Current Stock Market Analysis

What is stock analysis?

Stock analysis is a method used by analysts or investors to evaluate a particular investment sector, trading instrument, and the stock market as a whole. Stock analysis is carried out as an attempt to find out the potential future value of a stock using the current factors as a benchmark.  Detailed stock evaluation of the current price and nature of stock help investors and analyst to gain an edge in the market analysis. Also, traders use stock analysis to know how to fix the price of stock. Stock analysis is usually very comprehensive. There is no extent an investor or trader cannot go when doing stock analysis. This is because the wider the research, the wider the knowledge the trader or investor will acquire about the stock. In fact, in a search on google for the number of times stock market analysis occurs, the result shows 585 times on google and over 55 million on Yahoo. 

Stock analysis entails an evaluation of the company's current financial statement and a comparison of this statement to the previous one. The financial statement in stock is well detailed. A stock analysis would compare a company's previous financial statement of a company to its current one and also compare the result to the financial statement of other companies operating in the same industry. This shows that stock analysis is very detailed and well explained and understood. The goal is to help the investor make a good choice before investing.

Types Of Stock Analysis

There are two broad types of stock analysis, they include:

1. Fundamental analysis
   
2. Technical analysis
   

Fundamental analysis

This is a method of evaluating the intrinsic value of a stock or security. It entails a detailed evaluation of the economic and financial factors responsible for the price and market value of stock. Fundamental analysis encompasses anything that can affect the price of a security or stock. The factors that affect are subdivided into macroeconomic and microeconomic factors. Macroeconomic factors include the industry conditions and the state of economic while microeconomic factors include the effectiveness of the company's management and the way the company's product is accepted in the market. 

What analysts or investors aim at when carrying out a fundamental analysis is to arrive at a value that can be used to determine whether a stock or security is being undervalued or overvalued. Fundamental analysis shows whether the future of a company is well reflected in the current price of the stock. It also shows how this future is reflected. After the analysis, the analyst or stock investor would decide whether the stock is an attractive opportunity. This implies whether the stock has a positive future potential. Fundamental analysis aims to achieve these three result

• Determine the stock's real or fair value
• Determine whether the high or low value of stock in the market does not imply a negative future turnout of the stock
• If for instance, the stock fair market value is higher than the market price, the stock is deemed to be undervalued and a buy recommendation is given.

How fundamental analysis is carried out

The aim of every stock analysis is to find out whether a stock is well valued within the border market. To achieve this, fundamental analysis is done from the macro to the micro viewpoint so as to find out if stocks or securities are well priced in the stock market. Hence the analyst focus on the overall outlook of the country's economy, the strength of the industry, and individual company performance. This would help the analyst arrive at the correct fair market value. 

Also, in evaluating the future potential of the stock, fundamental analysts, or investors use public data. For example, a fundamental analyst can do an analysis of the value of a bond by focusing on the interest rate and state of the economy. The analyst can later include information about the bond issuer and any factor that might trigger a change in the credit rate of the bond. 

In the case of stock, a fundamental analyst can carry out his or her study using stock details such as the earning, revenue, return on equity, and future growth. Other information including the price margin of stock would also be considered. The analyst uses all these to determine the current stock value and potential for future growth. 

Types of fundamental analysis

Factors that are used to carry out a fundamental analysis are broad. Usually, they would include details about the company's financial state and the quality of the company's management.  It is as a result of the broadness of fundamental analysis that made it to be further grouped into two basic types. These two types include:

Qualitative analysis

Quantitative analysis

Qualitative analysis

There are four key qualitative factors analysts consider when carrying out fundamental analysis. These key factors include:

• Business Model

A business model is a term that is used to refer to what the does. It entails the overall business of a company. Although answering the question about what a company does is easy, it is much more than this. The business model of a company would also entail whether or not the company is making any profit from its business. 

• Competitive advantage

Competitive advantage includes the companies ability to withstand competition with companies within the same industry. Fundamental analysis includes looking at how the company has been able to maintain a solid competitive advantage. A company that can maintain a solid competitive advantage would have a steady profit record while one that cannot maintain a steady competitive advantage would be unstable in its profit record. Shareholders of companies with steady competitive advantage benefit from these advantages. 

• Management

it was mentioned in the explanation of fundamental analysis that part of the things considered when carrying out a fundamental analysis is the management of a company. Analysts and investors believe that there is a possibility that a company with an ineffective leader would not do well in the stock market even with a solid business model and competitive advantage. Therefore, management is an essential factor that can make or mar a company. Though it might be difficult to have a one on one discussion with the company's management, the corporate website of the company can reveal a lot. 

