Methods of Stock Analysis

Methods of Stock Analysis

To start investing in stocks, you have to understand how the market works. This will require you to invest time in learning how to analyse the information available on stocks and the companies associated with them. When analyzing stocks, there are two main approaches you can take. These are fundamental and technical stock analysis. While these are two distinctive ways of analysing information on your stocks, they are not mutually exclusive. A trader should use both, side by side, if they want to get the best results possible.

Fundamental Analysis

Fundamental analysis is best used to determine which company you want to invest in. It involves keeping notes on a company’s performance and its future prospects. To do this, you will have to keep a close eye on the company’s financial statements from week to week. This includes their balance sheet, their income statement, and their cash flow statement.

Balance sheet

Investors will check what the assets of a company are. They can then compare this with the liabilities of the shareholder or the firm dealing with stocks. These liabilities can include loans, deferred revenues, premiums, available liquidity, and others. Essentially, they are all the potential expenses of a company or shareholder. Obviously, the desired outcome is to have greater potential profits from the stock compared to their expenses. Essentially, this is checking how profitable an investment you are making is.stock analysis

Income statement

Investors will need to check the losses and profits a company has experienced to find out their net profits for proper stock analysis. In fact, this could be more accurately described as a profit and loss statement (P&L for short). This information could consist of several figures and can include: tax figures, expenses, income, product value, overall profit, net gains or loss.

If overall profits are lower than in the last quarterly or annual report or negative, investors are likely to be hesitant to keep their shares and could subsequently sell them.

Cash flow statement

The cash flow statement indicates the reason behind every expense and profit. These reasons could be operational, financial, and based on investment. It is solely based on real figures on expenses and profits, and no credit is included.

Several important indicators exist that can inform investors how the figures may relate to your potential profits for proper stock analysis. These are the Earnings per Share (EPS), Earnings Growth, the Price-Earnings ratio (P/E), and the Price-to-Earnings Growth Ratio (PEG).

Earnings Growth

This is the net income, or potential net loss, of a company over a period of time. This tells you how well the company is doing overall.


This describes, as the name suggests, the overall earning of a company relative to all of the shares a company offers. This figure is of the utmost importance in determining how worthwhile it would be to invest in a particular company. It is the most obvious indicator of the potential gains you could make by investing in a company.


The price earning ratio informs an investor on the price of a stock against the earning made per stock. This combination tells an investor whether a company’s stock is over or undervalued.


This is another, more specific ratio that compares the P/E of a company against the Earnings Growth. The lower this value, the better. As a lower value is more desirable. This is usually used in evaluating companies that generally make higher earnings. It essentially provides a more detailed picture of a company than a P/E can.

stock analysis

You should also keep track of any public events which could affect or directly mention the company you are invested in. How does the media feel about your company? What are the company’s future plans? How in demand is their product? How is the market they are involved in doing?

Technical Analysis

This type of stock analysis is generally more involved. Investors will investigate how a stock’s price has changed over time to predict future patterns. You should keep in mind what the price of a stock is, and how it may change according to whether you yourself buy or sell it. The way to inform yourself about the potential short-term price movement is by referring to a stock’s price action. It is the most basic information available to you on the performance of a stock. It is the representation of a stock’s current and past performance, usually represented in some sort of chart (usually candlestick).

Investors should follow the current trend of a price and make up their minds on whether the current trend will continue or shift. This could be stability, a rise, or a fall. You should keep in mind that long-standing trends can easily shift, especially if the price reaches a resistance or support (the upper and lower limit, respectively). You should also keep an eye on whether the momentum of the movement is rising or lowering.

These are, of course, best for short term strategies.

For long-term strategies, investors will have to keep track of the patterns of a stock’s performance. If a stock keeps changing in price at a particular point in the year, it is something worth keeping in mind. Old companies can have patterns that repeat themselves as far back as a hundred years into their history. This means you can find the overarching trends without too much worry.

Which Type of Analysis to Use

As we stated before, both types of stock analysis are necessary for successful stock investments. This does not mean, however, that each style does not have its own advantages and disadvantages.

A technical analysis is best used for short-term strategies, as you will need to analyse what sudden price changes occur over short periods of time and at what times they tend to occur. You can take advantage of sudden price fluctuations which may not be determinable with a more fundamental approach. The key for such strategies is precision; something technical stock analysis is entirely revolved around.

stock analysis

A fundamental analysis is, conversely, best used for long-term strategies. It has a wider overall scope and may involve more work per company, but it can make investing easier to keep track of. This is a good strategy if you do not want to overwhelm yourself with the everchanging details. Additionally, it can help you find potentially undervalued stocks that have great future potential other investors may not have noticed. As such, it can help you identify overvalued stocks that may have had a stellar past record, which you may have to avoid.

If you use both strategies in tandem, they can help you get the best of both worlds. You can avoid potentially risky short-term investments. You can also take advantage of sudden stock price movements you would otherwise not be aware of.


Now that you have finished reading this article, you should inform yourself with all the possible learning materials. This could be from the internet, traditional textbooks, or a multitude of other sources. Try to avoid simply following the behaviours of other traders and develop your own strategies.