Stock analysis is often a definitive decision driver for any trader.
When traders attempt to analyze where a stock price might land, they’re flying blind if they don’t collect and analyze historical pricing data.
Without knowing the past (or present), you can’t make a good decision on the future.
The phrase “stock analysis” might sound like a highly technical concept. Once you start digging through data, it can seem complicated only if you lose focus on what you’re trying to accomplish at the core …
It’s all about trying to determine where the stock price might go. That’s the end goal. Period.
A stock analysis must be observed from multiple angles. There are a few distinct, effective approaches that can provide the intel needed to help make informed, logical decisions.
So, what are you supposed to analyze? The stock price? A company’s revenue? The latest press story?
Let’s take a look …
What is Stock Analysis?
Stock analysis is exactly what it sounds like, but it’s important to note that it’s not a ‘thing.’ It’s an action — a process. It’s a description of the methods used to assess and compare historical and present data to attempt to forecast stock prices.
This can either mean you analyze a broad scope of the market from a 30,000 ft. overview, or simply hone in on the activity of a single stock.
You can look at how a stock performs in relation to itself over time, industry changes, or entire market changes. You might even compare a stock, company, or currency (we’ll get to that later) with others in the same industry to help determine where the price will settle at a given time.
How I Choose Stocks
The type of stock choice should first be driven by a fundamental element: portfolio goal.
The last thing you want is to be taken advantage of by the latest pump-and-dump schemes. You can’t just blindly chase the ‘flavor of the day’ without knowing your end goal. If you follow that path, you’ll likely join the majority of traders who lose money. Don’t go there.
Here are some things I ask myself when deciding where to invest:
- Does the company interest me? It helps to invest in a company or industry in which you have at least a mild interest. For example, if you have zero interest in durable medical devices, how enthusiastic might you be about investing in that company? Remember, you’ll be doing extensive, continuous research on that company.
- What do I know about the company? You must be informed — there’s no way around it. What’s the company’s history (not just stock price history)? What has it done up to this point? How profitable is it? When does the business encounter its down cycles? Any media reports on the company? This is very important stuff.
- Stock patterns and trends. Learn to understand patterns. You won’t become an expert overnight, but remain diligent. It takes patience, discipline, and a TON of research to have a clear picture of what you’re looking at. It’s one thing to know a pattern, but it’s another to know how to use it. Below, you’ll see more about patterns, trends, and the distinctions between them.
(If you’re interested in some of my secrets that help me find some of the hottest stocks to trade quickly, I’ll walk you through them here.)
How to Analyze Share Market Data
Market data is typically analyzed using stock charts. Pretty obvious, right?
These charts provide data about how any given stock is performing — also known as performance analysis. There are loads of free resources online that can provide the data needed from these charts.
For digging much deeper than basic stock charts, stock analytics software is hugely beneficial.
This type of software provides a dashboard of intel to help you strategically plan out the stock buys you’re considering. You’ll see the movement of stock prices in real time, which can help you adapt quickly to market variations.
Creating a trading plan with this software can help foster logical, calculated trades. Think of a trading plan like a business plan.
You can also perform backtesting with analytics software. This is where historical market data is used to help determine a trade’s outcome. Think it if as a simulation that can mitigate your financial risk when it comes time to buy.
Financial statements provide information about how the company is performing. Publicly traded companies typically provide information for shareholders on their websites.
Share Price Performance Analysis
A price performance analysis is a measurement of how a stock price fluctuates. It tells shareholders how much their wealth increases or decreases.
When analyzing the stock price itself, there are some crucial key metrics we’ll cover next — and you don’t want to overlook them.
Types of Stock Analysis
There are two basic and distinctly different types of stock analysis: technical and fundamental.
Each analysis type has its own place and purpose in analyzing any given stock. Having a basic understanding of how they work is only the beginning.
When using these two methods, you’ll wear different hats:
- Technical Analysis — This is where your ‘economist hat’ comes into play. It’s where the primary focus is on the stock action itself.
- Fundamental Analysis — You wear your ‘business hat’ when using this method. Here, the spotlight is on the inner workings of the business and how its performance affects the respective stock price.
