If you are a beginner investor, it is first necessary to know and acknowledge the stock market basics. To be successful in the market and make informed decisions, you need to understand the forex risks & opportunities.

What Is Market Analysis, and Why Is It Important?

Stock market analysis helps you assess and recognize a good opportunity in the market. It is the observation, study, and understanding of past and current market data. It enables investors to identify the value of security before they invest in it. Through market analysis, traders and investors can also arrive at a buying and selling decision.

It is necessary to conduct a market analysis before investing. Through thorough research and market analysis, investors can make assumptions on the future performance of their potential investments and decide whether they could be advantageous for them. It will help them maximize their results.

Two Basic Types of Market Analysis

There are two ways to analyze the stock market: 

Fundamental Analysis

Fundamental analysis is based on the assumption that a stock price does not necessarily reflect the intrinsic value of the underlying business due to uncontrollable external factors.

In fundamental analysis, investors and traders try to determine the value of a stock using the information provided in the company’s financial statements.

Additionally, the investor will analyze other aspects of the business, such as management quality, competition or competitive advantage, and financial soundness.

Forex is the marketplace for exchanging international currencies. The linked website provides an analysis of key political and economic news related to global currencies. The principles of fundamental analysis described in relation to companies can also be applied to countries or currency unions to evaluate currency pairs.

Here are some key indicators used in the fundamental analysis:

Debt-Equity Ratio (DER)

DER shows the amount of funds provided by the owners and borrowers of a company. If you are an investor using fundamental analysis, you’ll go for companies with lower DER, preferably those that are consistently decreasing.

Debt – Equity (D/E) Ratio = Total Debt / Total Equity

You can compare the D/E of companies within the same industry or the same company with its past market performance.

Remember, a company with higher debt is riskier than a company with lower debt.

Return on Equity (ROE)

ROE shows how much a company earns on the equity of shareholders. It can also demonstrate a company’s efficiency.

ROE = {(Income – Preference Dividend) / (Average Shareholder’s Equity)} x 100

An ideal ROE should be consistently high and increasing using the metric above. As with the DER, you can compare ROE with companies within the same industry or an individual company with its past performance. ROE can also be used in any industry.

Earning Per Share (EPS)

EPS shows the earnings of a company per share. It is one of the most commonly used and valuable measures looked at by investors.

Investors should be looking for a company that has consistently increased EPS.

Earning Per Share = (Net Income – Preference Dividend) / Weighted Average Number of Shares

Like ROE and DER, the EPS can be compared to one company’s previous performance or with other companies in the same industry.

Technical Analysis

Technical analysis assumes that the stock market generally moves according to trends. Traders and investors use technical analysis to analyze previous stock prices to predict the future price trend.

It also uses stop-losses. It helps investors limit their losses with any sudden changes in the market. This type of analysis uses various charts such as candlestick and bar charts to follow the pattern of stock prices.

Daily charts, on the other hand, are used to look for rapid movement in market prices. Weekly or monthly charts are often used by medium to long-term investors or traders hoping for the probability of earning more in the long term.

Technical analysis, however, usually focuses on short-term fluctuations in the stock market. Meanwhile, fundamental research focuses on business trading prices that can beat the market in the long run.

How to Understand Market Trends

Since technical analysis focuses on stock market trends, below are some of the rules you should know when analyzing trends:

Direction

The directions of a trend can be up, down, or sideways.

Three Data Points

There should be three or more contact points for a trend to become valid.

Slopes

The slopes can show how much the stock price should move daily. A line that is too flat should make you question the predictive power of the trend. However, an upward or downward swing can indicate a particular trend.

Duration of the Trend

A longer trend has greater predictive power than shorter trends.

Analyzing Stocks Beyond Numbers

In analyzing the market, it is essential to note that there’s more to stock research and analysis than just the valuation metrics. It’s important to invest in a good and quality business rather than a cheap stock.

Below are some of the vital components of market analysis you should keep track of:

Industry Trend

Investors need to focus on industries with promising long-term growth. The sectors with favorable growth trends today and the years ahead are:

●     E-commerce

●     Health care

●     Cloud Computing Payment Technologies

Durable Competitive Advantage

A durable competitive advantage is also known as the economic moat. It is a sustainable factor used by companies to have an edge over the competition.

If you want to put money in long-term investments, you need to choose a company that can sustain and increase its market share in the fullness of time.

Examples of durable competitive advantages include a trusted brand that can give the company pricing power. Remember that patents can protect a company against its competitors.

Quality Management

You must invest in a company or industry with the right people making critical decisions. A good product in a good sector can be ruined by inefficient management.

It’s wise to look for companies with CEOs and executives with extensive industry experience and financial interests that align with their shareholders’ interests.

Conclusion

Every investor has a way of analyzing the market. If you are a beginner, remember that your goal in examining the market is to look for companies that you believe will have favorable values in the long term. Knowing analytical methods will help you prevent significant losses and pick the right steps to success.