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Introduction to Stock Market Analysis

  • Bhumika Dutta
  • Aug 24, 2021
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Stock” has been one of the most popular words that are tossed around every day in the financial industry. If we have to understand what the stock market analysis is, we have to understand what stocks are. A stock is a financial instrument that reflects ownership of a portion of a company. 


This entitles the stockholder to a share of the corporation's assets and earnings according to the amount of stock they possess. "Shares" are the units of stock. At the stock exchanges, stocks are generally bought and sold, and this constitutes the “Stock Market”. 


Now that we have the basic idea of Stocks and the Stock market, let us move forward in this article with the following topics:


  • What is Stock Market Analysis?

  • Types of Stock Market Analysis.



Stock Market Analysis


Stock Market Analysis is a method in which the investors and traders make buying and selling decisions by studying and analyzing data history and present data. It allows the investors to understand the security that a stock can provide, before investing in it. There are stock analysts who perform thorough research to find out any activity at any sector of the stock market. 


By using stock market analysis, investors and traders can reach buying and selling decisions faster. There are two types of Stock Analysis: Fundamental Analysis and Technical Analysis. We are going to discuss both of them in detail below. 



Types of Stock Market Analysis:


  1. Fundamental Analysis:


Fundamental analysis is a type of stock market analysis that focuses on data from different sources like financial records, economic reports, company assets, and market share. 


According to Investopedia, investors and analysts generally evaluate the indicators on a business's financial statements - balance sheet, income statement, cash flow statement, and footnotes – to perform fundamental research on a public company or sector. These statements are made public in the form of a 10-Q or 10-K report through the EDGAR database system, which is run by the Securities and Exchange Commission in the United States (SEC). 


Investors examine a business's earnings report issued during its quarterly results news release to determine how much sales, costs, and profits the company generated.The analyst will generally check the measures of the company’s profitability, liquidity, solvency, efficiency, growth trajectory, and leverage. 


To evaluate how healthy a firm is, many ratios may be utilized. The current ratio and quick ratio, for example, are used to determine whether a firm will be able to pay its short-term commitments using current assets on hand. All of this is done to understand the worth and attractiveness of the business. 


Due to uncontrolled external variables such as investor attitudes, it is thought that the market price does not reflect the real worth of the firm. In the long term, when the market reaches equilibrium, the true value will match the market price. 


(Must read: Fundamentals of technical analysis)


Let us learn about the key indicators that are used in Fundamental analysis, according to this source:


  • Return On Equity (ROE):


Return On Equity provides information about how much money is earned by a company on the shareholders’ equity. It offers more information than a simple profit figure to display the efficiency of the company’s operations. 


The formula of Return On Equity is:


ROE= [(Income - Preference Dividend)/(Average Shareholders’ equity)]*100


An ideal Return On Equity is always consistent, high, and increasing. The ROE of any company could be compared with its own performance history and with the performance of other companies within the same industry.


(Also read: Equity Financing)


  • Debt-Equity Ratio (DER):


The debt-Equity ratio shows the number of assets that are used to finance the assets of the company. It depicts the number of funds provided by the borrowers and owners of the company. This ratio can be expressed in numbers and percentages.


The formula of Debt-Equity Ratio:


DER= Total debt / Total Equity


Ideal Debt-equity ratios are always decreasing in a consistent manner. The D/E ratio of any company can be compared with its past performance or with the DER of other companies within the same industry. Capital-intensive industries like capital goods, metals, oils, and gas can use ER to analyze their performances.


  • Earning Per Share (EPS):


Earnings Per Share is a measure that shows the amount of money earned by the company per share. This is one of the most useful measures for any company.


The formula to calculate Earning per share is:


EPS= (Net income - Preference dividend)/weighted average number of shares outstanding. 


The ideal EPS of a company will always increase in a consistent manner to show superior management performance. EPS can be used to understand the percentage of profit that is allocated to all the outstanding shares. It can be compared to its previous performances or performances of other companies.


(Suggested read: What is the wholesale price index?)


  • Price to Earning Ratio (PER):


Price to Earning Ratio is a method of comparing the current market price of any share with the earnings per share. It assumes the price that the investors might be willing to pay for the share. This ratio also shows how many years it will take to recoup the initial investment cash based on the rate of return. 


The formula to calculate PER is:


PER= Current share price/ Earning per share


The P/E ratio of a company can be compared to past performances and performances of other companies. The ideal Price to Earning ratio of any stock is consistently low. This ratio can be used to analyze the performance of companies in the FMCG, pharmaceutical, and technology sector. 



  1. Technical Analysis:


This is the second method of stock market analysis. Technical analysis examines historical and current market activity in order to forecast the likelihood of future price changes.


Technical analysts look at the whole financial market, focusing on price and volume as well as the demand and supply variables that drive the market. Charts are an important tool for technical analysts since they offer a graphical representation of a stock's trend over time. 


(Also read: Pros and Cons of Penny Stocks)


Only when supply and demand dynamics impact the price trend being studied is technical stock analysis useful. When there are external forces involved in a market change, technical analysis may not be effective.


For hundreds of years, technical analysis of stocks and trends has been employed. In the 17th century, Joseph de la Vega used early technical analysis tools to forecast Dutch markets in Europe. Technical analysis owes a lot to Charles Dow, William P. Hamilton, Robert Rhea, Edson Gould, and a lot of other people, including a ballroom dancer named Nicolas Darvas, in its present form. 


These individuals represented a new way of looking at the market as a tide that is best measured in chart highs and lows rather than the specifics of the underlying firm. With the publication of Technical Analysis of Stock Trends by Robert D. Edwards and John Magee in 1948, the varied collection of beliefs from early technical analysts was brought together and codified.


Technical analysis is based on the premise that the market price represents all relevant information that might influence a market. As a consequence, there's no need to consider economic, fundamental, or fresh events because they've already been factored into a security's price. 


When it comes to the market's broader psychology, technical analysts think that prices move in trends and that history tends to repeat itself. Chart patterns and technical (statistical) indicators are the two main forms of technical analysis.





It is very important to perform intrinsic research before making any type of investment. Through the research, one can analyze market patterns and assume the future performance of any investment. 


(Recommended read: Top 10 AI Stocks to Invest in 2022)


If one is investing in equity, he/she is buying some portion of a company and expecting to make money upon value increase. To ensure maximum returns, one must spend time on research. Thus the stock market analysis is very important for enthusiasts who are interested in investing their money in stocks.

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