Stock market analysis or stock analysis is a healthy way to keep a tab on a company’s fundamentals. Stock market is essentially a volatile market with unprecedented phases of highs and lows in which share prices might dip or rise phenomenally. Stock market analysis definitely helps in predicting these ups and downs to a considerable extent. There are two distinct methodologies, namely, fundamental analysis and technical analysis.
Fundamental Stock Analysis
This methodology is based on the assumption that share price movements follow logic in the long term and if waited for a considerable period of time the share prices will definitely reach its fair price value. Fundamental analysis involves both micro and macro parameters of a company’s performance. The varied company parameters such as the company management, financial performance, competitive advantage, market position etc. are analyzed. These are analyzed under the following specific heads:
Earnings: Earnings per share indicate a company’s profitability. A healthy EPS means an appreciating share price value for the company.
Debt ratio: The debt ratio of a company indicating the proportion of a company’s assets that are financed through debt is also relevant when it comes to fundamental analysis. If the debt ratio of a company is somewhere between 30 and 50 percent then the share price has a potential of rising in future.
Return on equity: ROE measures a firm’s efficiency at generating profits from every unit of shareholder’s equity. It tells how well a company uses investment funds to generate earnings growth. A company with an increasing ROE should be the investor’s choice.
Capitalization: Capitalization is an indicator of a company’s equity. It is a determining factor in stock valuation. A company with low market capitalization poses higher risks for its stocks and vice versa.
Dividend payout ratio: It is the percentage of earnings paid to shareholders in dividends and the higher it is the better the share is for investment.
Price to earnings: Price to earnings is the ratio of a company’s current price of shares to its earnings per share. And a high price to earnings indicates a higher earnings growth in the future for the company.
Book value: Book value is a company’s common stock equity as it appears in the balance sheet. It is a fairly accurate measure of valuation showing a company’s growth. Hence fundamental analysts compare the balance sheet with the share prices to find out whether a share is undervalued or overpriced.
Fundamental analysis is more important for investors who have an in-depth understanding of finance and who have a long-term investment horizon.
Technical Stock Analysis
Technical analysis is based on the assumption that a study of the share price movements in the past can be used to determine future trends and can be used to predict and assess future performance. The different tools used for technical analysis are long and short-term market trends, trade volume, oscillators, moving averages and line and bar charts. Technical analysis believes that every action in the market reflects the market events, and that prices follow trends and also that history is often repeated. Technical analysis is more useful for novice investors and also for those with short-term investment horizon as against fundamental analysis.