Let’s stop for a minute on fundamental analysis. Before you can begin to understand the performance of a business, you need to know the basics of how business finance works.
Without fundamental knowledge, you won’t have a foothold on how to properly use the data.
Technical Stock Analysis
A technical analysis is where historical data from stock prices is used to help with future price forecasts.
Here are three important key metrics to consider when performing a technical stock analysis:
- Market Action. Also known as price action, this is all about the price movement specific to a particular stock.
- Price Trend. When the price moves in an expected way for a period of time, it tends to fall into an observable trend. It’s considered a trend until the price suddenly moves from the range of expectation, then it’s deemed a broken trend.
- Patterns – Stock patterns fall under the old adage that ‘history repeats itself.’ Some analysts track the patterns of stocks as far back as 100 years, because the data is still relevant today. The way certain stock prices behaved after the Great Depression in 1929 could have repeated a similar pattern after the 2008 recession!
An Example of Technical Analysis
How can you sometimes gauge the outcome of a stock price using a technical analysis?
Check out this example …
We’ll call a hypothetical stock XYZ. Let’s say XYZ is sitting at $50 per share and increases by $3 per share every quarter — except it takes a dip of $1.50 per share during the fourth quarter each year. It’s been this way for the past four years.
With this data, a trader might estimate that they’ll make $9 per share for the first three quarters of the year and will lose that $1.50 per share by the fourth quarter. They’ll be ahead $7.50 by the end of the year if they hold onto that stock.
But is it that simple? No way.
All we did here was analyze data within XYZ’s four-year trend. What happened before those four years? How long might this trend last? This is where deeper historical data must be analyzed.
Other factors include competitor prices, stock splits, and supply/demand forces. Unless you’re into taking serious risks, then face-value factors, alone, aren’t remotely enough for stock-price analysis. You must dig deeper.
The NASDAQ Dozen outlines a 12-step process for analyzing the fundamental and technical aspects of stocks. It’s worth a look.
Fundamental Stock Analysis
Here’s where you’ll don the ‘business hat.’
This type of analysis is used by looking at a business’ financial health and its effect on stock prices. It uses key performance indicators such as cash flow trends, income statements, balance sheets, and the U.S. Securities and Exchange Commission (SEC) filings.
Other sources you should seek out include media articles, blog posts, and company press releases. Is this business a couple months away from releasing a new product into the market? Is there media buzz about it? Did they record profits last quarter, or did profits take a dive?
So how does a company’s performance directly relate to the stock price?
One important measurement is earnings per share (EPS). This calculation is found by dividing a company’s profits by the number of common outstanding shares.
Another parameter is earnings growth, which means measuring the growth of a company’s profit over time.
Finally, you have what’s called a price/earnings to growth ratio (PEG). This is the price-to-earnings divided by the growth rate of a company’s earnings over time.
PEG = PE Ratio ÷ Earnings Growth Rate
Investopedia has a great resource on fundamental analysis, as well as an example of some fundamental indicators of the S&P 500 from July 4–8, 2016.
Since forex (Foreign Exchange Market; often abbreviated FX) is specific to the trading each of the world’s currencies based on their buying and selling price, you can guess that forex analysis is used to determine trends based on just that.
Currencies on the forex market are traded in pairs, and certain currency pairs are more commonly traded than others. When performing a forex analysis, you can use both technical AND fundamental analyses.
On the technical analysis side, you might analyze patterns and historical data to determine the future price of currency pairs. Keep in mind that it’s quite a bit more intensive, as forex is a 24-hour market.
With forex, you’re also dealing with a lot of big data. Minute by minute, traders all over the world track the fluctuation of currencies around the clock. Often, traders use automated trading analysis methods, which take the data and convert it into trading decisions.
I’ve talked about forex trading charts before — line charts, bar charts, and candlestick charts. Each has its own purpose, and each respective chart reveals more complex data than the next.
- Line Chart — A line chart is the simplest of charts, and can show how you the data from one closing price to the next.
- Bar Chart — A bar chart shows the opening and closing of prices AND the high and low trade prices for a specific trading range.
