Why does an investor need to analyse a stock before investing or trading?
Here is the answer
There are more than 6800+ companies listed in the both the exchanges, currently 1328 stocks are actively trading in NSE, hence there vast number of shares it is necessary to find the particular share which yields good returns to the investors.
How to analyse a stock ?
Basically there are two types of analysis
- Fundamental Analysis
- Technical Analysis
Fundamental Analysis is carried out to find a good stock for investing purpose, basically for long term, say a year and more.In this analysis we are going to find how fundamentally strong the stock is and find out the fair value of the stock.
Here is the tip in order to narrow our search we can select nifty50 stocks for our for research purpose,
There are 2 approaches to fundamental analysis
- Top Down Approach
- Bottom Up Approach
Top Down Approach:
- Macro- Economic Analysis: In economic analysis we are going to analyze how the macro economic indicators like inflation rate, interest rates, GDP of the nation, money supply in the country will have effect on the selected stock. These all indicators have a direct or indirect effect on the Stock Markets.
For Eg: If money supply is more in the economy it will lead people to invest more in the market.
- Industry Analysis: In industry analysis we will understand about the company’s business and its Environment, scopes of competition, government rules and regulation, what is sales trend in the industry, entry and exit in the industry and analyse how these factors have effect on our selected company.
- Company Analysis: In company analysis we are going to conduct research on the financial stability of the company like analysing revenues, expenses, profits, capital structure and cash flows.
Bottom Up Approach
Bottom up Approach is similar to the top down approach but we carry out the research in the reverse way, firstly we do company analysis then move towards industry and then towards macro economy.
There are two aspects to Fundamental Analysis
- Quantitative Analysis
- Qualitative Analysis
Quantitative Analysis: Quantitative Analysis mainly focus the numerical aspects of the company like analysing the Income and Expenditure statement, Balance sheet and cash flow Statement
- Income and Expenditure statement gives the fair view of the revenues expenses and profit of the company and find out the profit that can be distributed to the shareholders
- Balance Sheet will depict the assets and Liabilities the company is holding
- Cash flow statement gives the fair view of the free cash that is available to the company to out the expanding and growth activities.
Qualitative Analysis:Qualitative Analysis focuses on the qualitative aspects of the company like Goodwill and Brand Recognition, Competitive advantage, Business model and management and corporate governance.
Technical Analysis is analysis of the stock purely for the purpose of trading and speculation, it is used for the short term, we look at the price movement of the stocks, trends of the stock and the patterns that are formed on the price movements, the main assumptions of technical analysis history repeat itself
- CHARTS :
Price and volume charts are the most typical tools that are for technical analysis. A volume chart depicts the number of shares of a company that were bought and sold in the market during a day and price chart shows the prices in which the stock trades all over the day
For analysis, traditional line or bar charts, and candlestick charts can be used. A candlestick chart is a special kind of chart that is particularly relevant for technical analysis. It is in the form of a series of consecutive candles. Charts are used together with trendlines.
Trendlines indicate the direction of movement of a stock over a period of time. We will discuss them later too.
- MOVING AVERAGES :
an average of a few days’ price is calculated. For example, if a five day pattern of a stock’s price is Rs.50, 53, 47, 45 and 52, it is difficult to tell the direction in which prices have actually moved; this is called a simple moving average (SMA). .
- commonly used moving average concepts are exponential moving average (EMA) and linear weighted average (LWA) which give more weightage to the recent prices.
There are so many technical Indicators which are used in technical analysis to name few
- Relative Strength Index
- Bollinger Bands
Link to video https://www.youtube.com/watch?v=4qB_qXmTTCY
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