Stocks and stock market analysis

Stock market analysis or stock analysis is a healthy way to keep track of a company’s fundamentals. The stock market is essentially a volatile market with unprecedented highs and lows during which stock prices can fall or rise phenomenally. Stock market analysis certainly helps in predicting these ups and downs to a great extent. There are two different methodologies namely fundamental analysis and technical analysis.

Fundamental stock analysis

This methodology is based on the assumption that the movement of stock prices obeys the logic in the long run, and if you wait for a significant period of time, stock prices are bound to reach their fair value. Fundamental analysis includes both micro and macro parameters of the company’s activities. Various company parameters such as company management, financial performance, competitive advantage, market position, etc. are analyzed. They are analyzed under the following specific headings:

Earnings: Earnings per share shows the profitability of the company. Healthy earnings per share means a company’s stock price is increasing.

Debt Ratio: A company’s debt ratio, which shows the proportion of a company’s assets that are financed by debt, is also important when it comes to fundamental analysis. If the company’s debt ratio is somewhere between 30 and 50 percent, then the share price may rise in the future.

Return on equity: ROE measures a firm’s efficiency in generating profit from each unit of equity capital. It shows how well a company uses investment funds to grow profits. A company with increasing ROE should be an investor’s choice.

Capitalization: Capitalization is a measure of a company’s equity. This is a determining factor in stock valuation. A company with a low market capitalization creates higher risks for its stock, and vice versa.

Dividend Payout Ratio: It is the percentage of profit that is paid out to the shareholders in the form of dividends and the higher it is, the better the share for investment.

Price to Earnings: Price to earnings is the ratio of a company’s current stock price to its earnings per share. And a high price-to-earnings ratio indicates higher earnings growth for the company in the future.

Book value: Book value is the common equity of the company as it appears on the balance sheet. This is a fairly accurate valuation measure that shows the company’s growth. Therefore, fundamental analysts compare the balance sheet with stock prices to see if a stock is undervalued or overvalued.

Fundamental analysis is more important for investors who have a deep understanding of finance and who have a long-term investment horizon.

Technical analysis of stocks

Technical analysis is based on the assumption that the study of past stock price movements can be used to determine future trends and can be used to predict and evaluate future performance. The various tools used for technical analysis are long-term and short-term market trends, trading volume, oscillators, moving averages and linear and bar charts. Technical analysis believes that every market action reflects market events, and that prices follow trends, and that history often repeats itself. Technical analysis is more useful for novice investors and those with a short-term investment horizon than fundamental analysis.

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