Stock Analysis

A method that an investor or trader uses to evaluate and investigate an investment or the stock market

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What is Stock Analysis?

Stock analysis refers to the method that an investor or trader uses to evaluate and investigate a particular trading instrument, investment sector, or the stock market as a whole. Stock analysis is also called equity analysis or market analysis. Investors or traders make buying or selling decisions based on stock analysis information.

Stock Analysis

Stock analysis helps traders to gain an insight into the economy, stock market, or securities. It involves studying the past and present market data and creating a methodology to choose appropriate stocks for trading. Stock analysis also includes the identification of ways of entry into and exit from the investments.


  • Stock analysis is a process followed by traders to evaluate and understand the value of a security or the stock market.
  • Stock analysis follows the idea that analysts can create methodologies to select stocks by studying past and present data.
  • Fundamental analysis and technical analysis are two broad types of stock analysis.

Types of Stock Analysis

Stock analysis can be grouped into two broad categories:

1. Fundamental Analysis

The fundamental stock analysis method involves the evaluation of a business at a basic financial level. Investors use fundamental analysis to determine whether the current price of a company’s stock reflects the future value of the company.

Fundamental analysis uses different factors such as the current economic environment and finances of the company to estimate its stock value. Different key ratios are also used to determine the financial health and understand the true value of a company’s stock.

  • Earnings per share (EPS) – The EPS is useful when companies operating in the same industry need to be compared. A company’s EPS indicates its profitability; hence, traders consider an increasing EPS a good sign. The higher the value of EPS, the more the company shares are worth buying.
  • Price to Earnings ratio (P/E)The P/E ratio indicates how much investors are willing to pay for the earnings of a company. A higher P/E value could mean an overvalued stock. Or, it could imply that the market is expecting the company to perform extremely well over time. On the other hand, a low P/E value is seen as unfavorable by the market.
  • Price to Earnings to Growth ratio (PEG) – The PEG ratio helps to determine the value of a company’s stock while considering the earnings growth of the company. The PEG ratio, along with the P/E ratio, can help obtain a clearer picture of a company’s stock than the P/E value alone.
  • Price to Book ratio (P/B) – The P/B ratio is used to compare the market value of a company with its book value. It seeks the value that the stock market places on a company’s stock relative to the book value of the company. A company with sound financial health will trade for more than its book value since investors will consider the company’s future growth while pricing the stocks.
  • Return on Equity (ROE) – It measures how effectively a company uses its assets for producing earnings. A high ROE implies that a company squeezes out greater profits with available assets. Hence, with all other things equal, it will be better to invest in high ROE companies in the long run.
  • Dividend Payout Ratio It measures the percentage of the company’s earnings paid to shareholders or owners. The earnings of the company, which are not passed on to the shareholders, are used to pay off debts, reinvest in business operations, or are retained for future use

2. Technical Analysis

The technical analysis method involves examining data generated through market activities, such as volume and prices. Analysts following such a type of stock analysis use technical indicators and tools like charts and oscillators to identify patterns that can indicate future price trends or direction.

Technical analysts examine the historical trading data of a security and estimate the future move of the security. It is frequently used for forex and commodities. The technical analysis is based on the following assumptions:

  • The market knows it all. Technical analysis assumes that the market price of a stock reflects all that has or can affect a company. Technical analysts consider that all the factors affecting the company are priced into the security.
  • Price follows a trend. It implies that once a trend is established, future prices tend to follow the direction of the trend. Such an assumption is the basis of many strategies for technical trading.
  • History is likely to be repeated. History repeats itself, mainly concerning price movement. Market psychology causes price movements to repeat. Technical analysis involves using chart patterns to analyze the movements in the market and study trends. Charts that have been used for over 100 years are still relevant since price movement patterns are often repetitive.

More Resources

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