Stock Analysis Explained

There is no right or wrong way to analyze a stock. In truth, the type of analysis you will want to understand, and perform, depends on what type of investor you are. Day traders will want to learn how to utilize short term indicators. Value investors will want to have a solid understanding of fundamental analysis. For a beginning investor, learning how to understand and use stock analysis can make one feel overwhelmed.

The Basics of Stock Analysis Explained

There are basically two types of stock analysis: fundamental and technical analysis. Fundamental analysis is what is utilized to identify a specific company's financial health. Earnings and revenue growth, as well as cash flow and profit margins are a few of the financial aspects fundamental analysis analyzes. Corporate earnings growth, or at least potential growth, is the main driver behind a stock's price advance. Understanding how a company's earnings are growing is essential to stock analysis.

Technical analysis is that which analyzes the price and volume of a specific stock, or the general market as a whole. Price and volume will show the psychology of the market. When properly utilized, one can identify which stocks are in demand by institutions. Institutional investors are the driving force behind the market. When these deep pocketed investors decide to buy a stock, they can easily drive the price higher for an extended period.

Price and volume analysis is not the only technical analysis tool investors can utilize. Short term traders can utilize stochastics to anticipate short term swings in a stock's price. Stochastics are complicated computer models which measure whether the stock is currently "oversold" or "overbought." To compare the price strength between companies, investors can use "relative strength." Relative strength typically measures a stock's performance against the S&P 500. A high relative strength indicates a stock which is in demand, and vice versa.