Retail investors depend on the recommendations of stock analysts, word of mouth and media coverage to make investment decisions. The more you invest, the more important it becomes to conduct your own fundamental analysis on stocks before investing in them. To invest confidently and prudently requires a thorough stock analysis and broad understanding of the industry you are choosing to put money in.
A seasoned investor who has been through a gamut of investments, including stock investments, will tell you that stock investment analysis is done on the basis of fundamental and technical analysis. Fundamental analysis in stock investment analysis mainly concerns delving deep into the company of the stock you wish to trade or invest in. Fundamental analysis, thus, involves the assessment of securities through the use of financial, quantitative and qualitative elements that aid you to determine the intrinsic value of a stock. Just so you know that you are on the right track, and can differentiate fundamental analysis from technical analysis, you should know that technical analysis involves strategies which largely depend on the action of price for a certain stock. Most analysis of the technical type determines whether a current trend of a stock will continue, and if there is any indication that it will not, the time when it is going to reverse is also assessed.
How to check fundamentals of a company? One of the most rewarding kinds of analysis in the stock market’s history is fundamental analysis. All analysis involves examining securities in some way. It is felt that microeconomic and macroeconomic elements are able to influence the value of a security. These are variables that are related to conditions of the industry, conditions of the economy, financial conditions and a company’s management proficiency. The primary element that drives a fundamental analysis is the evaluation of the intrinsic value of any security. Then, this must be compared with the stock price that is currently prevailing. In this way you can tell if any security is undervalued or whether it is overvalued.
Here’s how you can go about researching stock like a stock market expert.
Share market analysis is first and foremost a numbers game. If you know which company you want to invest in - the financial statements of the company is the place to start. These statements are publicly available. A quick read through the company’s balance sheet, income statement and cash flow statement summarises the company’s performance in objective terms. Financial statements give you information on sales, profit margins and scope for profitability in the future based on which you can evaluate the future earning potential of the company.
A comparative analysis of the company’s performance against its competitors or other companies in the same industry provides further insight on how well the company is performing relative to industry standards. Annual reports issued by the company, reports by stock analysts on the industry, trade magazines, surveys and research papers are resources that help put together a clear picture of industry trends.
To understand if a stock is worth the value it’s trading at, one must look at the valuation of the company. Stock prices should be influenced by the earnings of the company but other factors such as a global health crisis, foreign investment, change in regulations can inflate or bring down the value of a stock disproportionately. The price to earnings (P/E) ratio of a stock is also a good indicator of whether the price of the stock is high relative to the earnings per stock. Analysts review historical data as well - looking at earnings per share over a period of time A high P/E ratio may indicate that the stock is overvalued whereas a low figure is indicative of the stock being undervalued. It is one of many metrics used to determine if a stock is worth buying or not.
The entire objective behind researching and stock analysis is to arrive at a price target. Stock analysts project the future price of a stock based on all the above parameters. The price target determines your entry or exit from the investment. The price target is not a fixed figure and is subject to the influence of market forces, new information and global developments. However, it is the surest indicator of whether you stand to earn money in the future by picking up a stock, at its market value, in the present time.
In any guidelines or material on how to analyse stocks for beginners, you will always find two key ways to analyse stocks before you decide to invest in them. As mentioned, these are fundamental and technical analysis. While fundamental analysis is the famous way to tell if the stock is a solid one or not, experts may lay emphasis on a great degree of technical analysis as well. Although most retail investors do not go into this, there are serious investors who do. Therefore, you should have some idea of how to do this kind of analysis as well.
Technical analysis makes use of data from the past to estimate the movements of any stock in the future. The first step that experts take towards analysing a stock in a technical way is to study certain charts and graphs. Technical analysis assumes that the price of a stock, and the price alone, reflects anything that could or has already influenced a company. In a sense, compared to fundamental analysis, technical analysis takes the view of the short term into account. This is because the company’s intrinsic value is not seen as a factor used to examine any stock. Intrinsic value can only be studied over a period, and a long period at that. Technical analysis is good for short-term and mid-term stock holding, whereas fundamental analysis is better to pick stocks for the long term.
These are a few of the parameters you must consider while carrying a pre-investment due diligence exercise. With proper research with the help of an online stock broker comes preparedness to hedge against losses and plan for better gains.
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