- Candlestick Chart — Candlestick charts shows the same information on a bar chart but are more graphical, showing a rectangular shape between the opening and closing price.
The fundamental analysis of forex trading can be even more complicated …
Here, you’re looking at worldwide economic and political factors that might affect the supply and demand of an asset, and then analyzing how that might affect a currency pair. For example, did “X” country just elect a new president? What’s the worldwide perception of this new president?
This is a specific type of forex analysis (which could be closer to a fundamental analysis than anything) that examines the psychological state of others in the market. After all, let’s not forget that the market is made up of humans who have opinions, perceptions, fears, etc. I’ve stated before that market sentiment matters to short-term traders.
An Example of Forex Analysis
Let’s take the currency pair of both U.S. and Canadian dollars (US/CAD). You could apply a technical analysis strategy to observe price action, trends, and patterns.
Remember, however, forex trading can be much more complicated. To gain another perspective on what’s really happening here, you can take a look at the economies of the two countries. You can also cross-reference this data with the economy of other countries not included in this pair.
Finally, don’t forget the sentiment analysis aspect. If you notice, there’s a dip on September 8, 2017. Did something happen in the news on or around this time? There’s a multitude of news you can sift through. For example, Hurricane Irma formed on August 30, 2017, and dissipated on September 13 of that same year.
Maybe the hurricane had nothing do with the price dip in the currency pair, but you won’t know without performing due diligence. Heck, you might find out that when a tropical storm hits another part of the world, it could affect a different currency pair. Don’t discount anything without analyzing first.
You can find more info on forex analysis here.
Frequently Asked Questions
What Are Some Stock Research Tools?
Some popular stock research tools you can use are:
- Research Platforms. This platform can provide a wealth of information, such as quotes and statistics.
- Company Financial Statements. Companies are required to release this information to their shareholders. Check the company website for this information, or contact the company directly.
- News or Research Reports. News that can affect the market and influence companies’ and/or traders’ decisions.
Should You Avoid Stock Advice from Promoters?
Over the years, I’ve had plenty to say about stock promoters …
Bottom line: Think of stock promoters as nothing more than stock marketers or salespeople.
While it’s possible to use promoters to your advantage, never let their statements directly affect your trading decisions.
Sometimes, stock promoters’ tactics can be downright illegal. If you’ve seen The Wolf of Wall Street, then you know exactly what I’m talking about.
Promoters are typically nothing more than people or entities who create buzz to artificially inflate stock prices for insiders to benefit themselves by raising capital at those artificially inflated prices. So, it’s obvious that most are only working in their best interests and can’t be trusted.
I’ve greatly enjoyed using some promoters to my advantage. Learn how to spot their tactics and notice the associated patterns. If you watch these key penny stock trading videos, you could gain a better understanding of this strategy.
How Can I Learn Stock Analysis?
Many traders and investors learn stock analysis by reading books, taking online courses, and/or studying educational websites that cover the topic.
Of course, you’ll want to double-check that the resources you seek are reputable … and never take advice from stock promoters (have I emphasized that enough?).
Above all, I believe the best way to learn stock analysis is from someone who has achieved significant success doing it. Doesn’t it make sense to take direct advice from someone who’s been there and done it, rather than from someone who only writes a book about it?
Some of my students consider it “fast-tracking,” since they learned many valuable lessons from all the trial and error I had to go through over many years.
We’re always sharing tips, strategies, and advice that could better equip you for trading success. You can watch weekly live trading and Q&A webinars directly from me, and learn the strategies my top students used to propel themselves to millionaire status.
Although you might need to wear a couple of hats to perform a stock analysis, the important thing is to not lose sight of what you’re trying to do: figure out where the stock price might go
You can get wrapped up in the data from both analysis types until your head spins, but just remember that each piece of data should complement the other and hone in to your goal.
Whether it’s fundamental, technical, or sentiment analysis, you’re only using those methods to help drive your decisions. Your ultimate goal is to help ensure that your decisions remain logical and calculated at all times.
Keep that in mind, and you just might hit your mark.