you have a fair understanding about the stock market, we will be discussing the method which can be used for analysing a stock.

Definition:

Stock analysis is a method used by investors or traders to assess any particular stock or a trading instrument, or stock market. Investors and traders make trading decision based on their stock analysis.  Through stock analysis, these investors and traders are able to gain insights into the economy, stock market, the developments of companies listed on the stock exchange and many more.

Types of stock analysis:

There are two basic types of stock analysis. These are fundamental and technical analysis.

Fundamental analysis:

Fundamental analysis measures the intrinsic value of stocks by studying the economic and financial factors. Intrinsic value is the value of an investment based on the issuing company’s financial condition and other macroeconomic factors.

In fundamental analysis, the analyst studies a particular stock based on the developments made by the company, macroeconomic factors, management of the company. The analyst determines the price of the stock which is then compared to the existing market price of the stock to see whether the stock is undervalued or overvalued by other investors.

In fundamental analysis, investors focus on:

• The overall state of the economy
• The strength of the industry in which the company operates.
• The financial performance of the stock and the factors driving the stock.

Based on these factors, fundamental analysts arrive at a fair price.

Technical analysis:

Technical analysis (TA) is another method to examine the investment and identify the trading opportunities based on the statistical trends gathered from trading activity like price movement and volume.

Technical analyst looks into the past trading activity and price changes of the security and consider it as valuable indicators of the future price movements of any security.

In technical analysis, various TA tools are used to generate study the way demand and supply for a security will affect any changes in price, volume and implied volatility. In TA, it is assumed that past trading activity and changes in the price of the security is a valuable indicator of the future price movement of the stock when paired with the appropriate trading rules.

Trading rules are used to generate short term trading signals from various charting tools. It can also help to improve the evaluation of the strength or weakness of the security compared to the broader market or one of its sectors. 

Difference Between Fundamental and Technical Analysis

Fundamental and technical analysis are 2 major schools of thought when it comes to analysing financial markets. Investors use these techniques to make informed decisions. Technical analysis looks at the price movement of a security and use the data to forecast the future price movements. On the other hand, fundamental analysis looks at economic and financial aspects that impact the business.

For many years, there has been a debate about which is better- technical analysis or fundamental analysis. The tug of war between the technical and fundamental analysis has been ongoing and the existing geopolitical and economic factors worldwide has added a further cause for discussion.

Technical and fundamental analysis are often seen as opposing methodologies to analyse securities. However, there are some investors that have experienced success by combining both these techniques. These investors use fundamental analysis to see whether the stock is undervalued or overvalued and use technical analysis to understand the entry and exit point. Also, many technical investors use fundamental analysis to support their trade.

In this section of stock analysis, we will look into the difference between the two analysis techniques.

	Technical Analysis	Fundamental Analysis
1.	Involves looking for opportunities based on the statistical trends from trading activity like price and volume.	Involves analysis of business strength, and results along with the operating environment and macroeconomic factors to measure the intrinsic values.
2.	Technical analysis is considered for short-term investment	Fundamental analysis is considered for long-term investment
3.	Helps to identify the entry and exit points.	Helps to find the intrinsic value of the stock
4.	Decisions are based on market trends and stock price.	Technical investors decisions are based on the information available and statistics evaluated.
5.	Fundamental analyst studies the news, economic data and industry statistics	Technical analyst does technical analysis.
6.	The price of the stock is decided based on chart and indicators.	Future price of the stock is decided based on the past and present performance of the company. It also looks at the profitability of the company.

Some Frequently Asked Questions related to Stock Analysis:

What are the two methods of stock analysis?

As already discussed above, there are two basic two ways to analyse a stock. These are fundamental and technical analysis.

What is the best way to analyse a stock?

Fundamental and technical analysis are two ways to analyse any particular stock. Some of the tips followed by most investors while analysing stocks.

Fundamental Analysis of stocks:

• Understand the company in which you intend to invest.
• Study the financial reports of the Company.
• Check the company’s debt.
• Know about the company’s competitors.
• Analyse the future prospects.
• Review all aspects of the company time to time.

Technical Analysis of stocks:

• Stay away from volatile stocks. High volatile stocks are highly risky as there are huge chances of making losses.
• Do research on the stock.  It will help while trading.
• Follow the trend. If one follows the trend, there are chances that investors will also gain.
• Try to select stock with higher correlation with major sector and index. This will help investors to gain if the index or the sector performance improves.

How do professionals analyse stocks?

Investors depend on stock analysis to identify profitable stocks via technical and fundamental analysis. Investors use some of the ratios to examine the company’s stock. These include price to equity ratio, earnings per share, book value and return on equity.

What should I analyse before buying stocks?

Some of the factors to consider while buying stocks include:

• Time Horizon: Time horizon plays an important role while buying a stock. The investing time horizon could be short term, middle term or long term, based on your financial goals.
• Investment strategy: Investing strategy plays a vital role before purchasing a particular stock. Some of the investment strategies include value investing, growth investing and income investing. The investment strategy may vary from investor to investor based on their financial goals.
• Check fundamentals of the company: Investors should check fundamentals before buying a stock. Many popular investors do fundamental analysis before buying any stock.
• Stock performance compared to industry and peer companies: It is also important that investors check the performance of the company compared to its peer companies. This, gives a fair idea where the company is currently positioned.
• See shareholder pattern: Investors should also look into the shareholder pattern. Any changes in the shareholder pattern indicates their confidence in the company.
• Mutual funds holding: If any particular stock is held by many mutual funds, then it gives an indication that the stock is comparatively safe compared to the other stocks which are not held by any mutual funds.
• Size of the company: Before investing in the stock of a particular company, it is important to look into the size of the company and at the same time assess your risk appetite. Based on the evaluation, one should then decide whether to buy stock or not.
• Dividend history: Dividend history of the company indicates whether the company is profitable or not. Company’s pay dividend from the net profit they make during a particular financial year.
• Revenue growth: Revenue growth of the company over a timeframe indicates the success of the business. By calculating the revenue growth rate, a company gains insight into increase or decrease in sales volume, plus business expansion trends.
• Profit growth: Net profit is another important criterion while analysing a stock. Increased in net profit indicates that the company is able to efficiently control its costs and provide goods or services at a price significantly higher than its costs.
• Volatility: Stocks with high levels of volatility will rise quickly on bullish days, and fall like a brick on bearish days. Hence, it is important to check the volatility and your risk appetite before buying a stock.

How does Warren Buffet analyse stock?

Warren Buffet evaluates a company based on his value investing strategy. He looks into those companies that offer good return on equity over many years compared to rival companies in the same industry. Warren Buffet also reviews the profit margin of the company to ensure that they are healthy and have growth potential. Other than this, Buffet also look for those companies with unique product and services that gives them competitive advantage. He also looks into those stocks that are undervalued.