What is stock analysis? Stock analysis is the evaluation of a particular trading instrument, an investment sector or the market as a whole. Stock analysts attempt to determine the future activity of an instrument, sector or market.
The seven ways to analyse stocks
Technical analysis: this is the study of the supply and demand of a stock within the market. Investors who use technical analysis believe that a stock’s historical performance indicates how the stock will perform in the future. Little attention is given to the value of the company. Technical analysis places heavy focus on the study of trends, charts and patters.
P/E ratio
A common method to analysing stock is studying its price-to-earnings ratio. You calculate the P/E ratio by dividing the stock’s market value per share by its earnings per share. To determine the value of a stock, investors compare a stocks P/E ratio to those of its competitors and industry standards. Lower P/E ratios are seen as favourable investors.
Earnings per share
A company’s earnings per share show how efficiently its revenue is flowing down to investors. An increasing EPS is taken as a good sign by investors. According to NASDAQ, the higher a company’s EPS, the more your shares are worth, because investors seek to purchase a company’s stock when earnings are high.
PEG ratio
The price-to-earnings growth ratio takes theP/E ratio a step further by considering the growth of a company. To calculate the PEG, you divide the P/E ratio by the 12 month growth rate. You estimate the future growth rate. Investors typically consider a stock valuable if the PEG is lower then 1.
Book value
Another method used to analyse a stock is determining a company’s price-to-book ratio. Investors typically use this method to find high-growth companies that are undervalued. The formula for P/B ratio equals the market price of a company’s stock divided by its book value of assets. Investors view a low P/B ratio as a sign that the stock is potentially undervalued.
Return on equity
Investors use return on equity to determine how well a company produces positive returns for its shareholders. Analysing ROE can help you find companies that are profit generators. ROE is calculated by dividing net income by average shareholders’ equity. A continual increase in ROE is a good sign to investors.
Analyst recommendations
Many investors use analyst recommendations to quickly size up a stock. Analysts perform extensive fundamental and technical research, and the issue buy or sell recommendations. Before deciding to buy or sell shares, investors typically use analyst recommendations in conjunction with a stock analysis technique.
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