Stock Analysis Techniques

There are a few types of investors. Some are those who shy away from stock market because they think it is just too risky, some are those who want to invest in stock market but don’t understand how to do stock analysis therefore they stick with diversified mutual funds. And then there are those who understand how to do stock analysis and are able to cherry pick god ones among thousands of available stocks.

It is a proven fact that investing in stocks has given the best returns in the long term. The return of investment is much more than those in certificate of deposits or even mutual funds. But for that, it is important that you understand how to do stock analysis and know which stocks are a good buy and which are not. Let us take a look at methods which are used to analyze the stock.

There are basically 3 ways in which stock analysis is done:

• Fundamental analysis of stocks
• Technical Analysis of stocks
• Quantitative analysis of stocks

Fundamental Analysis of stock

In fundamental analysis of stocks, the investors study the stock as a business. When you buy a stock of a company, you are buying a part of that business. Therefore they try to find out the value of that business and then see what the worth of that stock is. This is usually done by assessing the financial per value share of the business. Those who believe in fundamental analysis of stocks like to think that this is the only good way to analyze the stock.

While doing this type of analysis, a few things at which analysts look are value, growth, income, GARP (Growth at reasonable price) and quality. We will cover the fundamental analysis of stock in detail under another topic. Warren Buffet is one of the most famous practitioners of this theory.

Technical Analysis of stock

A lot of investors just look at all the financial details available in the market which are disclosed by the company and then try to figure out whether it is a good buy or not. Since this is public information and available to everyone, you don’t find any edge over other investors. Therefore, some investors try to figure out alternate methods of analysis the stock. One such way is to use tools which tell them what the investors might think about the stock at a particular time. Those who try to do this analysis based on psychological information are called technical analysts of stocks. They use charts like point and figure charts, logarithmic charts, and Japanese candlesticks to do this kind of analysis. Again, we will cover technical analysis of stocks in greater detail under another post.

Quantitative Analysis of stocks

As the name suggests, this type of analysis is purely quantitative meaning it is based purely on numbers. Unlike fundamental analysis, this theory doesn’t believe on things like business, management’s expertise, competition, market potential etc. This theory believes that these parameters are subjective and can be inferred differently by different people. In quantitative analysis, only numbers talk. Company size is considered while analysis the stock. While doing the analysis, investors might adopt screen based investing. In this method, they apply some filters on the numbers. Only if a company passes all filters, and then they do in depth analysis about that stock, else reject it. Another system called CANSLIM is also used which is a hybrid of fundamental and technical analysis.