For many people, the stock market and its unpredictable movements make it unattractive as an investment option. But there are ways and means to analyze and interpret the market and its trends. For beginners or for people looking to enter into the stock market, interpreting the market and the stocks as a part of the market is the first step to make investments that can lead to profit.
The first requirement to invest in the stock market is to have a demat account. Opening a demat account with a reputed broker who will provide support and a vast knowledge base is essential. You can open a demat account with Kotak Securities and enjoy a host of benefits including learning the basics of stock market analysis.
There are two ways to analyze or interpret the share market:
- Technical analysis:
In technical analysis of stocks, the price movements of the particular share are considered. This type of analysis does not look at the financial performance of the company. It takes a look at the previous price trends and tries to estimate the future growth in the share price. This type of analysis focuses on price movements each day to earn a return. This type of strategy is adopted by short term traders and intraday traders. Most long term investors only use price trends and technical analysis as an indicator of when they should enter the market. This type of analysis uses charts, graphs, and other statistical devices to study and analyze the movements of a stock or the index and then to take decisions about entry and exit.
- Fundamental analysis:
This approach is used more by long term investors. Fundamental analysis of stocks requires a thorough study about the company. This doesn’t focus on the current market prices and the current trends in market prices. Unlike technical analysis of stocks, the fundamental analysis uses the company’s financials, the future business prospects, the current market price, the return on equity, the return on assets invested, to determine whether the stock is good for investment.
Fundamental analysis is used for long term strategies. The market price of a share may tank depending on market sentiments, or if the market is entering a bearish phase. However, companies that are fundamentally strong come out with greater returns over the longer period. Since these stocks are long term bets, only investors who are investing for a particular time period adopt this strategy.
A few concepts used while analyzing market trends:
Overvalued and undervalued stocks:
This is one of the most popular terms used for a stock. In this, the current market price of the stock is compared to the value of the industry in which the company operates. One of the indicators used for arriving at the intrinsic value of the stock is the Price to Earnings ratio or the P/E ratio. The P/E ratio is calculated as:
P/E ratio = Current Market Price/Earnings Per Share
This P/E ratio is also calculated for the industry. If the company’s P/E ratio is less than the P/E ratio of the industry, then the stock is undervalued. This means, the current market price of the stock is less than what it should be. An undervalued stock has potential to rise in the future, and hence is a good investment bet.
Overvalued stocks are those whose P/E ratio is more than the industry’s P/E ratio. Unless the company has strong fundamentals and business prospects, the share is due for some correction. Investing in the share at this point can possibly lead to losses.
Analyzing the share market is an important procedure to select good stocks. With thorough stock market analysis, it is possible to make profits from initial investments by picking good stocks.