types of Analysis – The Foundation of the Stock Market
By : Merlin Joy, Senior Financial Trainer, Venteskraft
Updated : April 7, 2020
Stock analysis and the types of analysis are important for traders as they need to evaluate the market as a whole before trading. Using these analyses along with the market conditions, traders choose their buying and selling entry points. Studying the current data and examining the previous market will only help the trader to have a better judgment on the entry point for buying and selling both. Stock analysis is ultimately utilized to gain an insight into the whole economy of the stock so that traders will be able to trade efficiently.
Basically there are two main types of analysis namely, fundamental and technical analysis, where fundamental analysis focuses on collecting information regarding the stock from market shares, company assets. Both fundamental and technical analysis can either be carried out individually or together. Financial records and so on. Usually, for public sectors traders and investors conducts the analysis through that particular company’s income statement, balance sheets, cash flow statement footnotes, and other financial statements. These sources will be open to the public in different forms through the database system controlled by SEBI. In addition to all the financial statements of the company, traders make sure they give close attention to whether it is healthy or not.
Profitability, liquidity, solvency, leverage, and efficiency are few of the critical factors taken into great consideration while carrying out the fundamental analysis. There are different ways to estimate a company’s health such as taking the current ratio to a quick ratio will determine whether the company is capable of paying its short term liabilities with its existing asset. Here the current ratio is calculated by dividing current assets by current liabilities where these figures and values are available in a balance sheet. If the ratio is seen to be less than 1 it is concluded that the company is not healthy in the first place causing them trouble to pay off short term debt. The debt levels of the company can be obtained from the balance sheets itself. Debt ratio, calculated by dividing total liabilities by total assets, if seen to be typically above 1 indicates that the company has more debts than assets, making it an unfit company for traders and investors.
Even in such scenarios, if the company offers high leverage the trader can predict a rise in interest rates thereby increasing its profitability. Another factor that needs to be looked into is whether the company follows a stable growth or deteriorating. In this case, to check the company’s growth status, by tallying its current financial statement to its previous year’s. The comparison can be between one for more companies that belong to the same industry. Operating margins, that shows how much revenue is left after paying operating expenses, is also simultaneously analyzed by the traders. A company with a higher operating margin will prove more favorable than the ones with lower margins.
The second in the types of analysis is the technical analysis. In technical analysis, traders and investors analyze past and present price action to foresee the future price movement of the stock. The analyst focuses on price action, volume, demand and supply which are key elements to reach conclusions and make predictive decisions based upon these factors. Under technical analysis more than any financial statements, charts are analyzed to predict the stock trends within a given period of time. This particular analysis is mainly subjected to support and resistance where a break in the support level indicates bearish/downtrend market condition and a break above resistance shows a bullish/uptrend condition. Technical analysis is the most efficient when the demand and supply affects the price action of the stock.
In conclusion, it is very essential that traders do proper research on the stocks they choose to trade, before investing all their capital. Without such a prepared report about the stock, it will seem difficult for the traders to predict stock price movements or performance.
