Finances & Money

How to Perform a Stock Trade Analysis

Investment is as much about research as it is about money, and the only way to minimize risk and maximize returns is to be vigilant when it comes to buying and selling. Stock trade analysis might sound like a complicated process that requires several degrees to perform, but it actually boils down to some very simple principles.

Fundamental Analysis

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A fundamental analysis of a business looks at the way it is influenced by financial and economic factors. Using cash flow statements and balance sheets, it is possible to determine the value of any given business. Stock analysis software can help you make the best picks.

Analysts will calculate this by discounting the businesses cash-flow projections to reach a figure which they take as the current net value of the company, usually described as the intrinsic value of the business. When stock prices are lower than this intrinsic value, they are considered a good investment, with higher prices viewed as trades to avoid.

Technical Analysis

The basis of any technical analysis is an understanding of the supply and demand in any market. By knowing these trends, it is possible to predict which direction their price is heading and make investment decisions based on the statistical likelihood of the share price increasing or decreasing. Technical analysis is often recommended for those who want to learn how to invest in penny stocks.

The technical model of stock analysis has been refined and improved over the years. In the technological age, of course, the variety and complexity of the available information mean that it is possible to include hundreds of patterns and data points in order to form predictions about future price movements. By using the past trading history of a security as an indicator of repeated trends, technical analysis seeks to predict future activity to a degree of accuracy unmatched by fundamental analysis.

Which Is Best – Technical or Fundamental?

As you might expect, there are competing theories as to whether technical or fundamental analysis is the most effective method. There is no definitive answer – while Wall Street analysts tend to focus largely on the fundamentals, most of the major brokerages employ a number of technical analysts in order to inform their decision making. You can even gain professional certification in technical analysis, which lends it some degree of validity.

Criticism of technical analysis is often based on the belief that past performance is reflected in the current price, known as the Efficient Market Hypothesis. However, it is also true that fundamental analysis can lead investors to cling on to stock in the hope that it will rally based purely on their belief that the company involved is an inherently good prospect.

For most investors, the truth is that in the absence of any guarantees, using all the available information to make investment decisions is the best way to improve their chances of turning a profit. While some consider fundamental and technical analysis to be completely at odds with one another, others believe that a combination of the two is likely to deliver the best results for investors.

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Susan Paige

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