7 Tools to Analyze Stock Market

stock market

Investing in stock market trading is riskier than people think it is. I mean, no one can just predict how the market would look tomorrow. Can you? You might today think that QPR Ltd. is the next Apple, and you invest a significant chunk in that. But, the next day you see that QPR declared bankruptcy. What would be your situation at that time?

Many people now would start thinking that- Should I not play this risky and costly game! You should. Believe me or not! Without investing your income, it is getting depreciated, as inflation is increasing day by day. And, do you know the stock market was the best performing market in the last century as compared to any other market (Gold, real estate, etc.)! And, seeing the growing interest of people in the stock market trading these days, we think the trend would continue this decade too.

The best way to escape this risk and still earn is by investing, after proper research and analysis. There are several tools to analyze a company or its stock. Online stock trading analyzers help a trader to find the best asset to buy among all its counterparts as well as helps in taking the right course of action.

In short, it helps a person to find the best investment at a specific time. Now, without wasting a second, let us move on to the tools of the stock market.

7 Tools and Analyzers to Find Best Stocks in the Stock Market

There are two methods to examine a company stock, i.e. fundamental and technical analysis. Both of them are very useful for traders and used frequently. Let us understand both the terms used in the stock market and see some of the analyzers.

Fundamental Analyzers In Stock Market

A fundamental analyzer provides the data related to the financial aspect of an organization like earnings, returns, etc. It helps you find the actual monetary value of a firm.

P/E Ratio: P/E ratio stands for price-to-earnings ratio here. Most stock market listed companies post their financial statements for their shareholders.

Most of these statements are publicly available. It is the most used fundamental analysis tool for comparing companies. The lower the ratio, the better it is. It gets calculated by dividing the stock’s current share price by its profit (earning) per share.

For instance, if a public listed company is trading at $100 per share, and it posts a profit of $10 per share, then the P/E ratio is 10 here. More earnings mean a lesser ratio, and better the company’s performance.

P/B Ratio: To derive price-to-book value or P/B ratio, we divide the price of a company’s stocks by its assets book value**.

It is used by traders to find undervalued firms. Assets book value means if a company stops its operation today and sells all of its assets, then the value of that asset is known as book value.

An organization with a lower price-to-book value ratio is a good investment. Stock market trading based billionaire, Warren Buffet, started his investing journey by spending his money on small P/B ratio companies.

A P/B ratio could be an excellent comparing tool for someone avoiding risks. However, it is not easy to find a good company having a low P/B ratio.

**Assets Book Value here means the value of assets remaining after deducting all the liabilities of a company.

ROE (Return on Equity):

ROE of a company tells how well the organization is utilizing the shareholder’s money to earn profits. A higher return on equity attracts more investors. ROE is the most used analysis tool by investors as it emphasizes earnings. It is calculated by dividing a company’s net profit by an investor’s equity. Equity is the difference between the assets and liabilities of a firm.

If you are someone looking for short term profit-boosting companies, then this tool would be most helpful to you.

Debt to Earning:

A company’s financial condition is not only determined by its earning. If you want an accurate picture of the company’s health, then you need to consider the debt, it has taken too. There are a plethora of methods to do it. However, the most simplified and fundamental way is to calculate the Debt-to-EBITDA of an organization. A beginner can easily find a company’s debt on the liabilities section in the Balance Sheet. EBITDA stands for earnings before interest, tax, depreciation, and amortization. You can find them in the income statement of any company.

However, debt is not an indicator that the company is not performing. But, usually, a company with high liability is considered comparatively riskier than its similar counterparts.

Technical Analyzers In Stock Markets

A technical analysis tool would help you make a sound decision about shares with the help of records and statistics. Charts, patterns, and indicators are some of its devices.

Relative Strength Indicator:

RSI is a recent price movement determinant that helps a trader to analyze if a stock is oversold or over purchased. It measures every online stock trading asset from 1 to 100. If a share’s relative strength indicator score is above 70, then it is considered over purchased. However, if the same RSI score is below 30, then it is oversold by investors.

If we apply the simple rationality logic here, we would understand the required course of action. For instance, if a stock is oversold, then as a consequence its prices would drop, less than its actual value. Thus, if a trader wants to gain, then he must purchase an oversold share, and vice versa, for overbought.

Moving Average Line:

It is another popular technical analysis tool, used by most traders. It merely measures the average of a company’s online stock trading price for a given time frame.

The time could be 50 days, 100 days, or 200 days. It is an accessible and useful indicator of whether a trader should purchase or sell a stock.

It draws a line over the price chart, and if the line is above price bars, then one needs to sell their assets. Similarly, if the simple moving average line is below price bars, then that means the asset is on-trend and needs to be purchased to gain.

It is a reliable indicator, and its trustworthiness is directly proportional to the time frame, you select. An average of more days would give many accurate results.

It is like a magic sword for beginners!

Stop and Reverse/SAR:

Parabolic SAR is a technical analysis tool with a little bit of complexity. This tool is not recommended to beginners as it requires the traders to be equipped with basics first. This online stock trading tool helps the user to identify the price trend and will indicate the exit and entry levels too.

As the name suggests, this tool makes a parabola on the price chart in the form of dots. If the dots are below the price line, then the asset is trending. Similarly, if the parabola is above the price line, then the time is to go short.

So, these were the tools to analyze and examine stock in the stock market. All of them have a different purpose. Some would help whether you should buy a stock or not, while some might help you to choose the best company share as per your requirements. Just to make you more clear about these tools, below is a brief but beautiful analysis for you! Yes, the analysis of analyzers! Our experts have done this short examination, who work in a similar field.

Analysis Example

Let’s say; there are two companies, ABC ltd. and XYZ Ltd. Both of these companies are from the same industry and while ABC is a well-established firm, XYZ, on the other hand, is a newbie. But would that affect my investment decision? It can be one of the factors but, solely on this! NO.

Now, let’s look at the fundamental tools we have discussed.

Tool ABC Ltd. XYZ Ltd.
PEG Ratio 2.65 2.94
Return on Equity  4.5 8.9
P/E Ratio 28.63 35.12
Debt-to-Earnings Ratio 1.63 3.87

If we try to analyze the above table, then we need to compare each tool separately. XYZ Ltd. is a winner if a trader aims to earn money as PEG, ROE, P/E ratios, all three of them, are better for XYZ. However, ABC has a less D/E ratio, which means investing in the same is less risky as compared to the other.

Rounding Up 

The above example clearly shows that there is no one specific factor or tool to spot an excellent trading stock. Even the stocks with the best analysis results fail miserably, and a plethora of underdogs grow exponentially. There is no full-proof wise way to analyze a stock. You need to find a tool, which works for you. And, this can be only achieved by experience.

But that doesn’t mean you need to use your precious bucks! You can open a virtual stock trading account and find your stock market trading style there. Our one of the best experts always says one thing, If you believe that a particular stock would perform and thrive, then you must invest.