Stock analysis is a term that refers to the evaluation of a particular trading instrument, an investment sector or the market as a whole. Stock analysts attempt to determine the future activity of an instrument, sector or market. There are two basic types of stock analysis: fundamental analysis and technical analysis.
- Fundamental analysis, in accounting and finance, is the analysis of a business’s financial statements (usually to analyze the business’s assets, liabilities, and earnings); health; and its competitors and markets. When applied to futures and Forex, it focuses on the overall state of the economy, and considers factors including interest rates, production, earnings, employment, GDP, housing, manufacturing and management.
- In finance, technical analysis is a security analysis methodology for forecasting the direction of prices through the study of past market data, primarily price and volume. Behavioral economics and quantitative analysis use many of the same tools of technical analysis, which, being an aspect of active management, stands in contradiction to much of modern portfolio theory.
The efficacy of both technical and fundamental analysis is disputed by the efficient-market hypothesis which states that stock market prices are essentially unpredictable.
How Fundamental Analysis works?
Fundamental analysis determines the health and performance of an underlying company by looking at key numbers and economic indicators. The purpose is to identify fundamentally strong companies or industries and fundamentally weak companies or industries. Investors go long on the companies that are strong, and short the companies that are weak. This method of security analysis is considered to be the opposite of technical analysis.
Fundamental analysis uses real, public data in the evaluation a security’s value. Although most analysts use fundamental analysis to value stocks, this method of valuation can be used for just about any type of security. For example, an investor can perform fundamental analysis on a bond’s value by looking at economic factors such as interest rates and the overall state of the economy. He can also look at information about the bond issuer, such as potential changes in credit ratings.
For stocks and equity instruments, this method uses revenues, earnings, future growth, return on equity, profit margins and other data to determine a company’s underlying value and potential for future growth. In terms of stocks, fundamental analysis focuses on the financial statements of the company being evaluated. One of the most famous and successful fundamental analysts is the so-called “Oracle of Omaha”, Warren Buffett, who is well known for successfully employing fundamental analysis to pick securities. His abilities have turned him into a billionaire.
Even the market as a whole can be evaluated using fundamental analysis. For example, analysts looked at fundamental indicators of the S&P 500 for the week of July 4 to July 8, 2016. During this time period, the S&P rose to 2129.90 after the release of a positive jobs report in the United States. In fact, the market just missed a new record high, coming in just under the May 2015 high of 2132.80. The economic surprise of an additional 287,000 jobs for the month of June specifically increased the value of the stock market on July 8, 2016.
However, there are differing views on the market’s true value. Some analysts believe the economy is heading for a bear market, while other analysts believe it will continue as a bull market.
How Technical Analysis works?
Technical analysis is used to attempt to forecast the price movement of virtually any trad-able instrument that is generally subject to forces of supply and demand, including stocks, bonds, futures and currency pairs. In fact, technical analysis can be viewed as simply the study of supply and demand forces as reflected in the market price movements of a security. It is most commonly applied to price changes, but some analysts may additionally track numbers other than just price, such as trading volume or open interest figures.
Over the years, numerous technical indicators have been developed by analysts in attempts to accurately forecast future price movements. Some indicators are focused primarily on identifying the current market trend, including support and resistance areas, while others are focused on determining the strength of a trend and the likelihood of its continuation. Commonly used technical indicators include trend-lines, moving averages and momentum indicators such as the moving average convergence divergence (MACD) indicator.
Technical analysts apply technical indicators to charts of various time-frames. Short-term traders may use charts ranging from one-minute time-frames to hourly or four-hour time-frames, while traders analyzing longer-term price movement scrutinize daily, weekly or monthly charts.