What is Stock Analysis? – Types and Importance

By Advisorymandi
16-November-2018 11:54:44 AM

Many traders give a lot of importance to the stock analysis as it helps them to get a general insight into the stock market and arrive at a better decision when it comes to buying and selling the shares. Stock analysis is also known as market analysis or equity analysis.

So, the main question arises here is what exactly you need to analyze? The share prices? Profitability or revenue of the company? Why it is important?

Let’s take a look…


Stock Analysis Definition

Stock analysis is essentially a method to evaluate and compare the past and present data of a stock to forecast its price and performance in the future. Going through the historical and current data provides a competitive edge to the traders or investors as it helps gain a valuable insight about the stocks, which they must focus on and also determine the entry and exit points for their trades.


Importance of Stock Analysis

It is extremely important to carry out a comprehensive research work before making an investment. It is only after an in-depth research work, you can evaluate or predict the future performance of a share, specific sector or the stock market. Even if you are going through the stock market tips, then also it is imperative to perform a thorough research just to have a great peace of mind that the investment you are planning to undertake will yield profitable returns or not.

When you are buying shares, then you are purchasing some portions of the business with an expectation to make profits if there is an increase in the business value. Before buying a cloth or phone, you may be carrying out a research to analyze their quality and performance. Similarly, when you are taking a stock market investment decision, then you must ensure that your hard-earned money is invested in the right place and does not go wasted.


Types of Stock Analysis

There are two prominent types of stock analysis in the stock market, which are:


Fundamental Analysis

The main objective of the fundamental analysis is to assess the financial records of a company, its performance, products, market share, competition, etc in order to determine how much the business is worth. The analysis is important because the value of the shares is directly related to the performance and value of a company. All in all, the main purpose of the fundamental analysis is to figure out the fundamentally strong companies and how their performance affects the respective share prices. There are some prominent things you must consider while carrying out the fundamental analysis, which is mentioned below:


Earning Per Share (EPS)

It is one of the most important measures carried out by most of the traders or investors to analyze whether the company they are planning to invest in the right choice or not. It is essentially the amount of money a company is actually earning on every share. It is calculated by dividing the net profit of the company by the number of outstanding shares. Investors generally prefer to invest in those companies.


EPS = Net Income – Preferred Dividends


            Weighted Average Shares Outstanding


Price to Earnings Ratio (PER)

It gives an excellent idea about the price which the investors are ready to pay for the share that largely depends upon the present earnings of the company.

Price to Earning Ratio = Current Share Price/Earning Per Share

The ratio helps in determining the time period in which you will get back the initial amount invested by way of returns. It is essential that you must look for the stocks having a low PE ratio for the purpose of investment.


Return on Equity (ROE)

It helps to analyze the performance of the company when it comes to generating the returns on the investment received from the shareholders. Through this indicator or method, the investors can figure out the operational efficiency of a company.

ROE = Net Income (annual) / Shareholders Equity

The investors always search for the companies having the consistent and high ROE for the investment.


Debt-Equity (D/E) Ratio

It is used to calculate the total debt or liabilities by the total value shareholder’s equity. It basically indicates the total capital or debt provided by the creditors and shareholders of the company. Through this, the investors can determine whether the company has the ability to repay its creditors on time or not.

D/E Ratio = Total Debt / Total Equity

If you are planning to invest in the stock market, then go for those companies having lower Debt-Equity (D/E) Ratio or decreasing consistently.


Technical Analysis

It is a method used for the purpose of forecasting the future price movements of the shares through the historical data. In simple terms, through the technical analysis, it becomes quite an easy task to determine whether there will be a sharp increase or decrease in the share prices. This kind of research is carried through various means like the bar charts and candlestick charts. There are some prominent things you must consider while carrying out the fundamental analysis, which are mentioned below:


  • Price Action: It is used to determine whether the share prices have increased over a period of time or not.
  • Price Trend: Through this method, an investor or trader analyzes whether the share prices move in a specific trend. For instance, does the share prices always go up after a positive news or an event?
  • Patterns: You may have heard a saying ‘history repeats itself’, and the people carrying out the technical analysis, consider it to be true in case of the stock market investment. They keep into the account the stock patterns as far back as 50-60 years to determine whether there is any similarity between the behavior of the shares 50 years back and in the present situation.


Bottom Line

As an investor, it is extremely important to understand that carrying out a stock analysis must be an integral exercise before planning to invest in the stock market. By taking some time to determine the performance of the share you are planning to buy, you can take more informed decisions and prevent yourself from the significant losses. Moreover, you must also evaluate the features of both the fundamental and technical analysis to ensure which one suits your trading strategy.

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Author: Advisorymandi

AdvisoryMandi is India's most trusted Stock Market Advisory marketplace covers NSE, BSE, MCX & NCDEX. Invest with confidence and harness the power of AdvisoryMandi to make smarter investment decisions in Stocks, Indices, Commodities, Forex & IPO.

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