• Corporate governance

Corporate governance is a term used to refer to the policies used within an organization. This policy would include the relationship between the company's stakeholders and management. The company's policies guiding this relationship is usually available in the company's bye-law and charter, corporate law, and regulations. The reason why this is essential is that as an investor, you wouldn't want to invest in a company that does not have a steady and stable relationship with its stakeholders. Also, take note of whether management respects shareholder rights and shareholder interests. 

Qualitative fundamental analysis also includes details such as market share among firms, customer's based, industry-wide growth, competition regulations, and much more. The qualitative analysis encompasses how the industry works. A good understanding of how the industry works would enlighten the investor on the company's financial ability before he or she makes the move to invest. 

Quantitative analysis

The quantitative analysis focuses on the company's financial statement. A financial statement is a crucial factor that helps the investor decide whether he or she should make an investment. The three most crucial financial statements often considered under quantitative analysis include a balance sheet, income statement, and cash flow statement. 

Balanced sheet

This is a detailed record of the company's assets, liability, and equity over a particular period of time. The name balanced sheet is so-called because it is used to refer to the balance in a business's financial structure. A balance sheet is calculated as :

          Assets = liability +shareholders's equity. 

Asset refers to all the properties and resources owned by the company at a particular point in time. These properties and resources include machinery, building, and cash. Liability and shareholders' equity covers the total monetary value used by the company to acquire its asset. It means that the money a company derived from liability and shareholder is what the company used to acquire its asset. Liabilities refer to debt while equity refers to the total amount of money the owner has contributed to the business. 

• The income statement

The income statement refers to the measure of a company's performance over a particular period of time. A good example of the income statement is the company's quarterly report. Technically, we can have a week or a month balance sheet but the income statement is more detailed and takes up to four months before it is calculated.

Income statements include information such as the company's expenses and profit. 

• Statement of cash

This represents a statement of a company's cash inflow and cash outflow over a particular period of time. A company's statement of cash usually cover these three vital areas:

• Cash from investing (CFI)
• Cash from financing (CFF)
• Operating cash flow (OCF)

The statement of cash helps the investor determine the overall financial outlook of a company. 

Technical analysis

Technical analysis focuses on a company's past and present price of the stock using this as a benchmark to predict the future price of the stock. The focus of this analysis is on the stock market as a whole. It studied the past and present price of stocks and the factors that trigger the changes in the price of the stock.

In technical analysis, the most important factors used to evaluate the value of stock include demand and supply. Technical analysis focuses on a change in demand or a change in supply and how this can affect the price of the stock.  To do this, the technical analysts or investors make use of charts. Charts are very important in the analysis and they are used to carry out a visual representation of the changes and trends in the price of the stock over a particular period of time. For instance, a technical analyst may use a chart to mark certain areas as a support level or resistance level. The support levels are marked by previous lows below the current trading price, and the resistance markers are placed at previous highs above the current market price of the stock. A break below the support level would represent a bear market. While a break above the resistance level would indicate a bear market. 

However, it is important to note that technical analysis is only effective in situations where the changes in the demand and supply of stock are the only factor that triggers the changes in the price of the stock. When other factors aside demand and supply are responsible for the change in the price of the stock, doing a technical analysis might not yield any tangible result. Examples of such factors include: merger, stock split, dividend announcement, accounting scandal, class action lawsuit, death of a company's CEO, change of management, and attack from terrorist

Since technical analysis only focuses on the effect of supply and demand on stock, analysts often use both technical and fundamental analysis in their evaluation. 

Sentimental analysis

This is an attempt to measure the price of stock by the attitude or behavior of investors. Sentimental analysis is used to show that not all assumptions made by investors about the value turn out to be true. When the assumption of investors is heading in a particular direction, the assumption might turn out wrong. Hence, the sentimental analysis focuses on the factors influencing investors assumption and prediction

Sentimental analysis is often referred to as contraries.  A sentimental analyst or investor tends not to follow the crowd. 

Summary

Selecting the best approach for stock analysis might be very difficult. However, analysts often make use of both fundamental approaches and technical approaches. Notwithstanding it is important to note that investing based on a future prediction might not yield as expected. Always know that returns and principal value of stock price will fluctuate as market conditions change. When shares are sold, it might be worth more or less than the actual value.