Stock Analysis 101

Ever wondered how stock analysts in large investment firms go about making stock recommendations? This Stock Analysis 101 page will help you understand some of the effort behind what stock analysts do – stock analysis. Who knows - you could become a stock analyst yourself!




Stock Analysis – a definition

Stock Analysis is the processes of recommending stocks based on various criteria. Because there are a myriad of strategies used by stock investors to make stock recommendations this stock analysis 101 will attempt to discuss the more frequent ones used.

Stock analysis is more than just stock picking. It involves investigating details about a particular stock and can be accomplished in different ways. Depending on your preference, you can either conduct a top-down or a bottom-up approach when analyzing stock.

Top-down approach – In this approach you start by identifying the industry and then identifying the company you would like to invest in. In other words you start with the “big picture” and then drill down by analyzing stocks you have identified in a given industry.

Bottom-up approach – this is the opposite of the top-down approach. In this approach, you begin by identifying the company and then analyzing all the way to the industry. The premise is that the company is capable of doing well even without the industry.

The following is a list of some of the ways that you can accomplish a stock analysis:

Fundamental Analysis:
– this is the process of analyzing the financial statements of a stock, determining it's health, competitive advantages, competitors and markets. As a stock investor, you perform these type of analysis on historical and present data, with an overall goal of making financial forecasts.


Technical Analysis:
– this process involves forecasting the future of stock price movements based on an examination of past price and volume movements. It is a bit like weather forecasting, the result is not an absolute prediction about the future. What technical analysis really does, is help investors anticipate what is "likely" to happen to stock prices over time.

Industry / Sector Analysis:
- commonly known as the top-down approach, this is one of the strategies used by stock investors to conduct stock analysis. Using this approach they begin their stock analysis by focusing on the industry sector of the stock on question, follow an industry for a period of time trying to determine how the sector is doing and where its headed before they decide on what stocks within that sector they want to further analyze.

Chart Analysis:
- this is a popular short-term trading techniques used to determine and forecast the price behavior of stocks based on stock charts and the patterns that describe investor reaction and emotional feelings towards a stock. Chart analysis allows investors to derive possible outcomes of the stock price trend.

Stock analysis can also be accomplished using stock analysis tools or software. There is a huge selection of stock analysis software and tools that exist on the internet. There are very few of them that are free and some of them cost a substantial amount of money. Most of the more expensive software tools can get very confusing. They are mainly used by day traders who need real-time information to make stock picks.

Stock investors can also perform stock market analysis – where they analyze how the stock market is doing as a whole. Based on the stock market analysis you will hear people saying that the stock market has a bullish or bearish trend. A related stock analysis strategy is either stock trend analysis or market trend analysis.

A stock investor uses different tools to predict the general trend of the Dow Jones (DJX), S&P 500 (SPX) and the Nasdaq (^IXIC) indices. This index analysis can be accomplished using tools like moving averages – which shows the direction of the trend - up, down or sideways; Wilder’s DMI (ADX) – which shows the strength of the momentum; RSI and Volatility Index (VIX) – which both show when a reversal is imminent.

Stock trend analysis allows the investor to find the general trend of a selected stock. You can apply the moving Averages and the ADX studies to a stock in order to get an objective measure of the direction and momentum of the stock. You can check the RSI to make sure a change is not in the wind, and look ahead about a month to see whether any earnings dates or dividend announcements are due.

Here a couple of things you will want to keep in mind:

Stock Analysis is a process – this means that you will need to dig deeper, look closer, and analyze a stock or a collection of steps based on a process that you have developed and refined over a period of time. Determine what is important to you – this begins with your understanding what kind of investor you are. This is especially important because with so many ways of performing a stock analysis it can get complicated very quickly.

Remember, when everything is said and done, your goal is to make money. But also remember Rome wasn’t built in a day – therefore – due process is necessary. The goal ultimately is not to become a stock analyst guru, but a better judge of what stocks you select which eventually allows you to make wise choices.