You wouldn’t buy a smartphone without researching its processor, camera, display, and technical specs. Then why invest without doing your own research? In this article, learn the most important things to research before investing anywhere. Learn how to analyze market competition, evaluate potential risks and returns, and the essential steps you need to take an informed investment decision.
So basically, the stock market can be analysed in 2 ways:
- Fundamental Analysis
- Technical Analysis
1. Fundamental Analysis
Fundamental analysis is the measure of a company’s intrinsic value by checking related financial factors such as earnings, future growth, profit margin, return on equity, and economic factors which can affect the price in the future.
Note: Intrinsic value is also known as real value and it is an anticipated measure of what an asset is worth. Financial analysts use cash flow to calculate the Intrinsic value of a stock/company.
Fundamental analysis helps in evaluating:
- The company’s health and performance
- Understanding business model
- Working ways of management
- Its strength and weaknesses
The purpose of fundamental analysis is to figure out how much a company is really worth and compare that value to its current market price. This helps investors decide if a stock or asset is being sold for more or less than it’s actually worth.
Do these 3 things to perform Fundamental Analysis:
- Examine historical data: To assess past events or situations
- Examine publicly available information regarding a company such as financial statements such as quarterly reports and annual reports, including statements from its management and public perception
- Evaluating a company’s management team is also an important part of fundamental analysis. This includes reviewing the management team’s track record, experience, and leadership style. Additionally, investors may want to assess the company’s corporate governance practices, including the board of directors and any conflicts of interest
How Fundamental Analysis Can Be Helpful:
- The performance of a company according to the average industry standard can serve as an important metric in fundamental analysis. Let’s say, you’re considering investing in a company from the banking industry. Under Fundamental Analysis, evaluate the overall performance of the banking industry and compare it to the specific company that you are buying the stock of. Judge by market trends and consumer demand.
- The political landscape can also be judged under Fundamental Analysis. For example, new tax laws and/or regulations on a particular industry may impact the profitability and growth potential of companies operating within or related to that industry.
- Company’s profits over the years, structure and revenue, debt, and growth.
Types of fundamental analysis
Fundamental analysis is classified into two types:
1. Qualitative Fundamental Analysis
2. Quantitative Fundamental Analysis
Qualitative Fundamental Analysis
Qualitative analysis involves the evaluation of a company’s non-financial characteristics, such as its management team, industry position, brand recognition, competitive advantage, and corporate governance practices.
For instance, an investor might evaluate a company’s management team to determine if they have a track record of success and a clear strategy for growth. Check industry reports, social media engagement, google trends, and market research surveys to determine if it has a loyal customer base and a competitive advantage over other companies in the industry.
Quantitative analysis involves the use of financial and statistical data to evaluate a company’s financial performance, including its revenue, earnings, cash flow, balance sheet, and other financial metrics.
Research papers on stock market show the key metrics used in the quantitative analysis include
- Price-to-earnings (P/E) ratio: This ratio compares a company’s current stock price to its earnings per share (EPS) and can help investors understand whether a stock is overvalued or undervalued.
- Return on equity (ROE): This metric measures how efficiently a company is generating profits relative to its shareholders’ equity and can help investors evaluate a company’s profitability.
- Debt-to-equity (D/E) ratio: This ratio measures a company’s leverage by comparing its total debt to its shareholders’ equity and can help investors understand a company’s financial risk.
- Earnings per share (EPS): This metric measures a company’s profitability by dividing its net income by the number of outstanding shares and can help investors evaluate a company’s financial performance over time.
By analyzing these and other financial metrics, investors can gain a better understanding of a company’s financial health and make more informed decisions about whether to invest in its stock.
2. Technical analysis
Technical analysis involves analyzing market data, such as historical prices and trading volumes to evaluate securities. Technical analysts use charts and other tools to identify patterns and trends in market data and to predict future price movements based on those patterns.
After studying the historical trading activity and price fluctuations of security, investors can make informed predictions about future price movements, provided that they apply appropriate investing or trading strategies.
Technical analysis of Indian stocks is used by traders and investors to evaluate trends and patterns in price and volume data, in order to make informed decisions about buying and selling securities.
In technical analysis, Investors examine price charts in order to predict future price movements. The two main factors that influence technical analysis are the time periods that are studied and the specific technical indicators that traders select to use.
Time frames shown on the chart range from 1 min to yearly time spans. Most investors use a 5-minute chart, 15-minute chart, Hourly chart, 4-hour chart, and/or daily chart.
For intra-day traders, price movements that occur within a 15-minute time frame can be highly meaningful, as they offer an opportunity to capitalize on price fluctuations that take place within a single day. However, the same price movement may not carry as much significance for long-term investors who rely on daily or weekly charts to inform their investment cycles.
There’s more! Use candlestick charts. They have become a popular format among investors, largely due to their ability to provide a clear and concise representation of market activity. They display the ‘open’, ‘high’, ‘low’, and closing prices in a way that distinguishes Bullish (typically green) and Bearish (typically red) sessions, making it easy to identify upward and downward trends.
As an investor, you can utilize a diverse range of technical tools to analyze price movements, track trends, and attempt to predict whether they will continue, cease, or reverse. In this regard, you can get a technical view on nifty and other securities.
There are numerous indicators available, each serving a distinct purpose in interpreting price behaviour.
- Volume indicators are generally depicted as histograms, which illustrate the degree of buying and selling activity within a particular trading session or timeframe.
- Moving averages and Fibonacci tools attempt to estimate and predict levels at which prices are prone to bounce upwards (support) or downwards (resistance).
Identifying the price trend of a fundamentally strong asset tends to generate significant returns, It can inform you of the right price to buy an asset. By identifying trends you can predict the lowest or the highest price of an asset which will help you minimize profits and minimized risk.
At first glance, this approach may seem straightforward; however, it can become quite challenging to execute in practice.
- Price movements are not always trending; they can fluctuate up and down within a particular range for an extended period.
- Trends can only be identified by analyzing past data, which may not be useful for making timely trading decisions. Predicting whether a trend will continue or reverse can be difficult, as there is no foolproof method.
- Moreover, multiple trends can exist within an overarching trend, and different traders may follow charts covering different timeframes (such as minute-by-minute, hourly, daily, weekly, or monthly). As a result, a short-term trader may identify a downtrend in intraday trading, while a long-term trader may be riding an uptrend simultaneously. An inexperienced technical analyst may feel unsure about which trend to follow in such situations.
It’s important that before jumping into purchasing stocks, you should understand the what and how of the market and financial players. Take all the stakeholders seriously.
Make your move after familiarizing yourself with all the necessary information regarding investing. Gain your initial confidence and open Angel Broking account. Starting an investing journey will be easy, rewarding, and value-adding with such established and credible players.
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