Investors use many indicators and signals to analyze a stock. The two most widely used forms of analysis are fundamental analysis and technical analysis.
1. Fundamental Analysis
The most widely practiced investment strategy. It relies on studying the fundamentals of a company before making an investment in stocks. This includes analyzing valuation measures, such as company’s price/earning ratio, competitive landscape, corporate initiatives, earnings history and dividend payout. It simply evaluates if the stock of the corporation is financially or fundamentally sound based on the following information: how long management has been in place and its record, the competitive environment, the chances of a company’s scoring big with a new product, and whether the company will have a good earnings.
Fundamentalists fall into the so-called value investors and growth investors. Value investors analyze a company’s financial situation and competitive position to see if the share price reflects the value of the company. If the share price is lower than the analysis suggests, the stock is a “value.” They look for companies that are cheaply price stocks. Warren Buffett is a famed practitioner of value investing. Growth investors are looking at the company’s rate of earnings and revenue growth. If it is steady and strong, a growth investor will be interested. They look for companies whose profitability is increasing or accelerating if not adequately maintained.
2. Technical Analysis
This analysis is more interested in both general and specific market patterns and trends. What goes on in the market around a stock can have a pronounced effect on a stock’s performance. For instance, in a bear market, even if the stock of a fundamentally sound and profitable company can suffer. In this case, investors use chart, which depicts stock price movement, volume and other technical indicators. Charting can be very simple or very complex. A simple charting strategy is to plot a stock’s price against a 200-day moving average. (The average is called “moving” because it moves with each day. Tomorrow, the moving average will include today’s price and those of the previous 199 days) A stock trading above its moving price can be described as having a positive momentum. A stock that trades below the moving average can be described as having a negative momentum.
Two common words among chartist are “support” and “resistance.” Using no more than a ruler, a chartist can trace a line across the chart that shows where the price rises and declines. A stock has support if it is bouncing off a certain price level. A stock faces resistance when it can’t break through a certain price level. Let us say, a company has the so-called moving average of P18 a share. If it moves lower, hitting P16 a share, and then moves higher, doing so a few times over several sessions, that chartist will say that the company has a support of P16 a share. On the other hand, if that company moves higher and can’t seem to get past P22 a share, it is said to face resistance at that level.
Kinds of Charting System:
· Bar Chart. Made up of vertical bars representing chosen time periods such as days, weeks, or months. The top and bottom points of the bar represent respectively the highest and lowest price of stock or issue traded for that day. The small tick on the left side of the bar stands for the price the stock opened. The tick on the right denotes the price it closed.
· Line Chart. Plot the closing prices of the stock and draws a line connecting two adjacent points to create the chart.
· Candlestick Chart. A powerful Japanese visual tool for getting accurate reversal and continuation patterns in market trends. The large or thick part of the line is called the “real body,” and gives a range between the session’s opening and closing prices.
Stock prices swing up and down due to changes in the intensity of greed and fear. Intensity of greed has only one common goal – to buy and make huge money, while intensity of fear is to sell stocks on account of rising apprehension. A successful trader, differentiated from a long-term investor, must learn to stand aside from the crowd’s influence of greed and fear and maintain an objective viewpoint of a stock’s present condition and well-being.