What is Stock Analysis and Why is It So Important?

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Most investors fail in the stock market because they don’t study the business or company before investing their money. That is why stock market analysis is so important to get insights into a company’s stock and make better decisions in buying or selling your shares in the stock market.

What is stock market analysis?

Investors rely on stock analysis in helping them find a profitable stock. Stock market analysis helps the investors to identify whether the worth of security is valued in the market. The analysis involves evaluation and examination of an investment sector, individual stock, or the stock market as a whole. As a result, traders and investors are able to come up with buying and selling decisions by using stock market analysis.  

Why is stock market analysis important?

The stock market is the main source of the companies that want to raise funds for their expansion. It can also help a company to launch new products and pay its debt.

Any changes in the stock market have an effect on a corporation’s finances and even the global economy. The stock market is used as an economic indicator in the U.S. economy. When the investor sees that the company that is listed is doing well financially, they become more confident to buy more stocks, stock options, or stock mutual funds.    

That is why doing your stock market analysis is important before you shed money on investment. Relying on stock investment tips and articles is not enough to give you an assurance that you are you will make a good buying and selling decision.

If you are going to put your hard-earned money into stocks, you need to research the company that you will invest in. Also, research their financial history to make sure that that company is not falling in debt, has a growing profit, and has satisfied customers. When you are buying a new gadget or a car, you do some research about their performance, price, and quality. You do the same degree of research and analysis with your choice of company to invest in.

PE and PEG Ratio

P/E ratio or price to earnings ratio is used to value a company’s share price. THe share price is relative to the business’s earnings per share which is determined by its profit, divided by its outstanding common stock shares. 

PEG ratio, on the other hand, measures not just the price to earning ratio but also the earnings growth. PEG stands for Price/earnings to Growth, just as its function implies. IT gives investors a more complete background as regards to the value of a certain company.

Both PE and PEG ratios are useful metrics that determine the value of a stock, and so it is worthwhile to learn how to calculate these ratios correctly when investing.

Types of Stock Analysis

There are three basic types of stock analysis that are mostly applied today. They are fundamental analysis, technical analysis, and quantitative analysis. 

Fundamental analysis

This is a method of evaluating the factors that could influence the security’s instinctive value and examining financial factors to forecast the direction of the price in the future of an asset. Here are some basic steps on how to perform fundamental analysis on stocks:

1. Learn about the company

You don’t give away a hefty amount of hard-earned cash to someone you don’t know and expect them to make it grow and give it back to you, right? The same goes for investing.

Good thing you can use the power of the World Wide Web to help understand the company. You can just visit their website and review their products, mission and vision, the board of directors, etc. You can also research published articles about the company.  

If you find the company attractive and reliable, then you can proceed with further research. On the contrary, ignore the company if you do not like what you have found out about them and their financial performance.  

2. Learn about the financial statements of that company

So you found the company interesting to invest in; the next step is reviewing their financial statement. It is like the report card of the business that shows its performance over a period of time. To understand your finances accurately, you need to understand how to read and analyze financial statements

3. Determine the company’s debt

A company with a huge debt cannot perform and reward its shareholders well. Learning the debt-to-asset ratio is important to give you an insight of the financial power of the company. A rule of thumb is not to invest in a company with a huge debt.

4. Study the company’s competitors

Find a list of the competitors of the company that you will invest in. Once you have the list, also do research on what they are doing that your prospective company is not. This method assesses the strengths and weaknesses of the current and potential competitors and helps you determine which company is the best to make an investment in. 

Technical analysis

Charles Henry Dow, the founder of the Wall Street Journal and co-founder of Dow Jones and Company, is considered as one of the founders of technical analysis. This method involves using historical price charts of the past market action, inducing price movement and volume, to determine the future price movement.

While fundamental analysis estimates the security of the intrinsic value, technical analysis, on the other hand, focuses on the historical price charts with technical indicators or oscillatorstrading signals, etc. to assess the strengths and weaknesses of the security. It’s also based on the supply and demand concept to determine a stock’s price.  

The candlestick chart is probably the most popular chart pattern used in technical analysis as it shows the four main prices for the day: the opening, closing, highest, and lowest. The up and down movement of candlesticks represents the price movements. The pattern is separated by the bullish pattern, which means that the price is likely to rise and the bearish patterns, which means the price is likely to fall. 

Technical analysis can be used in short term or long term trading on almost any market when trading stocks, trading forex, or indices. To learn more about technical analysis, the online course “Stock Market Chart Patterns For Day Trading And Investing” from Skill Success can help you get a grasp of the stock market chart patterns.

Quantitative analysis 

This method examines business in terms of numerical value by doing research and referring to the statistical model and measurement. Quantitative analysis is used to identify patterns to reduce risks. However, this is not often used as a standalone method; it is used in conjunction with fundamental analysis and technical analysis to determine the probable risk or advantage of your investment decision.  


As an investor, it is important that you perform stock market analysis before you invest your money in the stock market. It can be time-consuming to follow the steps mentioned in this article, but having an idea will prevent yourself from significant losses.

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