You may have read as many books as you could on investing, mastered a hundred different investment terminologies, and boosted your confidence with a few months of trading on a stock market simulator, and now you think you’re ready to place your first buy on a stock. However, before you take that final step just yet, it is important to ensure that you thoroughly research the stock you intend to buy. Without an exhaustive knowledge of the companies in which you wish to own a share, you risk losing your hard-earned money on poor investment choices.

To help you learn how to pick stocks carefully, this article will guide you with a step-by-step explanation of how to carry out stock market research.

Types of Stock Analysis

In order to understand how stock analysis works, it is important to know the various approaches used in evaluating the value of a stock. The three major stock analysis techniques include:

Fundamental Analysis

Fundamental stock analysis is a valuation method that focuses on calculating the intrinsic value of an asset based on various underlying economic factors that could influence its price in the future. This approach believes that the current price of a stock can be over-valued or under-valued in the market and to calculate its fair market value one must analyze the company’s fundamentals data such as earnings, profit margins, management, and business model which indicate the overall economic well-being of a company.

Technical Analysis

The technical stock analysis technique focuses on the statistical trends such as price movement and trade volume which have been observed over a stock’s trading history. Unlike fundamental analysis which analyses a company’s financial data, the technical approach believes that past trading activity and price changes are strong indicators of a stock’s performance. Technical analysis is often used for short-term trading or securities with greater volatility as it calculates how the current supply and demand of a stock will impact its price in the nearest future.

Macro Analysis

Macro investment strategy takes a top-level look at global and regional economic trends and political events to inform investment decisions. This stock analysis technique seeks to make intelligent predictions about future market trends by examining a vast amount of data that can give insight into macroeconomic factors, international politics, global supply and demand trends, regional policies, and more.

Step-by-Step Guide to Fundamental Analysis

Taking a top-to-bottom approach, fundamental analysis looks at economic indicators and financial reports to seek to understand the strength of the specific industry or sector, and finally, the financial health of the issuing company:

Research Industry-Specific Statistics

Gathering data such as a list of competitors, consumer behavior, market supply, and demand, as well as industry labor trends, are crucial for examining a specific sector’s performance and its growth potential or prospects.

Understand the Company

In determining the financial health of the company issuing the stock, your analysis requires both a qualitative and quantitative approach. The qualitative analysis evaluates company history and business information such as

1.  Business model

2. Quality of executive management 

3. Social responsibility initiatives

4. Competitive advantage

5. Brand value and recognition

The quantitative aspect of company analysis examines income statement, balance sheet, cash flow to evaluate the health of the business. Here are some of the key metrics to focus on when analyzing a company’s financial state:

1. Earnings per share - the portion of a company’s profit assigned to each stock unit. Debt-to-equity ratio - Measures the company’s total debt in relation to capital provided by its shareholders.

2. Free cash flow - money left over after a company pays for its operating and capital expenditures.

3.  Price-to-earnings (P/E) ratio - compares the price of a company’s share to the earnings on each share.

4.  Dividend yield - the ratio between the amount paid by a company in dividends every year and its share price.

Step-by-Step Guide to Technical Analysis

Technical analysis involves two aspects. The first is identifying visual patterns on a trading chart for a set period, while the second form of analysis applies various mathematical formulas to price and volume to generate signals on a stock movement. Together, these two forms of technical analysis are used to gain insight into the market psychology as well as the current supply and demand of a security and how these two factors will affect a stock’s price.

Study Chart Patterns

In this step, your analysis focuses on visually identifying statistical trends reported on trading charts about the price movement of a stock in relation to the changing trade volume within a set period. 

To generate useful information from your visual study, the first thing to note is that price movements can have three directions: uptrend, which indicates increasing stock prices, downtrend - indicating price decrease and a sideways trend which refers to the continuous fluctuation of stock prices between the other two levels.

Once you have identified price trends, the next item to study is the areas where the asset price is likely to reverse or go for a breakout. These areas are known as the support and resistance zones. A support zone is a level in an asset’s price movement where a  downtrend is likely to pause or be reversed due to increasing demand for a stock. On the other hand, The resistance zone is a level in the price movement where an uptrend is likely to pause or be reversed due to decreasing demand for the asset.

In technical analysis, it is always important to pay attention to the trade volume for a stock as it often confirms if an ongoing trend will continue. This means that the downtrend or uptrend for a stock is likely to continue that way if trade volume increases or to reverse if trade volume decreases.

Apply Technical Indicators

The more advanced way to conduct technical analysis involves using various technical indicators to generate buy or sell signals on an asset. These indicators are mathematical calculations applied to the price, volume, and open interest on an asset, to spot trends and predict future price movements. Here are some of the most common indicators used in technical stock analysis

1. Average directional index

2. Aroon oscillator

3. Moving average convergence divergence (MACD)

4. Relative strength index (RSI)

5. Stochastic Oscillator

6. Standard deviation

Step-by-Step Guide to Macro Analysis

In Macro Analysis, there are indicators to monitor like inflation rates, GDP growth, interest rates, employment levels, fiscal policy, manufacturing and services PMI (Purchasing Managers Index), international trade, etc. These indicators are then examined in relation to the stock-issuing company to forecast how these trends could impact the organization:

Identify & Analyse Key Trends 

In this step, it is important to understand current macroeconomic trends, their implications on one another, and their rate of change over time. Most importantly, the outcome of this analysis is to identify the trends that are likely to have the biggest impact on the issuing company, and whether this impact will be negative or positive.

Forecast Future Trend Movement 

Macro analysis further interprets current macroeconomic trends to project their potential implications on the key forces that determine an industry’s strength and ultimately the company's long-term profitability. These projections allow investors to develop solid investment strategies and evaluate the long-term performance of various assets.  

Other Stock Performance Indicators

Limiting your stock analysis to fundamental or technical analysis is rarely recommended. Various other indicators can help evaluate the value of an asset as well as identify new trading opportunities. Here are two other factors to analyze when carrying out stock research:

Social Sentiments - Strong social sentiments of the public towards a company can serve as an important indicator of how a stock’s price might perform in the market.

News - Ongoing media conversations and facts in the news about the financial market, industry-related performance, and individual companies can help inform your outlook on a stock’s future performance.

Anahit - Best Tool For Investment Research

Research is a crucial factor that differentiates successful investors from the many others who lose money yearly due to poor investment choices. However, because investment research requires thorough analyses of large numbers of stocks, this can be a cumbersome and expensive process, especially if you’re a retail investor without the time or resources to spend studying financial data or trading charts for various assets. 

At Anahit, we help you simplify your investment research with the help of our AI-driven algorithms that leverages and monitors five unique factors: fundamental, technical, macro social sentiment, and news to identify market patterns, recognize emerging investment opportunities, and predict a stock’s movement.

Research your next asset with greater confidence and less fuss by signing up on Anahit today! Visit Anahit.ai to get started now with a 3-month free trial.