Stock Analysis – In this article, we will see how to do stock analysis. The analysis has no fixed method. One has to try out a method or combination of methods and stick to one. Generally, stocks are analyzed on two aspects. Technical Analysis and Fundamental Analysis. People use either of them or both of them. Using combination proves to have better probability of picking a stock at right time. Along with these two, if we can add macroeconomic analysis, then it will be better.
Let’s first understand these Technical and Fundamental Analysis. And then we can check out other types of analysis to increase our probability of picking a right stock.
Stock Analysis – Fundamental Analysis
This analysis deals with revenue and profit of the company. If the company is growing continuously, then it reflects in the share price too.
Retail investors normally have access to a financial document called Annual report. Sample Annual report for Reliance – Link. This report contains all the financial information like Profit & Loss, Cash Flow, and Balance sheet. The other important information in this report is the Management commentary on the future growth. It also contains other information, but studying those needs some financial knowledge.
However, if we continue to do read these reports, we will be able to make sense one day.
Stock Analysis – Technical Analysis
Now let’s look at technical analysis. This is a very vast subject, but I follow price action analysis. This can be done in various ways. I found the below approach after trying many indicators and it works most of the times.
Technical Analysis Approach
I draw the parallel channel for any stock I am analyzing. And add indicators MACD and RSI on to the terminal. I will cover what I do after adding, in the below checklist summary section
Since we got an idea of the fundamental and technical analysis, I compiled a simple checklist before adding a stock to my portfolio
Check list summary
- Fundamental Analysis
- Revenues and Profits should be growing
- Cash flows should be reasonable
- Management commentary should be good for the future, this information mostly comes out after the stock has rallied. This will act as a validator only.
- Technical Analysis
- Stock price should be at the bottom of the channel
- MACD should be below zero and the indicator line should be about to cross the signal line
- RSI should be in oversold zone
- Valuation should be attractive. I use P/E ratio for the same.
- Other Analysis
- No management issues should be present
- No major macroeconomic conditions should have been present. Like, any negative policy changes or change in consumer sentiment
- Any major macroeconomic changes should be happening in near future. As an example, reducing interest rates in US will be good to Indian IT companies
Conclusion
I hope you got broader idea now for the analysis. This is not a hard and fast rule for stock analysis. It worked for my personality. Based on your personality, some of the parameters won’t be needed. Whatever analyses parameters you pick, those need to be constantly reviewed and optimized for better stock picking.
Now that we have seen the above, check out this relevant article which can be of interest to you – Basics of stock market