Stock analysis is a method for market participants to make buying and selling decisions. By studying and evaluating past and current data, market participants attempt to gain an edge in the markets by making informed decisions.
There are two basic types of stock analysis:
- Fundamental Analysis
- Technical Analysis
Market participants who want to invest in stocks look at the stock from a long term approach. They try to compare the current market price of a stocks to the intrinsic value of that stock by examining related economic and financial factors in order to see whether the stock is undervalued or overvalued. Fundamental analysts study anything that can affect the stocks value, from macroeconomic factors such as the state of the economy and industry conditions to microeconomic factors like the effectiveness of the company’s management.
Fundamental analysis concentrates on the business model and the data from sources, including financial records, economic reports, company assets, and market share. Investors typically analyze the metrics on a company’s financial statements – balance sheet, income statement, cash flow statement. Different ratios can be used to determine how healthy a company is. For example, the current ratio and quick ratio are used to estimate whether a company will be able to pay its short-term liabilities with its available current assets.
Technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities by analyzing statistical trends gathered from trading activity, such as price movement and volume. Unlike fundamental analysis, the focus of a trader is not on value (undervalued or overvalued stock) but they focus on historical price and volume trends for a particular stock. Technical analysts believe past trading activity and price changes of a stock can be valuable indicators of the stock’s future price movements. They look for overbought and oversold stocks instead of undervalued or overvalued stocks.
In general, technical analysts look at the following broad types of indicators:
- Price trends
- Chart patterns
- Volume and momentum indicators
- Moving averages
- Support and resistance levels
- Fundamental analysis focusses on stock’s real or “fair market” value. It evaluates the business model, financial health of the company and various other business metrics.
- Fundamental analysts look for undervalued or overvalued stocks to make a buying/sell decision. This is investor approach.
- Investors typically have a long term view about the stock and company they are investing in.
- Technical analysis focusses on identifying trading opportunities in price trends and patterns in historical price and volume data.
- Technical analysts look for overbought or underbought stocks to make a buying/sell decision. This is trader approach.
- Traders typically are not concerned about stock’s long term performance. They do not consider financial health, business outlook etc while making a buy/sell decision. They simply rely on the opportunities they find statistically. Traders typically buy stocks and hold them for a few seconds, hours, days or months depending upon their trading styles.
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- I have an investor profile already when it comes to buying/selling stocks
- I have a trader profile already when it comes to buying/selling stocks
- I want to learn and follow an investor approach when it comes to buying/selling stocks
- I want to learn and follow a trader approach when it comes to buying/selling stocks
- I am not interested in learning myself but want to rely on expert’s recommendations
- I am not interested in stocks