The Analysis of Stock Market and Other details

It is impossible to invest without understanding the stock and underlying companies. This would be like running blindfolded on the road. There are many types of analysis that can be done on the share market. Continue reading to learn about technical and fundamental analyses

WHAT IS FUNDAMENTAL ANALYSIS?

This method is used to assess the company's value. This method considers the intrinsic value of the share, taking into account the industry and economic conditions as well as the company's financial situation and management performance. Fundamental analysts will look at the balance sheets, profit and loss statements, financial ratios, and any other data that can be used to forecast the future of a company. Fundamental share market analysis, in other words, is the use of real data to assess a stock's worth. This method considers revenues, earnings, future growth and return on equity to calculate a company's potential for future growth.

The idea is that the share price will increase as the company grows. Investors will reap the benefits in the long-term.

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WHAT IS A OVERVALUED OR UNDERVALUED STOCK?

Ratios are used to compare the financials and the stock price after you have looked at the balance sheet. This allows you to see how much an investor is actually paying relative to the company's growth. The most commonly used ratio is the Price to Earnings, or PE ratio. This is calculated by subtracting the share price from the company's earnings per shares.

The stock is considered undervalued if the share value is lower than the industry average and its earnings per share are less than the industry average. The stock is being sold at a lower price than it is worth.

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An overvalued stock, on the other hand, is one where the investor pays more for every rupee that the company earns. The stock's intrinsic value is therefore higher than its price. Investors expect the stock to perform well in the future. An overvalued stock could have a high PE relative to its past PE ratio. A high PE relative to peers stocks could also be an indicator of an overvalued stock.

Investors must be careful. The stock's fundamental value should be compared to its historical values. There are high odds that the stock's price will fall to correct the mispriced if it experiences a sudden rise in valuation. Check for the most recent news regarding the company in case there is a sudden drop in valuation. There is a good chance that a new factor has emerged that could be harmful to the company's profit margins.

The trailing PE is the value of the PE calculated using the earnings per share over the previous year. It is not the best way to determine the stock's worth. Analysts often use forward PE to calculate the expected earnings per share for the next year or the previous year.

Let's look at an example.

Let's say that ABC earns Rs 50 per shares. The current share price of the company ABC is Rs 100. Its PE ratio is therefore 2. If the industry average PE ratio is 5, then the company's PE ratio is 2. If another company is in the same industry has a PE ratio greater than 10, its stock will be considered overvalued.

Analysts expect the company to earn Rs 100 per Share in the next financial years. This would mean that the forward PE would be 1.
This means that the price of the stock is much more affordable when you consider the company’s growth.

WHAT IS A TECHNICAL ANALYSIS?

Technical analysis is not a fundamental analysis. It does not assess the financial performance of an underlying company. The analyst studies the trends in share prices using this method. The assumption behind this method is that the market price of a stock is a function both of its supply and demand. This in turn, will reflect the company's value. This method also assumes that past price trends can be used to predict future performance.

Instead of using financial statements to assess the company's health, analysts use market trends to predict the performance of securities. Analysts seek to capitalize on the momentum in a stock or the market over time.

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Short-term traders and investors who trade often use technical analysis, but not long-term investors who prefer fundamental analysis.
Technical analysts make charts and read prices. Common technical share market analysis measures include Bollinger bands (Bollinger bands), Relative Strength Indicess (RSI) and others.

INVESTING PHILOPHIES:

Now you are familiar with stock market analysis techniques. What does this really mean for you? These investing philosophies can help you to understand.

What does value investing look like?

Value investing is an investment strategy that favors great stocks at great prices over great stock at good prices. It is also known as "price-driven investment". Value investors will invest in stocks that are undervalued by markets and avoid stocks that are overvalued. Warren Buffet is a well-known investor who believes in value investing.

If a stock of a company that is growing at 10% sells at Rs 100, with a PE Rat of 10, and another stock of the same company is selling for Rs 150 with an PE Rat of 15, a value investor will choose the first stock. The reason is that the first stock is less valuable than the second.

Value investors see potential in stocks of companies that have sound financial statements. They believe the market is undervalued. They believe that the market overreacts to bad and good news, which causes stock prices to move against long-term fundamentals. They are constantly on the lookout for companies that are undervalued.

Value investors make money by buying a stock at a low price and then selling it later when it rebounds in price. Value investors aren't able to predict the future direction of interest rates or the economy and market in the near term. They don't look at the stock's current value and compare it to its historical range.

They take the stock as fledglings, and then cash in when the stock is valued in the market.

If a stock's PE ratio is between 20 and 60 in the last five years, value investors might consider purchasing the stock if it's current PE is 30 or lower. They would then hold the stock until it reaches the 50-60 range, and then sell it. They may hold the stock if they anticipate further growth.

What's contrarian philosophy?

Contrarian trading is, as the name implies, trading against market sentiment. This means that you will buy stocks only when they are not in favor on the market. You should avoid stocks that everyone else is buying. These stocks are then sold when they regain favor.

Contrarians believe that you should take advantage of any temporary setbacks that occur or the negative news that has caused a stock's value to fall.

An example of contrarian thinking would be to buy umbrellas in winter for a low price and then sell them when it rains. Value investing is another type of contrarian philosophy.

HOW DO YOU PLACE CONTRARIAN TRADES?

If your trade is a contrarian one:

• Do a stock market analysis. You should look for stocks that have low PE ratios.
• After that, you can compare historical PE ratios with share prices.
• Learn more about the company, including its financial performance and future prospects. Select the stock if you feel the company is worthy.
• Wait for prices to fall. Buy at the lowest prices
• Market indicators such as mutual fund cash positions and put/call rates, and investment advisory opinions could also be useful. A portion of mutual funds' assets is held as cash. Mutual funds that have a higher cash holding are likely to be bearish. Conversely, mutual funds with a lower cash holding are more likely to invest in the markets. They are therefore bullish. This is why you should take the opposite position. Buy when MFs buy and sell when they are selling.
• A put option is an agreement to sell in future derivatives markets, while a Call Option is an agreement to buy in future. You can use the put/call ratio to determine how many call options and put options you have. This ratio is a measure of the number of put options and vice versa.
• A rise in put options indicates that the market's bearish side, but a decrease in demand for call options signals that the market's bullish side. You should be prepared to trade contrarianly.
• Many brokerage firms and banks issue investment advisories. These advisories include analysis of specific stocks, industries, and the overall economy. Investors buy stock when a positive recommendation leads to an increase of share price. Contrarian traders may buy stock when there are negative investment advisories, but sell after receiving positive recommendations.

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