As an investor, you probably use a number of different tools and resources to build your portfolio and make informed decisions about when to buy and sell investments. If any portion of your portfolio is made up of stocks, understanding how to analyze various stock options available can improve the way you trade. You can review the various methods to determine the best way to analyze stocks for your needs and desires.

What Is Stock Analysis?

Stock analysis is the process that an analyst uses to evaluate a particular instrument for trading, a sector of the investment market, or the entire market as a whole. Stock analysts use this method to attempt to determine the activity of a particular area of the market in the future. Investors and traders can utilize the analyses from experts when making decisions about what stocks to buy and sell, as well as the timing for trading particular stocks.

The two most widely accepted types of stock analysis are fundamental analysis and technical analysis. Each has its own benefits and drawbacks, but understanding how each analysis is performed can help you determine which experts you want to listen to when reviewing data and predictions.

  • Stock analysis involves assessing various factors about a particular stock to determine potential future activity.
  • The two main types of stock analysis are fundamental analysis and technical analysis.
  • Investors can utilize either type, or one of the other methods, for analyzing stocks when making decisions about what to buy and sell, as well as when to do so.

What Is Fundamental Analysis?

Fundamental analysis is the method of analyzing stock that focuses on the data available from various sources, such as company assets, financial records, market share, and economic reports. When performing a fundamental analysis on a public sector company, an analyst will usually rely more heavily on the metrics available on the cash flow statements and other financial statements, balance sheets, income records, and footnotes. A public company will release this information through its annual 10-K or 10-Q report, which is made available in the EDGAR system administered by the U.S. Securities and Exchange Commission (SEC).

Those who employ the fundamental technique for stock analysis will study any data that can impact the value of the security, including the state of the economy and other macroeconomic factors, as well as how well the company is managed and other similar microeconomic factors. The purpose of this analysis method is to determine the fair market value of the stock, so they take into account all the various factors that can determine what the value should be.

By identifying the fair market value, or real value, an analyst can then determine whether a particular stock is trading above or below its value. This information allows investors to potentially buy stocks when they are valued below what they are worth and sell when the value goes up.

Regardless of the method employed, the purpose behind stock analysis is to determine whether the value and strength of a stock are correct in the market where it is traded. Fundamental analysis of stocks uses a macroeconomic and microeconomic data approach, which is in contrast to technical analysis, a method that relies more on historical changes and data. In reviewing the method of fundamental analysis, Investopedia reports that all data used is available to the public, such as interest rates, the economic state, the issuer’s credit rating, and other key information.

What Is Technical Analysis?

Technical analysis is the other commonly used method for assessing the strength of a stock. It differs from fundamental analysis in that it focuses strictly on the statistical trends from the trading activity of a particular stock, rather than any data about the issuer or economy. Additionally, the purpose of fundamental analysis is to figure out the intrinsic value of a stock, while technical analysis is meant to evaluate the strength or weakness of a particular stock. When using this method, analysts review patterns and charting tools.

A few of the most commonly used patterns include trading signals, volume, and price movement. Something else that sets technical analysis apart from other analysis methods is that it can be used to evaluate any security that has historical trading data. Examples include currencies, futures, commodities, fixed-income, and other securities, in addition to stocks. Although it is used for evaluating stock strength, it is more prevalent in forex and commodities markets, where traders tend to place more focus on short-term movements in pricing.

Charles Dow introduced technical analysis in the late 19th century, although researchers John Magee, William P. Hamilton, Edson Gould, and Robert Rhea all contributed to the Dow Theory. Today, the method has evolved quite a bit to include hundreds of signals and patterns that have developed from research performed over several centuries. Those who employ this method believe that past price changes and trading activity indicate the future price movements of a security.

How to Analyze a Stock

Stock analysts provide their findings through a variety of methods and resources, but some traders wish to come to their own conclusions when analyzing stocks and other investment opportunities. Depending on your approach, you can employ either of the most common methods, or one of the other methods used to value a stock and assess its potential strength or weakness at a particular point in time. In addition to technical and fundamental analysis, several other accepted methods exist. These include the price-to-earnings (P/E) ratio, earnings per share, book value, price-to-earnings growth (PEG) ratio, and return on equity.

Fundamental Analysis Method

Performing one of the types of fundamental analysis of stocks involves reviewing all the financial data available about the stock issuer, as well as information about how the company has performed, how it is managed, and whether it is valued lower than it may be worth. You can find information about many of the companies that trade on the major U.S. stock markets through the SEC. Companies that trade on smaller or regional markets don’t have the same regulations, so you may not be able to get the information needed to perform this type of analysis.

Technical Analysis Method

If you want to perform your own technical analysis, you will need the historical data of a particular stock or security. This method can be more challenging, especially for newcomers to the trading world, as it is quite precise and involves using complex charting methods to determine whether the stock looks to be particularly strong or weak. The P/E ratio divides the value of a stock per share by its earnings per share. You utilize this data by comparing the number to the ratio of a company’s competitors, as well as the standards accepted in its industry.

Earning Per Share Method

Earnings per share is a method of analysis that involves looking at how efficiently revenue flows through a company to its investors. A rising earnings per share value of a company indicates positive growth and is viewed as a good thing by most investors. Most investors in the stock market want to buy stock from a company when its earnings are high, so owning shares of stock with a rising EPS can help this investment become more valuable.

Book Value Method

The book value of a stock is the price-to-book ratio, which helps an investor locate companies that are growing quickly but may be undervalued. This formula is the market price of a stock divided by the book value of equity, which you can find by subtracting the company’s liabilities book value from its assets book value. A low price-to-book ratio is an indicator that a stock could be available below its market value.

PEG Method

Employing the PEG method to analyze stocks takes the P/E ratio a step further by factoring in how much a company has grown. You can calculate this ratio by dividing the number you got from the P/E ratio by the growth rate over the last 12 months. The historical growth rate of the company will also help you estimate the potential for future growth. If the number you get from this calculation is below one, the stock is likely to be valuable.

Return on Equity Method

Return on equity is a method that allows you to determine how well a particular company is producing positive returns and sharing those returns with its investors. You can find the return on equity by dividing the net income of the business by the average equity held by the shareholders. When the ROE number continues to increase, the potential for positive returns is evident. In order to calculate this ratio, you need to have some basic understanding of stock market fundamentals.

No matter how you like to analyze stocks, doing so is helpful in determining which companies may be on the up and up, as well as which may be starting a decline. With this information, you can determine how you want to buy and sell stocks and enhance your portfolio. Getting started with stock analysis can be overwhelming, but our experts at Raging Bull can help you learn more about trading and the methods used to determine the potential value of a stock. Download our free e-book or schedule a one-on-one session to get started.

Jeff Williams

Jeff Williams is a full-time day trader with over 15 years experience. Thousands of entry-level and experienced traders alike – day-traders and swing-trade small cap stock traders – credit Jeff with guiding them to turning small accounts into big accounts.

Jeff’s "Small Account Challenge" shows people how to transform accounts from a few thousand dollars into $25k, $50k or even $100k.

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