Stock Market Analysis

August 8, 2023

Stock Market Analysis – Assess the Right Time to Invest!

Stock market analysis is used to learn about the equity market and determine the actual worth of a stock. Its primary instruments are fundamental and technical research.

Stock market analysis is hardly different from how you check out an e-commerce website to land a good deal at the best price possible.  


What is Share Market Study/Analysis?

Share market study/analysis involves going deeper into the world of stocks to research which stocks are worth buying and which ones should be sold. Essentially you try to figure out the intrinsic value, that is, the real value of a stock you are willing to buy or sell. 

Read More: Valuation of shares.You do that by looking into the historical data and prospects of future growth and to what extent the market has already priced it. There are two ways to execute Share Market Study/Analysis – fundamental analysis and technical analysis. We have covered both the topics in detail in the following article:

Fundamental Analysis

As legendary investor Warren Buffett says, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Price holds the key.

Fundamental analysis deals in evaluating what the intrinsic value of a company is. If a company is valued below its intrinsic or potential value, it signals a buying opportunity.

The analysis not only dwells into the company’s historical earnings, debt and working capital requirements and past corporate actions, but also the company’s competition, strengths and weaknesses, industry prospects and macro factors that could influence the intrinsic value of its shares.

A company may be fundamentally strong, but overpriced in the stock market. The other company might not be as fundamentally strong as others, but the stock market might not be valuing it right (or undervaluing it).

Most Important Fundamental Analysis Tools/Parameters

There are various Fundamental Analysis Tools/Parameters. Let’s take a look at some:

1. Price to Earnings Ratio 

Price to earnings ratio, also called PE ratio, is the most common tool to figure out the intrinsic value of a stock or the market as a whole. A PE ratio is defined by the price one pays for a Re 1 earnings of a company. If the PE is 21, it means an investor is willing to pay Rs 21 for every single rupee earnings by a company. The formula goes as – (price/earnings per share).

Learn everything about PE Ratio here.

2. Return on Equity Ratio 

Return on equity tells you how much post-tax profits a company has earned on overall investment shareholders have made in the company. A company capable of generating high return on equity consistently is the one with better prospects of continuous growth in profits. The formula is simple: 

Return on Equity = Net Income ÷ Average Shareholders’ Equity

3. Debt-Equity Ratio

If you have taken loans, a major part of your salary might be going into serving EMIs. Similarly, if a company has taken debt, a good part of its income might be going into interest payment. A debt-free company or one with a low debt-equity ratio makes for a good investment. 

Debt-Equity (D/E) Ratio = Total Debt/Total Equity

To learn more about Fundamental Analysis, read our blog on Fundamental Analysis of Stocks.

Technical Analysis

Technical analysis assumes that the prevailing stock price reflects all information available in the public domain and, thus, focus on the statistical analysis of price movements.

Technical analysts believe that past prices can help predict future price action. For intraday analysis, a 15-minute technical chart of an index or stock would be more important than a tactical trader who might take into consideration weekly charts to get most of his investments.

To learn more about Technical Analysis, read our blog on Technical Analysis of Stocks.

Most Important Technical Analysis Tools/Parameters

There are various Fundamental Analysis Tools/Parameters. Let’s take a look at some:

1. Moving Averages

One of the most used technical tools is the 200-day moving average. All you have to do is plot the 200-day moving average on the price chart. When the price of the stock rises above the moving average line, it’s a buy signal, and when the price falls below the moving average line, it is a sell signal. You can also look at the 50-day moving average or the 10-day moving average.

2. Relative Strength Index

Relative Strength Index looks into recent gains and losses to check if a stock is overbought or oversold. RSI is plotted on a scale of 0-100 and mostly takes into account the 14-day period. An RSI of 0 means that the stock price has fallen in all of the 14 trading days. An RSI of 100 shows that the stock price has rallied in all of the 14 trading days.

The stock is considered overbought when RSI is above 70. This is the time to sell. An RSI of less than 30 indicates the stock is oversold. This is the time to buy. 

3. Fibonacci Retracements

Fibonacci Retracement is based on an assumption that a stock retraces in a certain direction predictably. After some predictable retraces, it takes back its original direction. The best known predictable percentages are 38.2 per cent, 50 percent and 61.8 percent. So, when the stock retraces 38 per cent, it will generate either a sell or a buy call depending on the trend.  

4. Fibonacci Extensions 

Similar to Fibonacci retracements, Fibonacci extensions also determine possible support and resistance levels with the only difference being that they seek such levels above 100 per cent of the previous price movement. Common Fibonacci Extension levels are 161.8 per cent, 261.8 per cent and 423.6 per cent. 

We hope that you are clear about the topic. But there is more to learn and explore when it comes to the stock market, and hence we bring you the important topics and areas that you should know:

Market What is Primary Market?
Difference between IPO and FPO
Bull vs Bear Market
Trading What is Online Trading?
What is Algo Trading?
Investment What is Bonus Share?
What is Valuation of Shares?
What is Corporate Action?
Valuation of Shares
What is PE Ratio?
Analysis Stock Market Analysis
Difference between fundamental and technical analysis
Individual Topics What are CTT & STT Charges?
India Vix
Difference between FDI and FII
Account What is Trading Account
What is Demat Account

Quick summary

  • Share market analysis is research about which stocks are worth buying and which could be sold .
  • Fundamental analysis is evaluation of intrinsic value of the company.
  • Price earning ratio, return on equity ratio, debt equity ratio are the most important fundamental analysis tools.
  • Technical analysis is done on the basis of history of performance of a stock .
  • Most important technical analysis tools are moving averages, relative strength index, Fibonacci retracements, Fibonacci extensions.

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