Investing in the stock market can be one of the most profitable ventures a beginning trader can make. However, if the beginner does not do proper stock market analysis, the losses could be significant. The overall discipline of stock market analysis is done through studying the subjective internal and external factors surrounding a certain company and its stock.
Stock Market Analysis is not a Quick Process
Analysis of a stock’s present and past performance and the company backing it is a complex process. Considering this, it is a mistake to think that you can arrive at conclusions about how a stock will perform without doing a thorough stock market analysis. This process of analysis is done in the context of the overall global political and economic condition followed by analysis of the type of markets within. All this is done prior to analysis at the company level. As you can see, it requires knowledge and insight in a wide spectrum of areas and this takes time.
The Business
By default, most agree that the strength of a business is fundamental to the performance of a stock. It is only intuitive because if the business cannot do well then it will naturally impact the stock. This section in the analysis process is known as the fundamental research stage and requires you to dig deep into the workings of a company.
You will have to discover about a company such things as its competitive advantage, position in the pool of competitors, management, product quality, and financial performance. Some information about a business will be easy to find in its quarterly and annual financial reports while some will take a careful study of other news items that impact it. Virtually every external and internal factor affecting a company should be identified.
The Numbers
The numbers are important and must not be ignored in stock market analysis however they should be considered in conjunction with the business and its industry. The numbers include those such as highs, lows, and averages of the market in general and the specific industry. The different websites for the major exchanges publish the numbers. Other numbers deal with trends and how they shift in relation to news releases. In many cases, software tools are used that take market numbers as raw input to determine the net advance after considering the difference between total of stocks declining and the total of stocks rising.
The Industry
Finally, those involved in stock market analysis look at the industry that a company fits in to make predictions. Not every industry is affected by the current political and economical-situation. For example, the housing industry has suffered since 2007 but the company you are looking at may be impacted little by its demise. Information used for industry analysis includes trends related to its typical business cycle. A simple example here deals with seasonal performance such as when retailers experience an increase in sales during the Christmas season. On the other hand, there are some industries that perform consistently throughout their business cycles.
As you can see, stock market analysis is a complex task and requires knowledge and insight about the business, industry, market, and global political/economical-climate. Putting the variables of these categories together, the analyst extracts the best prediction based on what is known. That prediction is by no means solid but it is the best way to minimize investment risk.
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