What Is Stock Analysis?

What Is Stock Analysis?

Sometimes, you’ve got to look to the past to make good decisions in the future. This is true in many aspects of life, but particularly true in trading. This is why traders rely so heavily on stock analysis.

Stock analysis is a vital process that can help you make a decision about whether to make a trade. While it might sound complicated and highly technical, it’s really quite accessible to traders of all levels, particularly with tools like StocksToTrade in your repertoire.

Here, we’ll explain what stock analysis is, some of the ways it’s done, and how it can benefit you as a trader.

What Is Stock analysis?

Stock analysis is pretty much what it sounds like: a process by which you analyze stocks. The term stock analysis refers to any number of methods that you as a trader might use to review historical or current data on a given stock in order to attempt how it might perform in the future.

There’s not just one approach to stock analysis. It can be performed in myriad ways, and you might look at all sorts of different data and time periods.

Download the key points of this post as PDF.

Key Types of Stock Analysis

There two key types of stock analysis that are most common: technical analysis and fundamental analysis. Let’s dig a little deeper so you can gain a basic understanding of both types …

Technical Analysis

This is the type of stock analysis that focuses on the stock’s action. It uses historical data on the stock’s performance over time to determine if there are any patterns that can help you see how it might perform in the future. (The Dead Cat Bounce, for example)

When performing technical analysis, these are some things to look for:

• Price action. How has the stock’s price moved over time? Does it have a history of gaining?
• Price trends. When you look at the stock’s chart over time, are there trends in the price? For instance, does the stock always go up before or after a major holiday?
• Patterns. History rarely repeats itself exactly, but often close enough to merit consideration. When you look at a stock’s performance over time, are there patterns that seem to be reliable or predictable?

Fundamental analysis

This is the type of stock analysis that focuses on the company offering the stock. Not only is the value of the stock directly tied to the company’s performance and value, but looking at the company can clue you in on catalysts that could affect the stock either positively or negatively.

When performing fundamental analysis, these are some important things to look for and consider:

• What’s the EPS? The earnings per share (or EPS) is calculated by dividing the company’s profits by the number of outstanding common shares. This is an important metric for determining whether a company is a good choice for you.
• Earnings reports are key. A company’s quarterly earnings report is a great resource for you as a trader. Mandated by the SEC, this is where you’ll find the nitty-gritty about the company’s finances, and you’ll be able to assess whether the company is performing according to sales projections.
• Consult multiple sources. Don’t just read through press releases issued by the company to investigate the worthiness of a company or stock. These can often be presented in a self-serving light. Consult other sources such as the news and blogs to confirm your findings.  

Is One Type of Stock Analysis Better?

According to an informal poll on StocksToTrade, technical analysis is favored by about 50 percent of our members.

According to Tim Bohen, it’s smart to start technical. As he said in the same post as the poll, “I do think it is best to be technical first. The ratio may be slightly different for many, but I see many new traders trying to ‘trade the news’ on a stock that has very low volume and price movement. Remember: only price pays. So, put price first and fundamentals second.”

Our members like to use STT indicators like MACD (moving-average convergence/divergence line), accumulation/distribution line, and the head-and-shoulders pattern to look at the stock’s performance.

Bottom Line:

Stock analysis is a process that should be part of every trader’s routine. By taking the time to evaluate a stock’s performance over time and considering the company issuing the stock, you can gain powerful insight on potential trades.

Analysis can help you make more educated decisions, which can help you make better choices in your trading.

What type of stock analysis do you use? Leave a comment!