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Three different types of stock analysis

Stock market analysis is a way of evaluating a particular asset class, sector, company or the stock market as a whole. Investors use stock analysis to make buying and selling decisions, and plan their investment strategies.

There are generally three types of stock analysis: fundamental analysis, technical analysis and sentimental analysis.

1. Fundamental analysis

Fundamental analysis is a type of stock market analysis that seeks to measure the intrinsic value of a company and its stock. The goal of fundamental analysis is to determine whether a company’s stock is fairly priced.

During this type of analysis, someone examines financial statements, market share and more to determine the value of the stock. Information that may be relevant includes the company’s assets and liabilities, earnings per share, price to earnings ratio, price to book value ratio and more. Using this information, an investor can decide whether to buy, sell or hold the stock.

2. Technical Analysis

While fundamental analysis requires an investor to go into the weeds in a company’s financials, technical analysis looks at statistical trends to predict future price changes. During technical analysis, an investor considers past trading activity and price changes of a particular stock to predict what will happen in the future.

This type of analysis is done under the assumption that the market price of a company reflects its actual value and that history is likely to repeat itself. An investor can see where the current stock price is in a pattern to predict what will happen to the stock price in the future.

3. Sentimental Analysis

Sentimental analysis focuses less on the company’s finances or past performance, and more on the attitudes of investors. This type of analysis can help someone determine how investors view a particular company or stock, which can help to predict future price trends. During sentimental analysis, an investor can look to social media and recent events for either positive or negative sentiments about a company.

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A step-by-step guide to stock market research

Stock market research can help you make educated investing decisions. But where do you start? Below you’ll find each step you need to take to get started with your stock market research.

Step 1: Gather the forms you need

Your first step in doing stock market research is together all of the necessary forms. Here are a few you’ll want to look at:

  • Form 10-K: Each year, every publicly-traded company is required to file an annual report that shares its financial performance. Form 10-K includes a company’s financial statements, organizational structure, earnings per share, executive compensation and more. While Form 10-K is a long and complex document, it can tell you much of what you need to know about a company. These forms are published online and available to the general public.
  • Form 10-Q: In addition to the annual Form 10-K, companies mus also file Form 10-Q, which is made up of unaudited financial statements. While these documents aren’t as official as the company’s Form 10-K, it gives you more up-to-date information from recent months.
  • Press releases: In addition to a company’s SEC filings, you may also be able to gain some insight through any news or press releases that a company issues. These sources are particularly helpful for timely information about financial performance, mergers and other significant company events that could affect the stock price.
  • Analyst opinions: There are countless brokerage firms, stock research companies and other resources that share professional opinions about different stocks, mutual funds and the market as a whole. While this information doesn’t come directly from the source, it can provide more context than a financial statement. Analyst opinions are often broken down in terms that are easier for the average investor to understand, compared to a financial statement filled with industry jargon.
  • Industry publications: Industry trade magazines and other publications can also be an excellent resource to learn not only about an individual company but about an industry overall. Learning more about industry trends can help guide your investment decisions for individual companies.

Step 2: Focus on the key details

There’s a lot you can learn from financial statements filed with the Securities and Exchange Commission (SEC) and other resources, but not all of it is relevant to you as an investor. There are certain details that are more important than others when it comes to making investment decisions. Here are a few key details to focus on:

  • Net income: A company’s net income is its bottom line — in other words, it’s the amount the company has made after subtracting for operating expenses, taxes and depreciation. This figure is more helpful than the company’s revenue since it shows what’s left after expenses.
  • Earnings per share: Earnings per share is found by dividing a company’s earnings by the number of outstanding shares. This figure shows how profitable the company is on a per-share basis. Comparing earnings per share across different companies is often more useful than comparing overall revenue.
  • Price-to-earnings ratio: You can find a company’s price-to-earnings (P/E) ratio by dividing its current stock price by its earnings per share. A company’s earnings P/E ratio can give you an idea of how investors feel about the stock and its prospects.
  • Return on equity: A company’s return on equity shows the percentage of profit it generates for each dollar of shareholder money. This figure can show you how efficiently a company uses the money from its investors.
  • Return on assets: Just like return on equity can show you how efficiently a company uses its shareholder equity, return on assets can give you an idea of how efficiently a company uses its assets. Assets include cash, tangible goods and intangible items.

Step 3: Ask yourself these questions

Once you’ve gathered the necessary documents and done your quantitative research to understand the key metrics of a company, it’s time to turn to qualitative research. For this step, there are a few guiding questions you can ask yourself to help you decide if you want to invest in the company.

  • What does the company do? Warren Buffet famously said you should never invest in a business that you don’t understand. To that end, be sure you really understand what a company does before you invest your hard-earned money into them.
  • How does the company make money? It’s not enough to simply understand what the company does. Take it one step further to ensure you really understand the company’s business model and how it makes money. This can help you to predict whether it will continue to make money in the future.
  • How has the company performed in the past? Past performance isn’t necessarily a guarantee of future performance, but it can be helpful. If a company has already proven itself in the stock market, especially over many years, it may instill more confidence in you as an investor.
  • What is the company’s management style? A company’s management can have a major impact on its performance. Not only is it important how they run the company, but also how the public and investors perceive them.
  • What is the company’s competitive advantage? Many industries are highly saturated, and for a company to stand out, it must have a competitive advantage over the rest. Identifying a company’s competitive advantage — and whether it has one at all — can help you predict whether it has longevity.

A basic example of stock analysis

It’s fairly simple to explain how to do stock market research, but it’s an entirely different thing to see it in action. Suppose you wanted to invest in a soft drink company and were weighing your options between investing in Coca-Cola Co. (KO) or PepsiCo, Inc. (PEP).

As a first step, you would gather the latest financial statements for both companies. The simplest way to do this is by using the EDGAR database hosted by the Securities and Exchange Commission. There you can find the company’s prospectus, Form 10-K, Form 10-Q and many other important company announcements.

While gathering your documents, you may also visit the press pages for both companies or even do a quick internet search to see if either company has made headlines or announced any major news lately.

Once you have the documents you need, you can get to work comparing the companies financials, including their net income, earnings per share, price-to-earnings ratio and return on equity.

When you compare those basic metrics, one company may really stand out above the other on paper, which could make an easy investment decision. But if you look at the hard data and still aren’t sure, that’s where qualitative analysis comes in handy. Using qualitative analysis, you would look deeper into the management of each company, its historical performance and its general public perception.

Remember that while stock market analysis can help guide your investment decisions, it’s not a perfect science. The fact is that historical performance doesn’t guarantee future performance, nor do positive financial statements. Even the most experienced investors can’t definitively say which companies will perform the best over the next month, year, or decade. The best you can do is take the information you learn and make an educated decision.

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The bottom line

Stock market research can help guide your investment strategy and inform your decision on which stocks to invest in. Fundamental, technical and sentimental analysis can all be useful tools, and a mix of the three may give you the most accurate results.

As you follow the stock market research steps we outlined above, remember that not all investing has to be that complicated. While you may decide to allocate a percentage of your portfolio to individual stocks — in which case stock analysis will be a critical step — you might also decide to dedicate much of your portfolio to diversified investments like mutual funds and exchange-traded funds (ETFs).


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Erin Gobler Freelance Contributor

Erin Gobler is a freelance personal finance based in Madison, Wisconsin. After seven years working in state politics, she left to pursue writing full-time. Now she writes about financial topics including mortgages and investing.


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