For choosing the potentially profitable stocks in the financial market traders always depend on the methods widely used for analysing the stocks. So, here is the answer to the most frequently asked question: how to analyse the stock?
Two common ways which serve the purpose of analysis are fundamental analysis and technical analysis. Many elements fall under the category of fundamental analysis including, earnings per share, return on equity, firm’s price-to-earnings ratio and book value. An investor can go through the methods provided below and choose the one which fits him best for meeting the financial objectives.
How To Do Stock Analysis?
1. Technical Analysis
Technical analysis deals with the study of demand and supply of a particular stock within the financial market. Traders who use these analytical tools assume that the historical performance of a stock reflects how the stock will progress in the future. Little importance is given to the reputation or value of a firm. It pays great attention to the study of charts, trends and patterns.
2. P/E Ratio
A standard way to analyse a stock is examining its price-to-earnings ratio. The trader can estimate the P/E ratio by merely dividing the market value of stock per share by its generated earnings per share. To calculate the worth of stock, traders compare the P/E ratio of a particular stock with those of its industry standards and competitors. Generally, a lower ratio is considered favourable by the trader.
3. Earnings Per Share
A firm’s earning per share indicates how effectively its revenue is dropping down to traders. An increasing value of earnings per share is regarded as a good sign by traders. As per the NASDAQ, the larger a firm’s EPS, the more is the worth of your share. It is because traders try to buy a firm’s stock when the value of earnings is high.
4. PEG Ratio
It is the acronym for price-to-earnings-growth. PEG ratio is the same as EPS; just the difference is, it considers the growth of the firm along with its earnings. To calculate the value of a PEG ratio, one needs to divide the P/E by the twelve-month growth rate. Trader calculates the future growth rate of a firm by simply looking into its historical growth rate. A stock is considered valuable by traders if the value of PEG is lower than one.
5. Book Value
Next method in the list of analysing a stock is estimating a firm’s price-to-book ratio. Traders generally use this technique to determine the high growth firms which are underrated. The formula for this ratio is equal to the market worth of a firm’s stock divided by the company’s book value of equity. For estimating the book value of equity, we take the difference between the book value of assets and book value of liabilities. The low value of P/B is regarded as a sign of a potentially undervalued firm by an investor.
6. Return on Equity
Investors use the term return on equity to estimate how well a firm generates positive returns for its stockholders. Determination of ROE helps a trader to find firms which are the generators of profit. For calculating the value of ROE, one needs to divide net income by net stockholders’ equity. A continual surge in the value of ROE is a good indicator to the trader.
7. Analyst Recommendations
Many traders use professional recommendations to quickly close, open or vary the size of stock. These professional analysts predict the outcome by performing extensive technical and fundamental research, and then after issue, sell or buy recommendations. Before deciding to sell or purchase shares, traders generally use these recommendations in combination with some stock analysis method.
If you are a routine trader, you might know that there are various brokers in the market which provide you with the analytical indicator so that you can choose your stocks wisely. Some of the famous brokers in this list are 2invest and ETFinance. They offer tools which give real-time information, charts, and graphs along with the economic calendar for pushing you trading towards profit.