Stock analysis is a vital means of ascertaining the value of stocks. There are many ways of doing it and a process followed by one investor may not be approved by any other. Investing in shares of a company means that the investor is buying a small portion of the business. There are many companies listed on the stock exchange.
The question is which companies will offer better returns on investment. This is judged by the value of the stocks of every company. It requires a thorough analysis of the stocks.
Stock analysis may be of the following broad types.
(A) Fundamental Analysis
(B) Technical Analysis
(C) Quantitative Analysis
(A) Fundamental analysis:
The fundamental analysis is done by calculating the “per share value”. The fundamental stock analysis has been further sub categorized for the convenience of understanding. Under this system, stock analysis is done on the basis of value, growth, GARP( growth at a reasonable price), quality and income.
When the investor sees the value of the stocks, it means that he actually wants to reckon the price of the stocks, if they are sold a couple of years down the road. In other words, the investor wants to get back more than he actually invested. Hence, he does the stock analysis accordingly.
The investors who take growth as a means of measuring stocks analyzes the growth of the company every year. He sees as to what are the possibilities of the company’s business metrics, earnings and sales per year.
(c) GARP or Growth at a Reasonable Price:
The investors who take GARP as the indicator of the company’s growth, judge the company’s stock status by the combination of growth as well as value parameters. The most widely accepted approach in case of GARP is to monitor the P/E ratio. (P/E refers to the price/earnings ratio).
There are many investors who decide about purchasing stocks depending on the dividends earned from stocks.
The common approach here is a mix of GARP, growth and value. The ROE or the return on equity approach is taken into account.
The fundamental stock analysis has been widely criticized by many owing to its “hazy and blurred” approach.
(B) Technical analysis:
No specifically defined tool for technical stock analysis is recognized but a chart may be a way of determining the accuracy of numbers in the stock market. It is reckoned that this is not a very dependable way of stock analysis.
(C)Quantitative stock analysis:
This method of stock analysis is based on calculating numbers. There are other factors, which are taken into consideration. They are expertise of the management, potential of newly launched products and competitive environment.
Last Updated on : 26th August 2013