Table of Contents
What Is Stock Analysis?
Stock analysis is the evaluation of a particular trading instrument, an investment sector, or the market as a whole. Stock analysts attempt to determine the future activity of an agent, sector, or need.
Understanding Stock Analysis
Stock analysis is a method for investors and traders to make buying and selling decisions. By studying and evaluating past and current data, investors and traders attempt to gain an edge in the markets by making informed decisions.
Types of Stock Analysis
There are two basic types of stock analysis: fundamental analysis and technical analysis. Fundamental analysis concentrates on data from sources, including financial records, economic reports, company assets, and market share.
1. Fundamental Analysis
- To conduct fundamental analysis on a public company or sector, investors and analysts typically analyze the metrics on a company’s financial statements – balance sheet, income statement, cash flow statement, and footnotes.
- These statements are released to the public in the form of a 10-Q or 10-K report through the database system, EDGAR, administered by the U.S. Securities and Exchange Commission (SEC).
- The earnings report released by a company during its quarterly earnings press release is analyzed by investors who look to ascertain how much revenue, expenses, and profits a company made.
- When running stock analysis on a company’s financial statements, an analyst will usually check to measure its profitability, liquidity, solvency, efficiency, growth trajectory, and leverage. Different ratios can be used to determine how healthy a company is.
- For example, the current ratio and quick ratio estimate whether a company will pay its short-term liabilities with its available assets.
- The current ratio formula calculates by dividing existing assets by current liabilities and figures from the balance sheet.
- Although there is no such thing as an ideal current ratio, less than one could indicate to the stock analyst.
- Looking at the balance sheet still, a stock analyst may want to know the current debt levels taken on by a company. In this case, a stock analyst may use the debt ratio, which calculates by dividing total liabilities by total assets.
- A debt ratio above one typically means that a company has more debt than assets. In this case, if the company has a high degree of leverage, a stock analyst may conclude that a rise in interest rates may increase the company’s probability of going into default.
2. Technical Analysis
- The second method of stock analysis is technical analysis. Technical research focuses on studying past and present price action to predict the probability of future price movements.
- Technical analysts analyze the financial market as a whole and are primarily concerned with price and volume. The demand and supply factors that move the market.
- Charts are a key tool for technical analysts as they show a graphical illustration of a stock’s trend within a stated period.
- For example, a technical analyst may mark certain areas as a support or resistance level using a chart.
- The support levels marked by previous lows below the current trading price. And the resistance markers place at earlier highs above the stock’s current market price.
- A break below the support level would indicate a bearish trend to the stock analyst. At the same time, a break above the resistance level would take on a bullish outlook.
- Technical stock analysis is effective only when supply and demand forces influence the price trend analyzed. When outside factors involved in a price movement, analyzing stocks using technical analysis may not be successful.
- Examples of factors other than supply and demand that can affect a stock price include stock splits, mergers, dividend announcements.
- A class-action lawsuit, death of a company’s CEO, a terrorist attack, accounting scandals, change of management, monetary policy changes, etc.
- Both fundamental and technical analysis can do independently or together. Some analysts use both methods of analysis, while others stick to one.
- Either way, using stock analysis to vet stocks, sectors. And the market is an important method of creating the best investment strategy for one’s portfolio.