NSE has over 1600 companies on its exchange and over 5000 companies on BSE! BSE has the distinction of having the highest number of listed companies but NSE is higher in-terms of total volume transacted and liquidity.
It can be quite a task sifting through all these companies and knowing which one is good for investing or trading. The growth of a company is dependent on a number of factors and these are essential for an investor to know. That’s where Stock Analysis comes in.
There are 2 schools of thought when it comes to Stock Analysis, Fundamental and Technical.
Benjamin Graham laid the foundation of Fundamental Analysis with his book – Security Analysis (1934) and the Intelligent Investor which inspired Investing legends like Warren Buffett and Charlie Munger. Fundamental Analysis is researching publicly available information about a company and its stock with respect to the Economy – Industry.
Fundamental analysis helps answer the following questions:
Company’s revenue growing?
Is the company profitable?
Will it stand against the competitors and beat them?
Will it be able to repay its debts?
How is the management? Is the accounting transparent without any “Book Cooking”
A number of tools are available for the researcher for Fundamental analysis some of which are:
Return on assets (ROA): (Net income + Interest expense) / Total assets. This formula shows how the company was using its tangible assets. Higher ROA means assets are efficiently used. Declining ROA would mean the exact opposite.
Return on equity (ROE): (Post-tax earnings) / Shareholder equity. This formula shows how shareholder money was being utilized and profits ratio
(Total liabilities) / Shareholders’ equity. This formula measures available capital versus the capital employed.
Market Capitalization: (Number of shares) x (Price per share). The amount of shares traded in the market.
Price/sales ratio: (Share price) / (Revenue over a 12 month time frame). Measure of the share price of the stock
Price/book ratio: (Stock price) / (Total assets – Intangible assets and liabilities) Comparison of the share price with the stock’s intrinsic value. This indicates overvaluation or undervaluation of the stock
Technical Analysis employs various stock movement indicators as well as history to predict future movement.
Simple moving average: Averages the movement of the stock over a period of time. A line goes through the selected range.
Exponential moving average: Similar to simple moving average line.
Relative strength index: 100 – (100 / (1 + (Average of up closes for the day / Average of down closes for the day))) is the formula used to calculate. This indicates if the stock was overbought or oversold.
Moving Average Convergence/Divergence (MACD): A momentum indicator determined by subtracting the 26-day exponential average from the 12-day exponential moving average. This is used to detect trends.
On Balance Volume (OBV): Indicator showing the rise or fall in trading / investing volume of a stock.
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