What are the different ways available to analyze stocks?



What are the different ways available to analyze different stocks?

Investors usually invest in a stock after prior analysis of its profitability. There are some universal ways available which the investor follows. Here is a list of the same.


  • Fundamental Analysis: This would include an in-depth lookout in a company's financial statements(typically balance sheet, profit and loss account, and cash flow). Also if an investor wants to know about future plans of the company he may look into the management report mentioned in the annual report of the company. Another parameter would be to do ratio analysis for the company using the data provided in the annual report. For eg. Debt to Equity Ratio, Return on Assets, Debtors and Creditors Turnover Ratio, and the Inventory Turnover Ratio. 
  • Technical analysis: Technical analysis includes looking at the historical performance of the various stocks and analyzing some trends and patterns. The major focus is placed on the demand and supply of the stock  A little emphasis is placed on the value of a firm. Some examples are candlestick charts, moving average charts, etc.
  • P/E Ratio: This ratio is calculated by dividing the market value of the stock per share with the earnings per share. A lower ratio would show that there are more chances of growth for the firm. A higher ratio would show that the company's share price is quite saturated with little scope of high growth as compared to other competitors in the industry. 
  • Earnings per share: The higher the EPS of a firm the higher is the value of its shares. Usually, investors prefer to invest in a stock which has increasing earnings per share. This would show that the day to day operations of the firm are carried out in an efficient manner and therefore a good amount of profits are being passed to the investors. 
  • PEG Ratio: This ratio is calculated by dividing the P/E Ratio by the 12-month growth rate of the firm. Stocks with a PEG ratio of less than 1 are usually preferred by the investors. This way you can calculate the future growth of a firm with the help of historical growth rates. This makes the investor more confident in predicting the future value of a stock. 
  • Book Value: The price to book ratio is another important ratio that the investors use. This ratio helps you to find high growth companies that are potentially undervalued at the moment. This ratio is calculated by dividing the market value of a company's stock by the book value of equity. The book value of equity is simply the difference between the book value of assets and liabilities. The lower the ratio the better is the prospect for the company to achieve high growth than other competitors in the industry. 
  • Return on Equity: Return on Equity is calculated by dividing the net profit by the shareholder's equity.  A higher ratio would typically mean that the firm is able to generate profits on a regular basis. A stock with an increasing ROE is considered to be good for investing. Keep in mind that the ROE may be negative as well for loss-making firms. Investing in the stocks of these firms may lead to substantial depletion in your corpus amount. 
  • Analyst Recommendations: An investor who is not well qualified to perform the above analysis may opt to follow analyst recommendations. Analysts usually carry out extensive research and technical analysis and subsequently give buy and sell instructions. For eg. The trade setup for every trading day in money control contains buy and sell instructions. Almost all finance newspapers like the economic times contain buy and sell strategies for optimum growth in the investor's portfolio.
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