How To Analyse a Stock
Investing in the stock market is an attractive way to increase your wealth. But, to be successful in the market, it is very important to do the right analysis. In this article, we will give you complete information from basic concepts of stock market analysis to advanced methods, and we will try to understand it with an example.
What is Stock Market Analysis?
Stock market analysis is a process in which investors and traders evaluate the value of stocks. Its purpose is to identify whether a stock is undervalued or overvalued. There are two main types of analysis: fundamental analysis and technical analysis.
1. Fundamental Analysis
Fundamental analysis analyzes a company's financial situation, economic conditions, and other factors that can affect a company's future performance.
Analysis of Balance Sheet
The balance sheet of any company contains details of its assets, liabilities, and equity. By understanding this, you can know what is the financial position of the company.
Analysis of Income Statement
The income statement contains information about the company's revenue, profit, and losses. With this, you can estimate the profitability of the company.
Analysis of Cash Flow Statement
The cash flow statement shows how much cash the company has and how it is being managed. Investing in a company with strong cash flow is considered safe.
Example of Fundamental Analysis
Suppose you want to invest in the stock of ABC Limited. The share price of this company is ₹ 200, and its P/E ratio is 15. You analyze the company's financial statements and find that the company's net profit has been increasing steadily over the last 3 years. Apart from this, the company's ROE is 18%, which is above the industry average.
Next, you see that the company has a strong balance sheet, and its current ratio is 2, which indicates that the company has enough assets to cover its short-term liabilities. After conducting a macroeconomic analysis, you find that the industry in which the company operates has strong growth potential.
Taking all these factors into consideration, you conclude that ABC Limited's stock is undervalued, and investing in it could be a strong position.
Fundamental analysis is a process that helps understand the true value of a company. Through this, investors can make long-term investment decisions and receive strong returns. It is important to do a deep fundamental analysis for every investment so that you can make an informed and strategic selection.
2. Technical Analysis
Technical analysis involves analyzing stock price patterns, volume, and other market indicators. This method is very effective for short-term trading.
Technical analysis is used to predict the price movement of stocks, commodities, and other financial instruments. It analyzes past market data, such as price and volume, to predict future trends. The main purpose of technical analysis is to understand short-term trends and market sentiments.
Analysis of price charts
By analyzing price charts, you can find out the resistance and support levels of the stock. This information helps you predict the price movement of the stock.
Line chart- This chart shows only the closing price and simply reflects the price trends.
Bar chart- This chart shows the open, high, low, and close (OHLC) prices. This chart gives more information about the price.
Candlestick Chart- This chart also shows the OHLC price but shows it more visually. Candlestick charts have a 'body' and 'wick' which show the range and direction of the price movement.
Volume Analysis
It tells how many shares were traded at a particular time. Volume helps confirm the strength of a trend. If the price movement is happening with volume, then that trend is considered to be stronger.
Example- If the price of a stock is going up and the volume is also increasing, it means that the uptrend is strong.
Indicators Analysis
Moving Average- This indicator shows the average price of a given time. It shows smoothed price data and helps in understanding the direction of the trend.
Example- A 50-day moving average is the average of the closing prices of the last 50 days.
RSI (Relative Strength Index)- This indicator gives a value between 0 to 100, which indicates whether the stock is overbought (above 70) or oversold (below 30).
MACD (Moving Average Convergence Divergence)- This indicator shows the difference between two moving averages and helps in understanding momentum.
Bollinger Bands - This is a set of three lines, with a moving average above and below them indicating volatility.
Technical Analysis Example
Suppose you are analyzing XYZ stock. The price of the stock is around ₹150. You see that the 50-day moving average of the stock is at ₹145, which may act as support. Also, the RSI is approaching 70, which suggests that the stock may be overbought.
Also, you see the MACD indicator, where the signal line has crossed the MACD line from below, which is a bearish signal. Volume analysis shows that volume has been decreasing in the last few days, while the price is going up, which indicates a weak trend.
Taking all these factors into consideration, you conclude that XYZ stock may undergo some correction and the price may fall to ₹145.
Technical analysis is a powerful tool to understand short-term and medium-term trends in the market. By following it, you can correctly identify entry and exit points in the market. By using technical analysis properly, you can improve your trading strategy and achieve better results.
Understand with a market analysis example.
Suppose you want to analyze the stocks of Reliance Industries.
First, do a fundamental analysis: Look at the balance sheet, which contains information about the company's assets, liabilities, and equity. Analyze the company's profits and losses in the income statement.
Then, do a technical analysis: Look at the price charts and volume data so that you can predict the possible price movement.
Such a complete analysis will help you make better decisions and strengthen your investment strategy.
FAQS
What is the difference between technical analysis and fundamental analysis?
Fundamental analysis focuses on long-term valuation while technical analysis focuses on predicting short-term price movements and trends.
Does technical analysis work in all market conditions?
Technical analysis is suitable for volatile markets and short-term trades, but it may not always be reliable for stable markets or long-term investments.
Does technical analysis guarantee profits?
No, the technical analysis only predicts patterns of price movements. Profits are not guaranteed and risk is involved.